Natural Resources/Externalities
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) A good is called rival if
1) _______
A) there are negative externalities in consumption.
B) one person's consumption detracts from the enjoyment of
another's.
C) it is not possible to keep those who have not paid from consuming
it.
D) those who have not paid for it can be prevented from consuming
it.
E) many people can consume the good at the same time.
2) A good is called excludable if
A) many people can consume the good at the same time.
B) it is not possible to keep those who have not paid from consuming
it.
C) there are negative externalities in consumption.
D) one person's consumption detracts from the enjoyment of
another's.
E) those who have not paid for it can be prevented from consuming
it.
2) _______
3) A common property resource is
A) rival and excludable.
B) non-rival and non-excludable.
C) sold by markets rather than the government.
D) excludable but not rival.
E) non-excludable but rival.
3) _______
4) Which of the following best explains why a school of fish in the ocean is
a common property resource?
A) Everyone has access to the fish.
B) People who do not pay for the fish can be denied access, but
everyone is able to consume the fish at once.
C) Everyone has access to the fish, and everyone can consume them at
once.
D) People who do not pay for the fish can be denied access.
E) Everyone has access to the fish, but once one person catches them,
no one else can.
4) _______
5) The consequences of having free riders is that
A) markets will not be competitive.
B) pure public goods will be overprovided.
C) common property resources will be overused.
D) society will not produce as much of a public good as it actually
desires.
E) resources will not be distributed fairly.
5) _______
6) The problem of the commons refers to which of the following?
6) _______
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A) Club goods will be underused because membership fees will be
too high.
B) The government will use its power to tax to solve free-rider issues.
C) Monopolies will produce too few socially desirable goods, creating
a deadweight loss.
D) Common property will be overused because there is no individual
incentive to conserve it.
E) Pure public goods will be underproduced in private markets.
7) Nonrenewable common property resources are likely to be consumed
too quickly because
A) the government cannot protect them.
B) they reproduce very rapidly.
C) everyone has an incentive to exploit them before someone else
does.
D) they will be spoiled if not consumed now.
E) markets are imperfectly competitive.
7) _______
8) An externality occurs when
A) insufficient amounts of pure public goods are supplied.
B) nonrenewable resources are exhausted.
C) a cost or benefit falls on someone who is not part of the market
transaction.
D) there are deadweight losses.
E) common property goods are overused.
8) _______
9) Which of the following is an example of a production externality?
A) A lighthouse makes many ships safer.
B) A paper mill dumps pollution into a river, which contaminates a
beach.
C) Flu shots reduce the probability that you will get sick and make
others sick.
D) Cable TV can be provided for many people at the same time.
E) An oil reserve with several owners is drained too fast.
9) _______
10) When a local farm installs a different drainage system, the streams in
the area receive less runoff, and there are more fish. This is an example
of a
A) positive consumption externality.
B) common property resource.
C) negative production externality.
D) positive production externality.
E) negative consumption externality.
10) ______
For the following question(s) refer to the graph below.
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11) The figure above shows a market with a positive consumption
externality. Each unit of this good produced creates a $20 external
benefit. Without government intervention, what will be the equilibrium
price and quantity in this market?
A) $15, 100
B) $35, 150
C) $25, 150
D) $0, 0
E) $35, 100
11) ______
12) The figure above shows a market with a positive consumption
externality. Each unit of this good produced creates a $20 external
benefit. What is the socially efficient price and quantity in this market?
A) $35, 150
B) $0, 0
C) $15, 100
D) $25, 150
E) $35, 100
12) ______
13) The figure above shows a market with a positive consumption
externality. Each unit of this good produced creates a $20 external
benefit. Without government intervention, what is the size of the
deadweight loss in this market?
A) $1,000
B) $20
C) $0
D) $500
E) The deadweight loss cannot be determined from the information
given.
13) ______
14) The figure above shows a market with a positive consumption
externality. Each unit of this good produced creates a $20 external
benefit. How could the government best act to reach the socially
effi price
cien and
t
quantit
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y?
14)
A)
B)
C)
D)
E)
___
___
Put limits on consumption of the good to reduce overuse.
Start a system of marketable permits.
Give consumers a $20 per unit subsidy.
Have all of the good be produced by the government.
Tax producers of this good $20 per unit produced.
15) The figure above shows a market with a positive consumption
externality. Each unit of this good produced creates a $20 external
benefit. How could the government best act to reach the socially
efficient price and quantity?
A) Put limits on consumption of the good to reduce overuse.
B) Give consumers a $20 per unit subsidy.
C) Tax producers of this good $20 per unit produced.
D) Start a system of marketable permits.
E) Have all of the good be produced by the government.
15) ______
16) Which of the following graphs correctly shows a market with a negative
production externality?
A)
16) ______
B)
C)
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D)
E)
17) Smoke from the local factory damages the houses of residents in the
area. According to the Coase Theorem, this problem can be solved by
bargaining only if
A) the government intervenes.
B) there are taxes on pollution emissions.
C) there is no market power.
D) markets are competitive.
E) property rights are defined.
17) ______
18) A tax used to correct an externality is called
A) a Coase tax.
B) a Pigouvian tax.
C) a sin tax.
D) a subsidy.
E) an excise tax.
18) ______
19) Which of the following would NOT be an appropriate government
response to a negative externality?
A) Set up a system of marketable permits.
B) Impose a Pigouvian tax.
C) Regulate firms to restrict the amount of pollution emitted.
D) Subsidize production of the good.
E) All of the above are appropriate regulatory responses.
19) ______
20) a system of marketable permits, which of the following statements is
true?
A) High-pollution firms would buy permits from low-pollution firms.
B) Pollution would increase.
C) Low-pollution firms would buy permits from high-pollution firms.
D) The market would be less efficient.
E) Public interest groups could not buy permits.
20) ______
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the
question.
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21) What is a free rider, and what effect do free riders have on the
provision of public goods?
21) _____________
22) What is the difference between a pure public good and a
common property resource?
22) _____________
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23) Suppose that a paper mill produces waste products that it
disposes of in a local river, which creates pollution problems for
nearby residents. Draw a graph representing this problem, and
identify the market equilibrium price and quantity, the socially
optimal price and quantity, and the deadweight loss due to the
externality.
23) _____________
24) Is the optimal amount of pollution zero? Explain, with use of a
graph.
24) _____________
25) Why do economists favor marketable permits over a regulatory
solution to reducing a given amount of pollution?
25) _____________
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