6. Eggs are sold in a perfectly competitive market. No persons other than the buyers and sellers of.

1. Eggs are sold in a perfectly competitive market. No persons other than the buyers and sellers of eggs are affected in any way when eggs are traded in the market. Then it follows that:

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a. the price of eggs equals the marginal social cost of eggs.

b. the price of eggs equals the marginal social benefit of eggs.

c. the price of eggs exceeds the marginal social benefit of eggs.

d. both (a) and (b)

1. Diamonds are sold by a monopoly firm that maximizes profits. Then it follows that:

a. the marginal social benefit of diamonds exceeds its marginal social cost.

b. the marginal social cost of diamonds exceeds its marginal social benefit.

c. the price of diamonds equals its marginal social cost.

d. the price of diamonds exceeds its marginal social benefit.

e. both (c) and (d)

1. Points on a utility possibility curve represent:

a. a given distribution of well-being between two persons.

b. an efficient allocation of resources.

c. the maximum well-being of any one person, given the resources available and the well-being of another person.

d. all of the above

1. If efficiency has been attained,

a. it will be possible to make any one person better off without harming another.

b. it will not be possible to make any one person better off without harming another.

c. perfect competition must exist.

d. the opportunity cost of any change in resource use must be zero.

1. A move from an inefficient resource allocation to an efficient one:

a. will always be unanimously approved, even if gainers do not compensate losers.

b. will be unanimously opposed.

c. will be unanimously approved if gainers compensate losers.

d. can never result in losers.

1. Which of the following is a normative statement?

a. When interest rates rise, the quantity of loanable funds demanded for new mortgages will decline.

b. To achieve efficiency, governments should prevent monopoly in markets.

c. Unemployment increases during a recession.

d. When governments increase income tax rates, people work less.

1. Normative economics:

a. is not based on underlying value judgments.

b. makes recommendations to achieve efficient outcomes.

c. establishes cause-and-effect relationships between economic variables.

d. makes “if…then” type statements and checks them against the facts.

1. The extra benefit on one more unit of a good or service is its:

a. marginal cost.

b. marginal benefit.

c. total benefit.

d. total cost.

1. If the efficient output of computers is achieved this year, then market price of computers is equal to:

a. the marginal social benefit of computers.

b. the marginal social cost of computers.

c. the total social cost of computers.

d. the total social benefit of computers.

e. both (a) and (b)

1. Suppose the efficient output currently prevails in the market for ice cream. A tax on ice cream con­sumption will:

a. allow efficiency to continue to prevail in the market.

b. result in more than the efficient output in the market.

c. result in less than the efficient output in the market.

d. cause the marginal social cost of ice cream to exceed its marginal social benefit at the market equilibrium output.

1. Positive economics is:

a. an equity based approach in which income should be redistributed.

b. an objective approach without a particular goal based on underlying values.

c. a goal oriented approach based on desired policy outcomes.

d. a belief that governments can implement economic policies for the greater good of society.

1. Normative economics is:

a. completely free of any value system.

b. completely objective.

c. based on a a conscious effort to implement a particular social goal.

d. an approach that determines the effect of particular actions without judgment of the result being good or bad.

1. An efficient level of output means:

a. the total social benefit less the total social cost is maximized.

b. the total social benefit is below the total social cost.

c. the total social cost equals the total social benefit.

d. the total social benefit less the total social cost can be improved.

1. If a government desires to increase production beyond the current competitively determined efficient level, the government should:

a. tax the good.

b. subsidize the good at a price higher than its current price.

c. set the price below its current price.

d. impose a fixed fee whenever the good is purchased.

1. Pareto efficiency between two consumers is achieved:

a. only when the individual marginal rates of substitution are equal to the marginal rate of transformation.

b. only when the individual marginal rates of substitution are less than one, but not necessarily equal.

c. only when the individual marginal rates of substitution are greater than one and equal.

d. only when the individual marginal rates of substitution are equal.

True/False Questions

1. If a negative externality exists for sales of gasoline in a competitive market, more than the efficient amount of gasoline will be sold per year.
2. If the marginal external cost of pollution increases with the annual output of polluting goods, then the total external cost will increase at a constant rate with annual output.
3. When a positive externality exists, benefit to third parties other than the buyers and sellers of a good will result from market exchange of the good.
4. The marginal external benefit of the sale of smoke detectors in a city declines with annual output. The total external benefit of smoke detectors will therefore eventually become zero.
5. When a negative externality exists, the marginal social cost of annual output sold in a competitive market will exceed the marginal social benefit of that output in equilibrium.
6. If a negative externality is associated with the sale of wood stoves, then the marginal private cost of those stoves is less than their marginal social cost.
7. If a positive externality is associated with college enrollment, then when college instruction is pro­vided in a competitive market, the marginal social benefit of enrollment will exceed its marginal social cost in equilibrium.
8. At the current level of annual supply of inoculations against polio, the marginal external benefit of an inoculation is zero. To achieve efficiency, a corrective subsidy must be provided to those being inoculated.
9. To internalize an externality, a corrective tax must be set equal to the marginal external cost.
10. According to the Coase theorem, corrective taxes are necessary to internalize negative externalities when the transactions costs of exchanging property rights to use resources are zero.
11. The efficient amount of pollution abatement is likely to be 100 percent.
12. Pollution rights can be used to price the right to emit pollutants and to provide incentives to reduce emissions by profit-maximizing firms.
13. Emissions standards allow businesses to emit waste at zero cost until the limits set by the standards are reached.
14. The market for sulfur dioxide allowance trading has lowered the cost of achieving a given reduc­tion in sulfur dioxide emissions by electric power-generating plants.
15. Command-and-control regulation to reduce emissions is likely to be a less costly way of reducing a given amount of emissions than tradeable emissions permits.
16. When negative externalities exist, perfectly competitive markets produce less than the efficient output.
17. A toll road used to subsidize public transportation in an effort to reduce pollution is an example of a corrective tax.
18. Assuming no externalities and a competitive environment, the marginal private cost is equal to the marginal social cost.
19. Assuming a negative externality, the price of a good will be lower than if the price was set in a competitive environment without an externality.

Multiple Choice Questions

1. A negative externality results from the sale of firewood in competitive markets. Then it follows that:

a. the marginal private cost of firewood is less than its marginal social cost.

b. the marginal private cost of firewood exceeds its marginal social cost.

c. the marginal private benefit of firewood is less than its marginal social benefit.

d. the marginal private benefit of firewood exceeds its marginal social benefit.

1. If a negative externality prevails in a competitive market for air travel, then:

a. more than the efficient amount of annual air travel will be consumed in equilibrium.

b. less than the efficient amount of annual air travel will be consumed in equilibrium.

c. the marginal social cost of air travel will exceed its marginal social benefit in equilibrium.

d. both (a) and (c)

e. both (b) and (c)

1. A positive externality results from the purchase of smoke detectors. If smoke detectors are sold in a competitive market,

a. the marginal social benefit of smoke detectors is less than the marginal private benefit received by any consumer.

b. the marginal social benefit will exceed the marginal private benefit received by any consumer.

c. in equilibrium the marginal social cost of smoke detectors will equal the marginal social benefit.

d. in equilibrium the marginal social benefit of smoke detectors is zero.

1. The marginal external cost associated with air pollution increases with the annual output of a pollut­ing industry. At the current competitive equilibrium level of output per year, the marginal external cost is $10 per unit of output. To achieve efficiency,

a. a corrective tax of $10 per unit of output is required.

b. a corrective tax of more than $10 per unit of output is required.

c. a corrective tax of less than $10 per unit of output is required.

d. a corrective subsidy of $10 per unit of output is required.

e. a corrective subsidy of less than $10 per unit of output is required

.

1. The marginal external cost associated with paper production is constant at $10 per ton per year. The competitive market equilibrium for paper production is currently 10 million tons per year. A corrective tax on paper production:

a. will collect $100 million annually.

b. will collect more than $100 million annually.

c. will collect less than $100 million annually.

d. will reduce annual damages to those other than buyers and sellers of paper to zero.

e. both (a) and (d)

1. The marginal external cost per unit of effluent discharged into a river by a perfectly competitive chemical industry is currently estimated to be $50 per ton per year. Which of the following state­ments is true?

a. Efficiency can be achieved with a $50 per ton annual effluent charge.

b. At the competitive equilibrium output, the marginal social benefit of discharging effluent is $50.

c. Efficiency can be achieved by banning discharge of effluent.

d. At the efficient output, the marginal social benefit of discharging effluent will be zero.

1. Electric power is produced by an unregulated monopoly in a certain region. The monopolistic elec­tric power company’s production of electricity results in $10 per kilowatt hour of pollution damage to parties other than the buyers of electricity in the region. To achieve efficiency,

a. a $10 per kilowatt hour corrective tax is required.

b. more than $10 per kilowatt hour corrective tax is required.

c. a $10 corrective subsidy is required.

d. less than $10 per kilowatt hour corrective tax is required.

1. The competitive market equilibrium price of sanitation services in a small town with no government-supplied sanitation services is $2 per trash pickup. There is a $1 marginal external benefit associated with each trash pickup. The elasticity of supply of trash pickups is infinite in the long run, implying a horizontal supply curve. To achieve the efficient output of sanitation services,

a. a corrective subsidy must increase the price received by suppliers to $3 per pickup.

b. a corrective subsidy must decrease the price paid by consumers of sanitation services to $1 per pickup.

c. a corrective tax of $1 per pickup is required.

d. a corrective subsidy must increase the price paid by buyers to $3 per pickup.

1. The current competitive market price of fish is $3 per pound. A chemical producer emits effluent into a lake used by a commercial fishing firm. Each ton of chemical output causes a 20-pound reduction in the annual catch of the fishing firm. Assuming that transactions costs are zero and the chemical firm has the legal right to dump effluent into the lake,

a. the fishing firm would be willing to pay up to $60 per ton of chemicals per year to induce the chemical firm to reduce chemical output.

b. the fishing firm would be willing to pay up to $3 per ton of chemicals per year to induce the chemical firm to reduce chemical output.

c. the chemical firm would never consider the damage caused by its effluent.

d. government intervention is required to achieve efficiency.

1. According to the Coase theorem, externalities can be internalized when transactions costs are zero through:

a. corrective taxes and subsidies.

b. effluent fees.

c. assigning property rights to resource use but outlawing their exchange.

d. assignment of property rights to use resources and allowing free exchange of assigned property rights.

1. Which of the following is true if a negative externality is associated with the sale of gasoline?

a. Third parties other than the buyers and sellers of gasoline receive benefits.

b. Third parties other than the buyers and sellers of gasoline bear costs.

c. The marginal social cost of gasoline exceeds its marginal private cost.

d. both (b) and (c)

1. If a positive externality prevails in the market for smoke detectors, then when the market is in equilibrium,

a. the marginal social benefit of smoke detectors exceeds the marginal social cost.

b. the marginal social cost of smoke detectors exceeds the marginal social benefit.

c. the marginal social cost of smoke detectors is equal to the marginal social benefit.

d. more than the efficient amount of smoke detectors is sold.

1. Regulations require that emissions of carbon monoxide be limited to 1,000 tons per 100 square miles for all regions of the nation. If the marginal external cost of the emissions varies among regions in the nation, then the regulations will:

a. achieve the efficient amount of pollution abatement.

b. achieve more than the efficient amount of pollution abatement.

c. achieve less than the efficient amount of pollution abatement.

d. be likely to achieve more than the efficient amount of abatement in some regions, but less than the efficient amount in others.

1. If the marginal costs of reducing emissions varies among regions, then regulations requiring all regions in a nation to reduce emissions by the same amount will achieve:

a. the efficient amount of pollution abatement.

b. more than the efficient amount of pollution abatement.

c. less than the efficient amount of pollution abatement.

d. more than the efficient amount of pollution abatement in some regions, but less than the efficient amount in other regions.

1. Which of the following is true about command-and-control regulation that allows businesses to emit pollutants up to a certain point and bans emissions after that limit is reached?

a. They are equivalent to emissions charges.

b. They make firms pay the marginal cost of the damages done by their emissions, no matter what the level.

c. They allow firms to emit some pollutants at zero charge.

d. They are likely to minimize the cost of achieving any given reduction in emissions.

1. Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 1,000 units and an efficient price of $100.00 per unit, what efficient quantity-price combination would be consistent with a negative externality?

a. 1,000 units, $95.00 per unit price.

b. 950 units, $102.00 per unit price.

c. 900 units, $90.00 per unit price.

d. 1,100 units, $105 per unit price.

1. The effect of a negative externality is similar to:

a. A supply curve (marginal social cost) shifting to the left.

b. A supply curve (marginal social benefit) shifting to the right.

c. A demand curve (marginal social cost) shifting to the left.

d. A demand curve (marginal social benefit) shifting to the right.

1. Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 1,500 units and an efficient price of $50.00 per unit, what efficient quantity-price combination would be consistent with a positive externality?

a. 1,500 units, $60.00 per unit price.

b. 1,300 units, $45.00 per unit price.

c. 1,600 units, $40.00 per unit price.

d. 1,700 units, $56.00 per unit price.

1. The effect of a positive externality is similar to:

a. A supply curve (marginal social cost) shifting to the left.

b. A supply curve (marginal social benefit) shifting to the right.

c. A demand curve (marginal social cost) shifting to the left.

d. A demand curve (marginal social benefit) shifting to the right.

1. Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 500 units and an efficient price of $150.00 per unit, what efficient quantity-price net subsidy combination would be consistent with a corrective subsidy for a positive externality?

a. 500 units, $150.00 per unit price net subsidy.

b. 300 units, $120.00 per unit price net subsidy.

c. 600 units, $160.00 per unit price net subsidy.

d. 700 units, $100.00 per unit price net subsidy.

True/False Questions

1. Bread is an example of a good that is nonrival in consumption.
2. A pure public good is one for which it is easy to exclude consumers from benefits if they refuse to pay.
3. The marginal social cost of producing another unit of a pure public good will always be positive.
4. To obtain a demand curve for a pure public good, the marginal benefit of each consumer must be summed for each possible quantity produced per time period.
5. If the efficient amount of a pure public good is produced, each person consumes it up to the point at which his or her marginal benefit equals the marginal social cost of the good.
6. In a Lindahl equilibrium, each consumer of a pure public good consumes the same quantity and pays a tax share per unit of the good equal to his or her marginal benefit.
7. If the marginal social cost of a pure public good exceeds its marginal social benefit, additional units of the good can still be financed by voluntary contributions.
8. The free-rider problem is less acute in small groups than it is in large groups.
9. A congestible public good is one for which the marginal cost of allowing an additional consumer to enjoy the benefits of a given quantity is always zero.
10. Television programming is a good example of a price-excludable public good.
11. It is possible to price a pure public good and sell it by the unit.
12. The demand curve for a pure public good is obtained by adding the quantities demanded by each individual consumer at each possible price.
13. A Lindahl equilibrium usually has each participant paying the same tax share per unit of a public good even though their marginal benefit of that unit varies.
14. Internet service is an example of a price-excludable public good.
15. Clubs are a means of providing congestible public goods through markets.
16. A common way to fund a public good is through a government that raises funds through taxation.
17. Private education is an example of a price-excludable public good.
18. A congestible good has no limits in how much it can be consumed.

Multiple Choice Questions

1. A pure public good is:

a. one that can easily be sold by the unit.

b. one that is nonrival in consumption.

c. one whose benefits are not subject to exclusion.

d. both (b) and (c)

1. The marginal cost of providing a certain quantity of a pure public good to an additional consumer after it is provided to any one consumer is:

a. zero.

b. positive and increasing.

c. positive and decreasing.

d. positive and constant.

1. The nonrival property of pure public goods implies that the:

a. benefits enjoyed by existing consumers decline as more consumers enjoy a given quantity of the good.

b. benefits enjoyed by existing consumers are unaffected as more consumers enjoy a given quan­tity of the good.

c. good cannot be priced.

d. marginal cost of producing the good is zero.

1. The demand curve for a pure public good is:

a. a horizontal line.

b. obtained by adding the quantities individual consumers would purchase at each possible price.

c. obtained by adding the marginal benefit obtained by each consumer at each possible quantity.

d. the marginal cost curve for the pure public good.

     5.      The efficient output of a pure public good is achieved at the point at which:

a. the marginal benefit obtained by each consumer equals the marginal social cost of producing the good.

b. the sum of the marginal benefits of all consumers equals the marginal social cost of producing the good.&