ECON CHAPTER 4 SAMPLE TESTS A-B

Suppose the United States has two​ utilities, Commonweath Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year.​ However, the marginal cost of reducing a ton of pollution for Consolidated Electric is ​$200 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is ​$275 per ton. The​ government's goal is to cut sulfur dioxide pollution in half​ (by 20 million tons per​ year). If the government issues 10 million tradable pollution permits to each​ utility, what will be the cost of eliminating half of the pollution to​ society? Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfur dioxide pollution at a cost of ​$__________ million per year. If the permits are not​ tradable, what will be the cost of eliminating half of the​ pollution? If permits cannot be​ traded, then the cost of the pollution reduction will be ​$________million per year.

$4000 ; $4750

____________surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram by area __________

Consumer ; A

A black market is

a market in which buying and selling take place at prices that violate government price regulations.

Economic efficiency is

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

Which of the following is not an example of an externality​? An externality is not created by

consuming a Big Mac.

Suppose the government requires each firm to reduce sulfur dioxide emissions by an equal amount such that total emissions are reduced by 10.0 million tons per year. Is this approach necessarily economically​ efficient? This​ command-and-control approach

is not efficient because firms can have different costs of reducing pollution.

Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. How could the government use a command-and-control approach to reduce pollution to the optimal level for​ society? The government could

limit sulfur dioxide pollution to a particular quantity per year.

A price ceiling is a legally determined __________ price that sellers may charge. A price floor is a legally determined ___________ price that sellers may receive.

maximum ; minimum

When the government imposes price floors or price​ ceilings,

some people​ win, some people​ lose, and there is a loss of economic efficiency.

How do externalities affect​ markets? If a positive externality in consumption is present in a​ market, then

the private benefit from consumption will be different than the social benefit from consumption.

In the​ diagram, marginal benefit __________marginal cost at output level Q1. This output level is considered economically __________.

is greater than ; inefficient