econ ch 5 test bank

if the electricity supplier is not legally liable,

the victims of the pollution have an incentive to pay the producer of pollution -the payment goes to offset the producer's extra cost to reduce SO2

when is an economy efficient?

when all benefits and costs are incorporated (maximizing ES)

rivalry

when one person's consumption of a good or service means no one else can consume it

Worldwide annual carbon dioxide emissions increased from about 198 million metric tons in 1850 to ________ million metric tons in 2015. A) 1,930 B) 3,855 C) 35,700 D) 246,500

c

cap-and-trade-system

-better because it allows the market to "price" pollution allowing more MB/MC decisions -opponants to system view it as a "license to pollute" -lets the market figure it out -govt identifies an acceptable amount of pollution and gives permits to companies - if you pollute less, you have some remaining that can be sold to companies that need to pollute more

How the government intervenes

-impose a tax on suppliers equal to the cost of the negative externality (increase supply curve) -provide a subsidy equal to the benefit of the positive externality (increase demand curve)

examples of externalities

-no externality in eating a Big Mac -Positive externality in getting a college (or any) education --> the people that don't go to college benefit because society has a lower crime rate -Negative externality when buying electricity --> burning coal for electricity produces pollution and creates acid rain, which has a negative effect on people who may use solar energy

is electricity supplier is legally liable,

-the producer of pollution has an incentive to pay the victims of pollution -the payment goes to offset their incremental loss of benefit from having to put up with more SO2

Why doesn't eliminating the negative externality of pollution not mean eliminating all pollution

-there is a point where the MC of reducing a unit of pollution exceeds the MB -if no one is bothered by a little smog, it doesn't make sense to reduce smog further

when enforcing property rights is not feasible, though, two types of solutions to the tragedy of the commons are possible

1. if the geographic area involved is limited and the number of people involved is small, access to the commons can be restricted through community norms and traditions 2. if the geographic area or the number of people involved is large, legal restrictions through taxes, quotas, and tradable permits on access to the commons are required

What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented

A Pigovian tax is a government tax intended to bring about an efficient level of output in the presence of externalities. A Pigovian tax eliminates deadweight loss.

Explain how the decision by parents to not immunize their children, hoping that their children will not get sick because other parents have had their children immunized, is an example of free riding. How is this behavior dangerous to the public?

Free riding is benefiting from a good without paying for it. Parents who do not get their children immunized, and instead assume their children will not get sick because all the other children that their own kids will be in contact with have been immunized, are attempting to benefit from the vaccinations of other children without paying for their own kids' vaccinations. This behavior is dangerous to the public because the likelihood of an unvaccinated child catching and spreading a disease is much greater than that of a child who has been vaccinated.

public goods

Goods that are neither excludable nor rival in consumption ex: national defense, court systems

How does a negative externality in production reduce economic efficiency?

If there is a negative externality in production, consumers not directly involved in the consumption of the product pay some of the external cost of producing the product. Since the producer does not bear the entire cost of production, the producer's marginal cost of production (the supply) is reduced. This encourages the producer to produce more of the product, leading to a market equilibrium which is greater than the efficient equilibrium and resulting in a deadweight loss.

How does a positive externality in consumption reduce economic efficiency?

If there is a positive externality in consumption, people not directly involved in the consumption of the product capture some of the external benefits of the product being consumed. Since the consumer does not reap the entire benefit of consumption, the consumer's marginal benefit of consumption (the demand) is reduced. This results in the consumer consuming less of the product, leading to a market equilibrium which is less than the efficient equilibrium and resulting in a deadweight loss.

What is meant by the term "internalizing an externality"? How does a Pigovian tax or subsidy internalize an externality?

Internalizing an externality refers to transferring the external benefit or cost to the producer or consumer that generates the externality. A Pigovian tax transfers a negative externality in production back to the producer, which reduces the supply of the product and results in an efficient level of output. A Pigovian subsidy transfers a positive externality in consumption back to the consumer, which increases the demand for the product and results in an efficient level of output.

Explain how mandatory seat belt laws may reduce the negative externalities of risky behavior.

Mandatory seat belt laws are designed to reduce the severity of injuries resulting from traffic accidents. By requiring all passengers in a vehicle to wear seat belts, the chances of serious injury are smaller, even when other drivers engage in risky behavior like speeding or reckless driving.

Should the level of pollution be reduced to zero and if not, then to what level?

No, the level of pollution should not be reduced to zero because the benefits reaped from greater and greater amounts of pollution reduction may not justify the cost of those incremental cleanups. Pollution should be reduced up to the point where the marginal benefit of pollution reduction equals the marginal cost of pollution reduction.

ex of command-and-control approach

One example listed in the text ocurred in 1983, when the federal government required auto manufacturers to install catalytic converters to reduce auto emissions on all new automobiles.

What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?

Private benefit from consumption is the benefit received from the consumer of a good or service. Social benefit from consumption is the total benefit from consuming a good or service, including both the private benefit and any external benefit. The private benefit and the social benefit are equal when no externalities exist.

Goods differ on the basis of whether their consumption is rival and excludable. Explain the terms "rivalry" and "excludability" as they are used to define goods. List the four categories of goods, and define these categories in terms of rivalry and excludability.

Rivalry occurs when one person's consuming a unit of a good means no one else can consume it. Excludability means that anyone who does not pay for a good cannot consume it. 1. Private good: rival and excludable 2. Public good: nonrivalrous and nonexcludable 3. Quasi-public good: nonrivalrous and excludable 4. Common resource: rival and nonexcludable

State the Coase theorem.

The Coase theorem states that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities, regardless of initial assignment of property rights.

Some environmentalists have criticized tradable emission allowances on the grounds that they give permit holders a license to pollute. Furthermore, environmentalists argue that those who sell their permits receive a monetary benefit from their contribution to polluting the environment. Use economic reasoning to evaluate this criticism.

The criticism ignores one of the central lessons of economics: resources are scarce and trade-offs exist. Resources spent reducing one type of pollution are not available for other uses. Furthermore, the opportunity cost of polluting (using the permit) is the price of the permit. In other words, firms are forced to face the cost of polluting. So although firms receive a monetary benefit from the sale of permits, the scheme gives them the incentive to find the cheapest way to reduce pollution.

"When it comes to public goods, individuals do not reveal their true preferences because it is not in their self-interest to do so." Evaluate this statement.

The statement is true. For example, in the case of a private good such as a hamburger, a consumer either reveals her willingness to pay by purchasing the good at the market price or goes without it. This is not the case with a public good. Once produced, individuals cannot be excluded from consuming the good even if they have not paid for the good. Therefore, it is in a consumer's interest not to reveal her true preferences for the good.

What are transactions costs? Why do transactions costs create difficulties in finding a private solution to the problem of pollution?

Transactions costs refer to the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. In the case of pollution, there are often both many polluters and many people suffering from the negative effects of pollution. The transactions costs in dealing with the reduction of pollution would include the time and other costs of negotiating and monitoring an agreement, drawing up a binding contract, and purchasing insurance. When many people are involved, the transactions costs can be higher than the net benefit from reducing the pollution and a private solution may not be feasible.

1) When the federal government orders firms to use particular methods to reduce pollution, it is said to be using A) command-and-control policies. B) strong-arm tactics. C) global initiatives. D) market-based policies.

a

16) When a negative externality exists, the private market produces A) more than the economically efficient output level. B) less than the economically efficient output level. C) products at a low opportunity cost. D) products at a high opportunity cost.

a

The cost borne by a producer in the production of a good or service is called A) private cost. B) public cost. C) social cost. D) internal cos

a

Which of the following describes how a negative externality affects a competitive market? A) The externality causes a difference between the private cost of production and the social cost. B) The externality causes a difference between the private cost of production and the private benefit from consumption. C) The externality causes consumer surplus to exceed producer surplus. D) The externality causes a difference between the private cost of production and the equilibrium price.

a

Which of the following is an example of a common resource? A) the Sumatran tiger population in the wild B) rabbit fur C) the stock of knowledge in the public domain D) taxicab services

a

n England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was A) the area of pasture was nonexcludable and the consumption of the grass was rival. B) self-interest motives led livestock owners to raise too many cows and sheep. C) due to a policy of neglect on the part of the English government. D) it did not get enough rainfall.

a

externality

a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service -govt intervention is needed to correct the for the externality (increases economic efficiency)

how to determine the market demand curve for private goods

add horizontally the quantity of the good demanded at each price by each consumer

hoe to find the demand curve for a public good

add up the price at which each consumer is willing to purchase each quantity of the good (add vertically)

What causes externalities/market failures?

an incomplete property rights or difficulty enforcing them

excludability

anyone who does not pay for a good or service cannot consume it

All of the following are examples of public goods except A) broadcast television with commercials. B) clean water systems. C) stock of knowledge in the public domain. D) crime prevention.

b

Common resources differ from public goods in that A) common resources are nonexcludable while public goods are excludable to those who do not pay for the good. B) unlike public goods, common resources are rival in consumption. C) common resources are collectively owned by a group of people while public goods are government owned. D) common resources are resources that cannot be renewed but the production of public goods can be increased any time.

b

One difference between the demand for a private good and that for a public good is that A) with a private good, each consumer chooses the quantity she wants to consume but with a public good, each consumer chooses the price she is willing to pay for a fixed quantity. B) with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity. C) with a private good, each consumer receives different amounts of benefit from consuming the product but with a public good, every consumer realizes the same amount of benefit from consuming the product. D) the marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from consuming the last unit of a private good because there are externalities in the consumption of the public good.

b

The social cost of cutting trees for firewood in a government forest is A) the increased likelihood of flooding as more trees are cut. B) the increased likelihood of flooding as more trees are cut plus the private cost of cutting the trees. C) opportunity cost to the individual of cutting the wood. D) the marginal costs of cutting the last tree.

b

Which of the following criteria should be used to evaluate if government intervention in a market for the purpose of environmental protection is justified? A) Does the intervention program reduce pollution to zero using the least costly method? B) Is the intervention program economically efficient? C) Does the intervention program make the amount of economic surplus as large as possible? D) Is the damage to the environment from government intervention as small as possible?

b

15) A positive externality causes A) the marginal social benefit to be equal to the marginal private cost at the market equilibrium. B) the marginal social benefit to be less than the marginal private cost at the market equilibrium. C) the marginal social benefit to exceed the marginal private cost at the market equilibrium. D) the marginal private benefit to exceed the marginal social cost at the market equilibrium.

c

5) Which of the following is a source of market failure? A) unforeseen circumstances which leads to the bankruptcy of many firms B) a lack of government intervention in a market C) incomplete property rights or inability to enforce property rights D) an inequitable income distribution

c

A product is considered to be rival if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume. D) it is jointly owned by all members of a community.

c

An important difference between the demand for a private good and the demand for a public good is that A) individuals reveal their preferences for a public good but they do not have to reveal their preferences a private good. B) the resources used to provide public goods are common resources or government owned; the resources used to produce private goods are all privately owned. C) individuals reveal their preferences for a private good but they do not have to reveal their preferences for a public good. D) the demand for a private good produces consumption externalities; the demand for a public good produces production externalities.

c

For-profit producers will produce only private goods because A) markets exist for private goods but not for public goods. B) the cost of production can be easily determined. C) buyers will be willing to pay for the goods since the benefits are excludable. D) all external benefits can be internalized using market prices.

c

How does the construction of a market demand curve for a private good differ from that for a public good? A) There is no difference; in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity of the good. B) There is no difference; in both cases the demand curve is determined by adding up the quantities demanded by each consumer at each price. C) The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good. D) The market demand curve for a private good is determined by adding up the price each consumer is willing to pay for each quantity of the good but the market demand curve for a public good is determined by adding up the quantities demanded by each consumer at each price.

c

In 2017, economists working at the U.S. Department of Treasury's Office of Tax Analysis have estimated that the marginal social cost of carbon dioxide emissions was about A) $7 per metric ton. B) $32 per metric ton. C) $49 per metric ton. D) $70 per metric ton.

c

It is difficult for a private market to provide the economically efficient quantity of a public good because A) by law governments cannot use cost-benefit analysis to determine this quantity. B) public goods produce positive and negative externalities. C) individual preferences are not revealed in the market for the good. D) it is too expensive to produce the necessary amount of the good.

c

Overuse of a common resource may be avoided by all of the following methods except A) charging for the use of a common resource. B) issuing tradable permits for the use of a common resource. C) government taking over ownership of all private common resources. D) setting quotas or legal limits on the quantity of the common resource consumed.

c

The Coase theorem states that A) government intervention is always needed if externalities are present. B) assigning property rights is the only thing the government should do in a market economy. C) if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. D) a free-market equilibrium is the best solution to address externalities.

c

The market demand for a public good can be determined by A) adding up the total private benefits and external benefits that each quantity provides the citizens of a country. B) adding up how much each citizen expects to consume at each possible price. C) adding up how much each consumer is willing to pay for each unit of the public good. D) estimating the value of the benefit that each unit provides and multiplying that by the number of consumers.

c

The tragedy of the commons was avoided in the Middle Ages by A) selling common grounds to individuals. B) the local police who monitored entry into the commons. C) social pressure to uphold traditionally accepted limits on family use of the commons. D) the government which imposed a tax for the use of the commons.

c

What does the phrase "internalizing an external cost" mean? A) limiting the extent to which domestic firms can outsource production B) prohibiting economic activities that create externalities C) forcing producers to factor into their production costs the cost of the externalities created in the production of their output D) finding a way to address cross-border pollutio

c

When production generates a negative externality, the true cost of production is the A) private cost of production. B) public cost of production. C) social cost of production. D) average cost of production.

c

Which of the following statements about the economically efficient level of air pollution is correct? A) The economically efficient level of pollution is zero. B) The economically efficient level of pollution occurs where all social costs equal all social benefits. C) The economically efficient level of pollution occurs where the marginal cost of pollution reduction equals the marginal social benefit of reduction. D) The economically efficient level of pollution occurs where total benefits of pollution reduction are maximized.

c

2) A carbon tax which is designed to reduce pollution is an example of a A) command-and-control policy. B) government administrative rule. C) noneffective incentive. D) market-based policy.

d

A market supply curve reflects the A) external costs of producing a good or service. B) external benefits of producing a good or service. C) marginal social costs of producing a good or service. D) marginal private costs of producing a good or service.

d

Congressman Murphy made the following proposal: "We should establish policies that completely eliminate air pollution. This is the only way to ensure that none of our citizens suffer the negative effects of air pollution." If Congressman Murphy's proposal was adopted and all forms of air pollution were eliminated, which of the following would be true? A) The total cost of pollution reductions would equal the total benefit to society. B) Economic efficiency would be maximized. C) The total benefit to society from reductions in air pollution would be maximized. D) The marginal cost of the last unit of pollution eliminated would exceed the marginal benefit.

d

Consider the stock of ocean tuna which is massively overfished. It is rational for an individual to exploit the resource rather than to conserve the stock because A) the marginal private benefit of harvesting tuna is higher than the marginal social benefit of harvesting it. B) the marginal private benefit of harvesting tuna is lower than the marginal social benefit of harvesting it. C) the marginal social cost of harvesting the fish is lower than the marginal private cost. D) the marginal private cost of harvesting the fish is lower than the marginal social cost.

d

In economics, the optimal level of pollution is A) zero. B) the level for which the total benefit from reducing the pollution is the greatest. C) the level for which the marginal benefit from reducing the pollution is the greatest. D) the level for which the net benefit from reducing the pollution is the greatest.

d

Kenneth Chay and Michael Greenstone examined the impact of reductions in air pollution since the passage of the Clean Air Act of 1970. Which of the following statements summarizes their findings? A) The marginal benefit of reductions in air pollution was less than the marginal cost. B) The marginal cost of reducing emissions of sulfur dioxide has increased over time as the marginal benefit of the reductions has increased. C) The benefits of reducing the six main air pollutants in the two years following the Act greatly exceeded the costs. D) In the two years following passage of the Act, fewer infants died than would have died if the Act had not been passed.

d

Negative externalities and the tragedy of the commons are problems that have a common source. What is this common source? A) self-interest motives of producers and consumers B) a lack of concern for human rights C) a lack of competition D) a lack of clearly defined and enforced property rights

d

Private producers have no incentive to provide public goods because A) the government subsidy granted is usually insufficient to enable private producers to make a profit. B) production of huge quantities of public goods entails huge fixed costs. C) they cannot avoid the tragedy of the commons. D) once produced, it will not be possible to exclude those who do not pay for the good.

d

Which of the following best illustrates free riding? A) Since no one owns elephants and elephants are valued for their hide, meat, and ivory, elephants can be hunted to extinction. B) For every purchase of a $30 fare card, you are entitled to five free bus rides. C) If your neighbors professionally landscape their front yards, it is likely that the market value of your property will increase. D) All three homeowners in a quiet cul-de-sac have expressed the desirability of security lighting in the common parking area. One of the homeowners installs the lighting and asks you to contribute toward the cost. You choose not to contribute.

d

Which of the following could be evidence of a market failure? A) Resources in an economy are not fully utilized. B) The market price of a product is above the average cost of production. C) There are only a handful of firms competing against each other in an industry. D) Market prices do not reflect true production costs.

d

Which of the following displays these two characteristics: rivalry and nonexcludability? A) a public good B) a private good C) a quasi-public good D) a common resource

d

Which of the following is an example of a common resource? A) catfish in a private pond in Mississippi B) impounded dogs in a dog pound C) public health care services in the United States D) sea otters in the coastal waters of the Pacific Ocean

d

he supply curve of a public good shows A) the total quantities that all producers are willing and able to supply at each price. B) the maximum amount suppliers require to produce each quantity of the good. C) the total cost of producing each unit of the good. D) the marginal social cost of producing each unit of the good.

d

Pigovian taxes and subsidies

eliminate DWL, thereby improving economic efficiency

A market failure arises when an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event.

false

If there is pollution in producing a product, then the market equilibrium price is too high and equilibrium quantity is too low.

false

If transactions costs are low, private bargaining will always result in an efficient solution to the problem of externalities.

false

Private goods

goods that are both excludable and rival in consumption ex: big macs, running shoes

common resources

goods that are rival in consumption but not excludable ex: tuna in the ocean, public pasture land

command-and-control approach

involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit -doesn't work well bc it is a "one strategy fits all" approach

negative externality leads to

overproduction

Social (total) benefit

private benefit + positive externality

market failure

situation in which the market fails to produce the efficient level of output (ex: externalities)

transaction costs

the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of GoS (ex: selling home- broker gets a share of the money) -trans costs are low when buying/selling a stock -high when buying/selling a house

A.C. Pigou

the first economist to argue for the use of taxes or subsidies to eliminate negative and positive externailities

positive externality leads to

underproduction

When ES is at a maximum,

the net benefit to society from production of a GoS is at a maximum

74) The marginal private cost of a good or service is the cost borne by the producer.

true

A quasi-public good differs from a public good in that unlike a public good, it is possible to keep those who do not pay for the quasi-public good from enjoying the benefits of the good.

true

For the Coase theorem to work there must be clear assignment of property rights.

true

In economics, the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest.

true

One problem with using a command-and-control approach to pollution reduction is that the monitoring costs may be too high.

true

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

true

When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society.

true

When products that create positive externalities are produced, at the market equilibrium output, the social benefit generated by consuming the product exceeds the private benefit.

true

A negative externality is an example of market failure. The root of the problem lies in the definition and enforcement of property rights. Explain.

If harmed parties do not have rights or have rights that are not enforced or weakly enforced, producers can make choices that impose costs on others and do not have to bear the full cost of their actions. This creates a discrepancy between the private cost of production and the social cost of production, the true cost of production being the social cost. Since the private cost is less than the social cost, firms will produce more than the economically efficient output level, resulting in a market failure. (Students can also explain using positive externalities.)

What is a private cost of production? What is a social cost of production? When is the private cost of production equal to the social cost of production?

Private cost of production is the cost borne by the producer of a good or service. Social cost of production is the total cost of producing a good or service, including both the private cost and any external cost. The private cost and the social cost are equal when no externalities exist.

What are some of the limitations of the Coase theorem in practice?

Some limitations of the theorem are as follows. First, the Coase theorem works only if the transactions costs are low, which is unlikely if there are many bargaining parties. Second, private solutions to the problem of externalities will occur only if all parties to the agreement have full information about the costs and benefits associated with the externality. In reality, this may not be likely or may be difficult to ensure. Third, all parties must be willing to accept a reasonable agreement. For example, if those suffering from the effects of pollution do not have information on the costs of reducing pollution it is unlikely that parties can reach an agreement. Unreasonable demands can hinder an agreement. Fourth, the Coase theorem might not work if property rights are not assigned.

6) What is a market failure? A) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost. C) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event. D) It refers to a breakdown in a market economy because of widespread corruption in government.

a

Congress passed the Clean Air Act in 1970. Since this act was passed, emissions of the six main air pollutants A) have fallen by more than one-half. B) have increased significantly due to the growth of the U.S. economy. C) cannot be measured since Congress failed to appropriate money to monitor the level of emissions. D) have remained essentially constant, even though significant economic growth has occurred in the United States since 1970.

a

If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set A) equal to the marginal external cost at the economically efficient level of pollution. B) equal to the marginal private cost of production at the economically efficient level of pollution. C) equal to the amount of the deadweight loss created in the absence of a pollution tax. D) at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.

a

Policies that mandate the installation of specific pollution control devices are called A) command-and-control policies. B) benefit policies. C) welfare policies. D) incentive policies.

a

Some policymakers have argued that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption. If the government decided to impose a tax on soda, the government will cause A) consumers to internalize the externality. B) producers to internalize the externality. C) the external cost to drinking soda to become a private cost paid by the government. D) the external cost to drinking soda to become a private cost paid by producers.

a

The efficient level of paper production will occur where the A) marginal private benefit from consuming paper is equal to the marginal social cost of production. B) marginal social benefit from consuming paper is equal to the marginal social cost of production. C) economically efficient level of the output of paper is equal to the economically efficient level of inputs. D) production of paper no longer produces negative externalities.

a

Which of the following describes how a positive externality affects a competitive market? A) The externality causes a difference between the private benefit from consumption and the social benefit. B) The externality causes a difference between the private benefit from production and the social cost of production. C) The externality causes quantity demanded to exceed quantity supplied. D) The externality causes a difference between the social cost of production and the social cost of consumption.

a

when transaction costs are low,

a private market solution is more likely (ex: there are few suppliers and victims and the cost of the externality is relatively easy to quantify)

when transaction costs are high,

a public govt solution is needed to eliminate the externality and get the market to where MB = MC

13) If you burn your trash in the backyard in spite of regulations against it, then you are A) acting economically irrational and creating a social cost. B) avoiding the private costs associated with disposing your trash some other way and creating a social cost. C) acting rationally and creating a positive externality. D) saving landfill space and creating a social benefit.

b

17) Getting an annual flu shot is a way to reduce the chances of not only contracting influenza, but also spreading it to other people. In this sense, getting an annual flu shot is reducing ________ of spreading a contagious disease. A) positive externalities B) negative externalities C) the private benefit D) the social benefit

b

A free market fails when A) there is government intervention. B) there is an external effect in either production, consumption, or both. C) firms that produce goods which create positive externalities go bankrupt. D) firms that produce goods which create negative externalities earn high profits.

b

A major problem with using a tradable emission allowances system to control pollution is A) that it grants firms a license to pollute. B) the difficulty in determining the emissions target. C) it discourages firms from implementing cost-effective pollution control technology. D) that it does not eliminate pollution completely.

b

If there are no externalities, a competitive market achieves economic efficiency. If there is a negative externality, economic efficiency will not be achieved because A) too little of the good will be produced. B) too much of the good will be produced. C) a deadweight loss will occur that is equal to the area under the demand curve for the good. D) economic surplus is maximized.

b

When there is a positive externality, A) the marginal private benefit received by consumers is greater than the external benefit. B) the marginal social benefit received by consumers is greater than the marginal private benefit. C) the marginal private benefit received by consumers is greater than the marginal private cost. D) the marginal private benefit received by consumers is greater than the marginal social benefit.

b

9) A negative externality exists if A) there are price controls in a market. B) there are quantity controls in a market. C) the marginal social cost of producing a good or service exceeds the private cost. D) the marginal private cost of producing a good or service exceeds the social cost.

c

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention. A) A. C. Pigou B) Adam Smith C) Ronald Coase D) John Maynard Keynes

c

Alternative approaches for reducing carbon dioxide emissions are A) carbon taxes and carbon scrubbing. B) carbon trading and carbon subsidies. C) carbon taxes and tradable emission allowances. D) burning low carbon coal and deforestation.

c

Because producers do not bear the external cost of pollution A) the economically efficient level of production is achieved. B) private production is below the economically efficient level. C) private production exceeds the economically efficient level. D) the market price is too high.

c

Consider the following characteristics: a. low transactions costs b. small levels of pollution c. high levels of pollution d. clear assignment of property rights Which of the above are assumptions behind the Coase Theorem? A) a, b, and d B) a, c, and d C) a and d D) a only

c

Consider the following methods of pollution reduction: a. the government sets a target for maximum emissions b. the government mandates the installation of specific pollution abatement equipment c. the government imposes a per unit tax on the good that creates pollution d. the government gives firms a tax rebate for every unit of pollution abated Which of the above is an example of a command-and-control approach to reducing pollution? A) a only B) b only C) a and b only D) a, b, and d only E) a, b, c, and d

c

Ronald Coase was awarded the 1991 Nobel Prize in Economics primarily for addressing problems related to externalities. Which of the following describes Coase's work? A) Coase argued that government intervention is necessary to achieve economic efficiency in markets that are affected by externalities. B) Coase proved that economic efficiency cannot be achieved in a market that is affected by positive or negative externalities. C) Coase argued that under some circumstances private solutions to the problems of externalities will occur. D) Coase proved that a competitive market achieved a greater degree of economic efficiency than a non-competitive market when externalities occur.

c

The first economist to systematically analyze market failure was A) Adam Smith. B) Ronald Coase. C) A. C. Pigou. D) J. E. Meade.

c

Which of the following conditions holds in an economically efficient competitive market equilibrium? A) The deadweight loss is positive but at a minimum. B) Producer and consumer surplus are exactly equal in size. C) There are no positive and no negative external effects from consumption and production. D) The marginal benefit of the last unit produced and consumed is maximized.

c

Compare two situations. (A) A firm is not legally responsible for damages that result from air pollution caused by its production of steel. (B) A firm is legally responsible for damages that result from its production of steel. Ronald Coase argued that if the property rights are assigned and transactions costs are low, A) bargaining between the firm and the victims of the air pollution caused by the firm will result in little reduction of pollution in either situation (A) or (B) because the firm has greater economic and political power than the victims. B) bargaining between the firm and the victims of the air pollution caused by the firm would lead to a greater reduction in pollution in situation (A) than situation (B). C) bargaining between the firm and the victims of the air pollution caused by the firm would lead to a smaller reduction in pollution in situation (A) than situation (B). D) bargaining between the firm and the victims of the air pollution caused by the firm would lead to an equal reduction in pollution in situation (A) and situation (B).

d

Consider a situation in which a utility company emits high levels of sulfur dioxide and the company is not liable for the damages its pollution causes. According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution. A) necessary; equitable B) necessary; efficient C) not necessary; equitable D) not necessary; efficient

d

Some policymakers have argued that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption. All else equal, if the government decided to impose a tax on soda, the equilibrium quantity of soda would ________ and the equilibrium price of soda would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

d

What is the rationale behind a tradable emission allowance scheme? A) to create a market for externalities: the scheme brings together buyers and sellers of marketable permits B) to discipline polluting firms by specifying the maximum amount of emissions allowed and giving them permits to pollute up to their allowance C) to raise revenue for the government through the sale of emission permits and at the same time set an emissions target D) to provide firms with the incentive to consider less costly alternatives to pollution reduction by making firms pay for the right to pollute beyond their specified allowance

d

When there is a negative externality, the marginal private cost of production ________ the marginal social cost of production. A) is greater than B) is equal to C) eliminates D) is less than

d

When there is an externality in a market, A) the externality will move the market to an economically efficient equilibrium. B) the externality will cause the market price to be less than or greater than the equilibrium price. C) the government should use price controls to enable the market to reach equilibrium. D) government intervention may increase economic efficiency.

d

`If there is pollution in producing a product, then the market equilibrium price A) is too high and equilibrium quantity is too low. B) and equilibrium quantity are too low. C) and equilibrium quantity are too high. D) is too low and equilibrium quantity is too high.

d

The marginal social cost of a good or service is the cost borne by the producer.

false

quasi-public goods

nonrival and excludable ex: cable tv, toll road

Social (total) cost

private cost + negative externality