1. Market failure in
the form of externalities arises when
a. production costs are included in the prices of goods.
b. not all costs and benefits are included in the prices of
goods.
c. the benefits exceed the costs of consuming goods.
d. the market fails to achieve equilibrium.
2. Which of the
following is an example of a positive externality?
a. air pollution
b. a person littering in a public park
c. a nice garden in front of your neighbor’s house
d. the pollution of a stream
3. The social cost of
a good is
a. its benefit to the people who buy and consume it.
b. its total benefit to everyone in society.
c. its cost to everyone in the society that occurs in
addition to the private costs.
d. the cost paid by the firm that produces and sells it
.
4. The private
benefit of consuming a good is
a. its benefit to the people who buy and consume it.
b. its total benefit to everyone in the society.
c. its cost to everyone in the society.
d. the cost paid by the firm that produces and sells it.
5. When a person
drives a car that pollutes the air the
a. private cost of consuming the car’s services exceeds the
social cost.
b. private benefit of consuming the car’s services exceeds
the social benefit.
c. social cost of consuming the car’s services exceeds the
private cost.
d. social benefit of consuming the car’s services exceeds
the private benefits.
6. If a perfectly
competitive industry is not forced to take account of a negative externality it
creates, it will produce where
a. the marginal cost of production equals the marginal
private benefit.
b. the marginal cost of production equals the marginal
social benefit.
c. the marginal social cost of production equals the
marginal social benefit.
d. price equals marginal social benefit.
7. Flu shots are
associated with a positive externality. (Those who come in contact with people
who are inoculated are helped as well.) Given perfect competition with no
government intervention in the vaccination market, which of the following
holds?
a. At the current output level, the marginal social benefit
exceeds the marginal private benefit.
b. The current output level is inefficiently low.
c. A per-shot subsidy could turn an inefficient situation
into an efficient one.
d. All of the above are correct.
8. Because there are
positive externalities from higher education,
a. private markets would provide too little of it.
b. private markets would provide too much of it.
c. the government should impose a tax on college students.
d. the government should impose a tax on students’ families.
9. This diagram
represents the tobacco industry. Which of the following would be included in
the supply (private cost) curve?
a. the cost of labor
b. the cost to the government of the hospital expenses of
smokers with cancer
c. the increased risk of cancer to the nonsmoking passengers
in the smoker’s car pool
d. the price of a pack of cigarettes
10. This diagram
represents the tobacco industry. It is clear that the industry creates
a. positive externalities.
b. negative externalities.
c. no externalities.
d. no equilibrium in the market.
11. This diagram
represents the tobacco industry. The market creates an equilibrium price and
quantity exchanged of
a. $1.90 and 42 units.
b. $1.80 and 35 units.
c. $1.60 and 42 units.
d. $1.35 and 59 units.
12. This diagram
represents the tobacco industry. The socially optimal price and quantity
exchanged are
a. $1.90 and 42 units.
b. $1.80 and 35 units.
c. $1.60 and 42 units.
d. $1.35 and 59 units.
13. This diagram
represents the tobacco industry. If the government uses a pollution tax, how
much of a tax must be imposed on each unit of production?
a. $1.30
b. $0.50
c. $1.80
d. $0.30
14. This diagram
represents the tobacco industry. If the government uses a pollution tax, how
much tax revenue will the government receive?
a. $12.60
b. $10.50
c. $66.50
d. $63.00
15. Internalizing an
externality means
a. the good becomes a public good.
b. government regulations or taxes are sufficient to
eliminate the externality completely.
c. government imposes regulations that eliminate the
externality completely.
d. incentives are altered so that people take account of the
external effects of their actions.
16. A dentist shared
an office building with a radio station. The electrical current from the
dentist’s drill causes static in the radio broadcast, causing the radio station
to lose $10,000 in discounted future profits. The radio station could put up a
shield at a cost of $30,000; the dentist could buy a new drill that causes less
interference for $6,000. Either would restore the radio station's lost profits.
What is the economically efficient outcome?
a. The radio station puts up a shield, which it pays for.
b. The radio station puts up a shield, which the dentist
pays for.
c. The radio station does not put up a shield and the
dentist does not buy a new drill.
d. The dentist gets a new drill and it does not matter who
pays for it.
17. Why can’t private
individuals always internalize an externality without the help of government?
a. Legal restrictions prevent side payments between
individuals.
b. Transactions costs may be too high.
c. Side payments between individuals are inefficient.
d. Side payments between individuals violate equity
standards.
18. What economic
argument suggests that if transactions costs are sufficiently low, the
equilibrium is economically efficient regardless of how property rights are
distributed?
a. The Coase Theorem
b. Say’s Law
c. The Law of Comparative Advantage
d. The Law of Supply
19. Assume the
production of the product in the figure imposes a cost on society of $7.00 per
unit. If the free market equilibrium output is 50 units, the government should
a. impose a tax of $2.50 per unit.
b. reduce the output of the firm by approximately 39 units.
c. impose a lump-sum tax of $350 per period.
d. impose a tax of $7.00 per unit.
20. A benefit of
taxes over regulation to internalize externalities is
a. it is easier to choose the optimal amount of taxes than
the optimal amount of regulation.
b. regulations are more difficult to impose than taxes.
c. taxes equate the social costs with the social benefits.
d. taxes provide incentives to adopt new methods to reduce
the externality.
21. If the government
wants to tax a polluter, the economically efficient outcome occurs when the
a. marginal tax equals the marginal cost to other people
from the pollution.
b. average tax equals the average cost to other people from
the pollution.
c. total tax equals the total cost to other people from the
pollution.
d. tax is high enough to stop pollution completely.
22. Which of the
following is NOT a method that could effectively deal with negative
externalities?
a. relying on voluntary compliance
b. taxing the output of industries that pollute
c. creating legal environmental standards
d. increasing public spending on cleanup and reduction of
pollution
23. A common
complaint about environmental regulation and enforcement is that it
a. applies only to firms that produce goods, not services.
b. is politically motivated and so is always misdirected.
c. can be too burdensome to producers who can pay the fines
more easily than they can reduce pollution.
d. results in more pollution than without the regulations.
24. The benefit to a
pollution tax over other forms of internalizing a pollution externality is that
it
a. eliminates pollution completely.
b. forces cleanup to occur.
c. is imposed only on the market with the externality.
d. creates positive externalities to compensate for negative
externalities.
25. Pollution permits
a. impose regulations on firms that they must achieve.
b. set a quantity of pollution that will exist.
c. cannot be traded between firms in order to make sure that
the worst offenders must clean up their production processes.
d. are efficient because they eliminate all pollution.
26. This diagram
shows the market for pollution when permits are issued to firms and traded in
the marketplace. The equilibrium price of pollution here is
a. $500.
b. $1000.
c. $1500.
d. $2000.
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