Problem set Chapter 10

Which statement is a positive externality?

Edwin buys a run-down house, renovates it, and increases the property values of all the houses in the neighborhood.

An external cost is:

a cost imposed on bystanders.

When a good is nonrival and nonexcludable, the good is referred to as:

a public good.

Which of the following would be both nonrival and nonexcludable?

a siren tornado warning system

Mario is willing to sell an extra unit of his product as long as price is:

at least as high as the marginal private cost.

The marginal external cost is the:

external cost imposed on bystanders by one additional unit of output.

The Coase theorem states that the externality problem can be solved by private bargaining:

if bargaining is costless and property rights are clearly established.

The free-rider problem is most common when a good is:

nonexcludable.

Municipal law enforcement and iTunes downloads are similar in that both are _____, but they differ in that municipal law enforcement is _____, while iTunes downloads are _____.

nonrival in consumption; nonexcludable; excludable

The benefit enjoyed by a buyer as a result of purchasing one additional unit of a good is the marginal _____ benefit.

private

Which is considered a nonexcludable good?

public beaches

On hot summer days, parking lots at Disneyland are usually full by early morning, even though one must pay to park there. Parking at such lots is _____ in consumption and _____.

rival; excludable

Traffic congestion is a common example of a negative externality. In principle, it should be possible for drivers to negotiate the right to drive at particular times, thereby compensating those who would prefer not to drive at peak times and solving the externality. The most likely reason these negotiations do NOT occur is that:

the bargaining costs of such negotiations would be prohibitive, as there are (in large cities) many interested parties.

Marginal private cost is the:

the cost paid by the seller in producing one additional unit of output.

When a quota is used to control an externality, the government must determine both _____ and _____.

the socially optimal quantity; how to distribute that quantity across suppliers