Economics 111 - Exam 2
Classify the scenarios according to whether or not they describe a negative externality. A person with no allergies gets a mosquito bite from a disease-free mosquito.
not an example of a negative externality
People have little incentive to produce a public good because:
of the free-rider problem.
Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Which type of externality is likely to result from a consumer's decision to purchase a solar-powered vehicle instead of a gas-powered vehicle, and how does it arise? This decision generates a
positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution.
Four potential policies for handling environmental problems are presented. Match each scenario to the policy it demonstrates. A steel mill pays nearby homeowners to compensate them for the noise they must endure.
private property rights
Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. The fraternity pays the local community to compensate for the noise pollution.
private solution to an externality
Suppose the U.S. Congress passes a tax of $0.70 on each can of soda. Using the diagram and the "wedge shortcut," determine how much deadweight loss this would create.
$10,500
If a tax shifts the supply curve from S1 to S2, tax revenue is:
$1,800
Suppose the town of Drippling Springs enacts a wage floor of $20. What does area CF represent?
lost gains from trade
The table shows the demand schedule and two supply schedules for a tire producer. The socially efficient number of tires is ______________ the number of tires produced at the private market equilibrium.
lower than
Classify the scenarios according to whether or not they describe a negative externality. A person gets a flu shot and is therefore less likely to spread illness to others.
not an example of a negative externality
Classify the scenarios according to whether or not they describe a negative externality. A donut shop emits a delicious smell into the air as a by-product of production.
not an example of a negative externality
Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. The residents of the apartment complexes pay Mu Epsilon Nu not to have loud parties.
private solution to an externality
After the imposition of a per unit tax on production, consumers pay $5.00 per unit and producers receive $4.95 per unit. What is the value of the per unit tax?
$0.05
In the accompanying pizza market, with a $2 tax imposed on the sellers, how much do buyers pay for a pizza?
$11.50
Command and control, sometimes called direct control, is when the government passes legislation specifically regulating an activity, typically because the activity leads to market failure. Classify each statement about this type of regulation as either true or false. Command and control is subject to political considerations.
true
Command and control, sometimes called direct control, is when the government passes legislation specifically regulating an activity, typically because the activity leads to market failure. Classify each statement about this type of regulation as either true or false. One option with command and control is for the government to decide on a specific amount of pollution that firms can legally emit.
true
Command and control, sometimes called direct control, is when the government passes legislation specifically regulating an activity, typically because the activity leads to market failure. Classify each statement about this type of regulation as either true or false. Under command and control, the government has the option to specify the technology that firms must use in production.
true
The table shows the demand schedule and two supply schedules for a tire producer. At a price of $100, 90 tires/day are demanded. At this price, society will be _________ compared to its situation when the producer is required to account for the pollution costs.
worse off
The table shows the demand schedule and two supply schedules for a tire producer. Does there appear to be an externality associated with tire production?
yes, a negative externality
A public good is:
nonrival and nonexcludable
Creating property rights for southern bluefin tuna is:
difficult because southern bluefin tuna travel throughout the Pacific Ocean.
According to the figures, what is the value of the deadweight loss?
$50
If a $3 tax per unit purchased were placed on buyers instead of sellers, buyers would pay _____ and sellers would receive _____.
$6; $3
When the production of a good results in pollution, private and social costs are different.
True
If a tax is imposed on a market with inelastic demand and elastic supply:
Buyers will bear most of the burden of the tax
An economy with permanent, universal price controls is in essence a:
Command economy
Which statement is FALSE? A) It is possible to have a shortage of a good even if its supplies are abundant. B) Politicians often blame speculators and profiteers, rather than changes in supply and demand, for rising prices. C) To eliminate a shortage, prices must rise. D)A frost that destroys half the orange crop will create a surplus of oranges.
D)A frost that destroys half the orange crop will create a surplus of oranges.
Private costs are costs that the firm is not obligated to disclose to the public.
False
The terms "social cost" and "external cost" are synonyms.
False
When the production of a good results in pollution, private and social costs are the same.
False
Wages are an example of an external cost.
Flase
If there are 100 tickets to a concert and 200 fans who would like to go to the concert, each placing a slightly different value on the tickets, is it more efficient to hold an auction for the tickets or to hold a random drawing for the tickets?
Hold an auction
Solving a tragedy of the commons problem could be done through: I. establishment of property rights over the common resource. II. the invisible hand. III. government-armed protection.
I and III only
Which of the following statements is TRUE? A tax and a subsidy are similar in that: I. they both create a deadweight loss. II. the burden of the tax and the benefit of the subsidy depend on relative elasticities of demand and supply. III. they both change the equilibrium level of output.
I, II, and III
Which statement(s) is(are) TRUE? Price floors set above the equilibrium price cause: I. shortages. II. surpluses. III. deadweight losses.
II and III only
A price ceiling is a(n)
Legally established maximum price that can be charged for a good
The government enacts a price control, causing a shortage of 15 units of the good. Therefore, the _____ is set at _____.
Pricing ceiling; $10
When airlines were regulated, many offered wider seats and fancy meals. This is an example of:
Quality waste
You can watch the show Spartacus on the premium cable television station Starz for about $10 a month. Which of the following is TRUE?
Spartacus is inefficiently provided because some people who don't watch the show are willing to pay more than the marginal cost of broadcasting the show to one more viewer.
What is the difference between tradable allowances and a Pigouvian tax?
Tradable allowances target quantity and a Pigouvian tax targets price.
Pollution is an example of an external cost.
True
Social cost is the sum of private and external costs.
True
Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Which type of externality is likely to result from a consumer's decision to purchase a solar-powered vehicle instead of a gas-powered vehicle, and how does it arise? Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome?
a subsidy to consumers who choose to purchase solar-powered vehicles.
Classify the scenarios according to whether or not they describe a negative externality. A factory emits pollution into the atmosphere as a by-product of production.
an example of negative externality
Classify the scenarios according to whether or not they describe a negative externality. A neighbor plays loud music that annoys the surrounding community.
an example of negative externality
Select the appropriate term to complete the sentences. Suppose Jeremy, Francis, and Andrew are part of Mu Epsilon Nu, a college fraternity known for its very loud, rambunctious weekend parties. The parties annoy many of the residents in nearby apartment complexes due to the loud music and blaring neon lights. This is an example of _____________
an external cost
The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If her roommate hates loud music, and the smell of donuts makes her sick, she will reject both apartments due to what she sees as
an external cost
Suppose the demand for pizza is inelastic and the supply of pizza is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of:
both the pizza and the cigarette taxes would fall more heavily on buyers than on sellers.
Four potential policies for handling environmental problems are presented. Match each scenario to the policy it demonstrates. The government requires that auto manufacturers limit pollution to a specified threshold.
command-and-control regulation
Four potential policies for handling environmental problems are presented. Match each scenario to the policy it demonstrates. The government requires that auto manufacturers use new, cleaner technology in producing cars.
command-and-control regulation
During the Middle Ages, many villages had areas reserved for families to take their cows or sheep to graze. All families were welcome to use this land without charge. This land for grazing can be characterized as a:
common resource
Four potential policies for handling environmental problems are presented. Match each scenario to the policy it demonstrates. a. An auto manufacturer is charged a fee per unit of pollution emitted into a river.
corrective tax
The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she is a morning person and loves the smell of donuts, she will view the donut shop as a(n)
external benefit
The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she likes to stay up late and loves listening to all kinds of music, she will view the bands practicing as a(n)
external benefit
Command and control, sometimes called direct control, is when the government passes legislation specifically regulating an activity, typically because the activity leads to market failure. Classify each statement about this type of regulation as either true or false. Command and control is always the best option when it comes to reducing the amount of pollution.
false
Command and control, sometimes called direct control, is when the government passes legislation specifically regulating an activity, typically because the activity leads to market failure. Classify each statement about this type of regulation as either true or false. Command and control is more flexible than market‑based regulation.
false
When the minimum price that can be legally charged is above the market price, we say there is a price:
floor
Consider the production of paper in Strelsau. Suppose that the supply of paper is upward‑sloping and the demand for paper is downward‑sloping. The smell of the paper‑production process in this town is both strong and horrific. Suppose that the production of paper causes a negative externality of $0.75 per ream, and the conditions outlined by the Coase theorem do not hold. By how much does the optimal price per ream of paper differ from the market price per ream of paper? The optimal price is _______ the market price by ___________ $0.75.
higher; less than
Over time, housing shortages caused by rent control _____ because the supply of housing is _____ elastic in the long run.
increases; more
Though markets can provide goods that are excludable but nonrival, they do so at the price of:
inefficiency
Tuna in the ocean is a common resource because:
it is difficult to prevent people from fishing in the ocean and every time someone catches tuna there is less tuna for someone else.
If markets underproduce public goods because of the free-rider problem:
it may be more efficient for the government to tax individuals to pay for the production of the public good.
Some economists compare the destructiveness of rent control to that of aerial bombardment because it causes:
landlords to neglect their buildings, allowing them to deteriorate over time.
Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. The local city government sends the police to break up the parties.
non-private solution to an externality
Street lights are an example of a good that is:
nonexcludable and nonrival
A free rider is a person who:
receives the benefits of a good but avoids paying for it.
Price ceilings create five important effects:
shortages, reductions in product quality, wasteful lines, a loss of gains from trade, and a misallocation of resources.
Montgomery owns a nuclear power plant in the town of Springfield. His power plant dumps substantial quantities of radioactive waste into the local pond, which has given rise to a mutant guppy fish population with three eyes. The town decides to have Montgomery do something about the externality. Which method would NOT result in Montgomery accounting for the social cost of running the power plant? It would not work to
subsidize Montgomery for every three‑eyed fish found in the pond.
If a $2 tax on cigarettes decreases both consumer and producer surplus:
tax revenues will be less than the amount of the lost consumer and producer surplus.
Ronald Coase's ideas on property rights have helped economists and policymakers better understand environmental problems. Identify the true statement regarding Coase and property rights. Coase contended that
the assignment of property rights to someone is essential.
Four potential policies for handling environmental problems are presented. Match each scenario to the policy it demonstrates. Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution vouchers.
tradable pollution permits
Select the appropriate term to complete the sentences. According to the Coase theorem, private parties can negotiate to an efficient solution in the ___________ if the is (are) relatively low.
transaction cost
Command and control, sometimes called direct control, is when the government passes legislation specifically regulating an activity, typically because the activity leads to market failure. Classify each statement about this type of regulation as either true or false. A limitation of a command and control is that firms have no incentive to remove additional pollution once they are within the legal pollution limits.
true
