NSS Econ Book 3 Ch 17 question bank

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Chapter 17
The roles of government (I): market failure
Multiple Choice Questions
Question code: B3C17Q001 (new)
Under which of the following cases does the problem of externalities NOT exist?
(1) A famous tenor sings in an opera house in London and is fully compensated.
(2) Eddie buys a diamond ring as a gift for his girlfriend but receives nothing in
return from his girlfriend.
(3) Tony studies Finance at a university. He pays all the educational expenses by
himself.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: A
Question code: B3C17Q002
Externalities exist when a party’s action affects other parties but there is no
_____________ or ____________.
A. increase in output; decrease in price
B. compensation paid; payment received
C. tax paid; subsidy received
D. production cost paid; profits earned
Answer: B
Question code: B3C17Q003
________ externalities exist when a party’s action _______ other parties but no
compensation is paid to the other parties.
A. Beneficial; benefits
B. Positive; involves
C. Harmful; harms
D. Negative; negates
Answer: C
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Question code: B3C17Q004
A negative externality exists if there is a divergence between ________ in the market.
A.
B.
C.
D.
private and social costs
total cost and total benefit
private and social benefits
social benefit and social cost
Answer: A
Question code: B3C17Q005
A positive externality exists if there is a divergence between __________ in the
market.
A. average and social benefits
B. private and social benefits
C. total cost and total benefit
D. social benefit and social cost
Answer: B
Question code: B3C17Q006 (new)
Which of the following is an example of a divergence between private and social
benefits?
A. A full-time teacher teaches his students during the summer holidays without
receiving payment from his students.
B. On Mother’s Day, a mother receives a kiss from her daughter free of charge.
C. Coco cooks and her neighbours enjoy the smell.
D. Janice sings in a charity show and is fully compensated.
Answer: C
Explanation
Option A is not correct. If the economic agent is paid according to his contribution,
there is no beneficial externality. In this case, the teacher receives compensation from
his school to teach his students.
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Question code: B3C17Q007
Externality exists when
A.
B.
C.
D.
a tutor receives his salary.
a consumer buys clothes at a discount.
Mary enjoys the music played by her neighbour free-of-charge.
a company pays dividends to its shareholders.
Answer: C
Question code: B3C17Q008
Which of the following is an example of positive externality?
A.
B.
C.
D.
pollution
new knowledge
traffic congestion
overfishing
Answer: B
Question code: B3C17Q009 (new)
A famous women’s volleyball player visits Hong Kong. Which of the following are
her private benefits?
(1) The payment she receives for attending functions in shopping malls
(2) The increase in the popularity of her national volleyball team
(3) The increase in her image royalties (肖像使用費)
A.
B.
C.
D.
(1) and (2) only
(1) and (3) only
(2) and (3) only
(1), (2) and (3)
Answer: B
Question code: B3C17Q010 (new)
Which of the following is an external cost of a fireworks show organised by the
government?
A. Payment to fireworks manufacturers
B. Increase in revenue of nearby shops
C. Police manpower employed to maintain order in the area
D. Light pollution
Answer: D
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Question code: B3C17Q011 (new)
Which of the following is NOT an external benefit of maintaining a residential
building?
(1) The increase in the price of the building
(2) Reduction in the building’s insurance fee as the external walls pose less danger
to passersby
(3) The comfort of the residents in the building (residents have paid their
maintenance fee)
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: D
Question code: B3C17Q012 (new)
There is a long queue outside a newly opened snack shop. Which of the following is
an external cost of its opening?
A. Extra wages to hire more workers to cater to the unexpected queue
B. The amount already paid to purchase food ingredients
C. Loss of business at a neighbouring shop as the queue blocks its entrance
D. The profit earned by the snack shop
Answer: C
Question code: B3C17Q013 (new)
John opens a factory. Which of the following may be included in his private costs?
(1) Rent on the factory premises
(2) Interest on his start-up capital borrowed from a bank
(3) Damage that the production process imposes on the health of his workers
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: D
Explanation
Option (3) may be included in his private cost because this may reduce his workers’
productivity.
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Question code: B3C17Q014
Social cost includes the cost borne by
A.
B.
C.
D.
(1) the government.
(2) the economic agent taking the action.
(3) individuals who are affected by the action.
(1) and (2) only
(1) and (3) only
(2) and (3) only
All of the above
Answer: D
Question code: B3C17Q015
* Suppose Ming only considers the private cost of having lunch at McDonald’s.
Which of the following is correct?
A. Inefficiency must exist as he does not consider the social cost.
B. There will be a divergence between private cost and social cost because the wages
for McDonald’s staff are too low.
C. The government should intervene as the social cost will be greater than the private
cost.
D. Ming’s action can be efficient.
Answer: D
Question code: B3C17Q016
If there is a divergence between private and social costs,
A. inefficiency may exist due to underproduction.
B. an external benefit must exist.
C. the difference between the costs is the external cost.
D. the government must take action to correct it.
Answer: C
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Question code: B3C17Q017
If all drivers considered the external costs they imposed on other drivers, then
A.
B.
C.
D.
no one would drive.
travel time would be shortened.
the road must not be fully utilised.
society would suffer a loss.
Answer: B
Question code: B3C17Q018
The socially optimal output level will be attained when
A.
B.
C.
D.
private cost equals social cost.
marginal private cost equals marginal private benefit.
total social benefit equals total social cost.
there is no deadweight loss.
Answer: D
Question code: B3C17Q019
From the viewpoint of economics, the efficient level of timber harvesting (砍伐林木)
is the level at which
A. there is no timber harvesting at all.
B. the total social cost of timber harvesting is at a minimum.
C. the total social benefit from timber harvesting equals the total social cost of timber
harvesting.
D. the marginal social benefit from timber harvesting equals the marginal social cost
of timber harvesting.
Answer: D
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Question code: B3C17Q020
Given the quantity transacted, marginal social benefit equals marginal private cost in
the market. Which of the following are correct?
(1) If there is no negative externality, efficiency will be attained.
(2) If there is an external cost, a deadweight loss exists.
(3) If there is no external cost, inefficiency exists.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. All of the above
Answer: A
Question code: B3C17Q021
* Suppose there is no external benefit. The efficient output level is attained if
A. the marginal social benefit is equal to the marginal private benefit.
B. the marginal social cost is equal to the marginal private benefit.
C. the marginal social benefit is equal to the marginal private cost.
D. Insufficient information to determine
Answer: B
Question code: B3C17Q022
Society will experience overconsumption if the
A. marginal social benefit is greater than the marginal private cost.
B. marginal private cost is greater than the marginal private benefit.
C. marginal private benefit is greater than the marginal social cost.
D. marginal social cost is greater than the marginal social benefit.
Answer: D
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Question code: B3C17Q023
Overproduction occurs when
A.
B.
C.
D.
(1) there is an external cost.
(2) there is an effective quota.
(3) there is a unit subsidy.
(1) only
(1) and (3) only
(2) and (3) only
(1), (2) and (3)
Answer: B
Question code: B3C17Q024
Andy loves to sing at midnight. This is an example of
A. a negative externality.
B. an external benefit if Andy’s neighbourhood loves his songs and he does not
receive any payment.
C. an external cost as it is illegal to sing at midnight.
D. an external benefit because this will help Andy become an excellent singer.
Answer: B
Question code: B3C17Q025
If there is a deadweight loss,
A. underproduction must exist.
B. overproduction must exist.
C. marginal social surplus must not be zero.
D. marginal social benefit must not be equal to marginal private cost.
Answer: C
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Question code: B3C17Q026 (new)
Suppose a divergence between private and social costs exists, and economic agents
only consider their own benefits and costs. Which of the following statements is
correct?
A. There is underproduction.
B. There is excess supply.
C. Total social benefit equals total social cost.
D. The external cost is greater than zero.
Answer: D
Question code: B3C17Q027
Under which of the following situations will underproduction most likely occur?
A. Ann talks loudly and disturbs other colleagues.
B. Bob studies hard and gets full marks on his examination.
C. Cathy, a web designer, builds a website for her client.
D. Donald volunteers to do magic tricks in Victoria Park every Sunday to entertain
pedestrians.
Answer: D
Question code: B3C17Q028 (new)
If there is an external cost, taxation may be used to correct the market because
taxation can decrease the output level by
A. decreasing the marginal social benefit.
B. increasing the marginal private cost.
C. increasing the marginal social cost.
D. decreasing the marginal external benefit.
Answer: B
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Question code: B3C17Q029
Under which of the following situations may taxation help improve efficiency?
A. The excellent performance of Hong Kong athletes at the East Asian Games
improves the image of Hong Kong.
B. Some people watched the fireworks free of charge during the opening ceremony at
the East Asian Games.
C. Drinkers in Lan Kwai Fong (蘭桂芳) disrupt pedestrians.
D. Some restaurants provide special offers at Christmas.
Answer: C
Question code: B3C17Q030
From the viewpoint of society, which of the following can be the benefits of imposing
a pollution tax to correct negative externalities?
(1) Tax revenue from the pollution tax can be used to reduce pollution.
(2) The deadweight loss decreases to zero.
(3) Factories cut their output level to an efficient level.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. All of the above
Answer: D
Question code: B3C17Q031 (new)
Which of the following is a possible way to narrow the divergence between private
and social benefits in Hong Kong?
A. Tobacco duty
B. Grant to university students
C. Levy on plastic bags
D. Introduction of emissions trading
Answer: B
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Question code: B3C17Q032 (new)
A highway creates noise and disturbs residents nearby. Which of the following can
lessen the problem of external cost?
(1) Collecting charges from highway users
(2) Subsidising nearby residents to install soundproof windows
(3) Privatising the highway
A. (1) only
B. (2) only
C. (1) and (2) only
D. (2) and (3) only
Answer: C
Question code: B3C17Q033
If there is a positive externality, which of the following measures may be used by the
government to correct the problem?
A. Taxation
B. Price ceiling
C. Quota
D. Subsidy
Answer: D
Question code: B3C17Q034
A subsidy may be used to correct the problem of externalities because it can
A. reduce external cost.
B. increase external benefit.
C. reduce marginal private cost.
D. reduce the output level.
Answer: C
Question code: B3C17Q035
If marginal social benefit is greater than marginal private benefit, then
A. market exchange will not work.
B. a subsidy must be provided to correct the market.
C. an external benefit must exist.
D. there is an overproduction.
Answer: C
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Question code: B3C17Q036
* Under which of the following situations can a subsidy help improve efficiency?
A. An economics teacher shares his teaching materials with the public free of charge.
B. Pirate Bay provides BitTorrent files free of charge (BitTorrent is an internet file
sharing method).
C. Internet search engine providers provide web searches free of charge.
D. Baidu (百度) provides free MP3 song downloads.
Answer: A
Explanation
In Options B, C and D, the firms are usually paid by advertisers and the pay is
positively related to the websites’ number of hits. Hence, to increase their websites’
hit rates, the firms will provide different services free of charge. Subsidising those
activities may lead to a decrease in efficiency, instead of an increase in efficiency.
Question code: B3C17Q037 (new)
If there is a harmful externality, then the government may
A. subsidise economic agents which generate the external costs.
B. restrict the output level to reduce the deadweight loss.
C. do nothing because the market will always solve the problem itself.
D. take over all private firms because only public firms can produce without
generating an external cost.
Answer: B
Question code: B3C17Q038
Recently, the Chinese government tore down some illegal cement plants because the
plants could not meet environmental protection requirements. This intervention is an
example of
A. taxation and subsidisation.
B. public ownership.
C. market exchange.
D. restriction or removal by regulation.
Answer: D
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Question code: B3C17Q039
In Hong Kong, some primary and secondary schools are owned and run by the
government. This is an example of
A. market exchange.
B. integration.
C. free goods.
D. public ownership.
Answer: D
Question code: B3C17Q040
Which of the following is an example of market solutions to the problem of
externalities?
A. The government subsidises firms which generate an external benefit.
B. The government taxes firms which generate an external cost.
C. The government restricts output to a certain level.
D. The government defines private property rights for scarce resources and thus
market exchange emerges to reduce overproduction.
Answer: D
Question code: B3C17Q041
Which of the following are examples of market solutions to the problem of
externalities?
(1) Firms trade with each other for quotas to emit pollutants.
(2) A factory, which pollutes a nearby farm, combines with the farm.
(3) The government builds a tunnel.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: A
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Question code: B3C17Q042
* The government may reduce pollution by issuing pollution permits because
A. the government knows the efficient output level and can implement the permit
system efficiently.
B. the marginal cost of producing the goods will increase as the producers must buy
permits to increase production.
C. the permits will justify pollution and increase the output level.
D. the permits are given to firms exercising social responsibility and cannot be
traded.
Answer: B
Question code: B3C17Q043
If pollution permits are granted and can be traded freely, then
A. the pollution level must increase because pollution is legal now.
B. the socially optimal output level must not be attained because a government
cannot measure the amount of pollution accurately.
C. firms will earn higher profits because they can pollute unrestrictedly if they can
pay for the permits.
D. the marginal private cost of production will increase so that the output level will
decrease.
Answer: D
Question code: B3C17Q044 (new)
If there is traffic congestion,
A. there is a divergence between private and social costs.
B. the government should increase the gasoline tax.
C. charging a toll for the use of the road must be efficient.
D. All of the above
Answer: A
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Question code: B3C17Q045 (new)
A textile factory discharges pollutants into a river, threatening the health of
downstream residents. Which of the following is true?
A. Market transaction could solve the problem of pollution, regardless of the
transaction cost involved.
B. A tax should be imposed to limit the factory’s production.
C. Relocating the factory may be efficient.
D. None of the above
Answer: C
Question code: B3C17Q046 (new)
Some people watch a football match from the roofs of nearby buildings without
paying. Which of the following is correct?
A. The government should intervene since it is dangerous to stand on building roofs.
B. There is a divergence between private and social benefits.
C. The football clubs should find ways to charge the people who watch from the roof.
D. None of the above
Answer: B
Question code: B3C17Q047 (new)
Beekeeper’s bees help pollinate fruit trees in a nearby orchard. At the same time, the
bees collect honey from the fruit trees. Which of the following is correct?
A. As there are external benefits, there is underproduction.
B. The beekeeper should be paid for his pollination services.
C. The government should subsidise the orchard owner to improve economic
efficiency.
D. There may be no divergence between private and social benefits.
Answer: D
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Question code: B3C17Q048
If the cost of monitoring pollutant emissions is extremely high, then
A.
B.
C.
D.
the introduction of emission trading may not solve the problem of externality.
the introduction of emission trading will be efficient.
the government must intervene to stop pollution.
the level of pollutant emissions must be equal to the level permitted.
Answer: A
Question code: B3C17Q049
If there is a transaction cost, then the market exchange for correcting the negative
externality
A. must not work because the transaction cost must lead to a failure of market
exchange.
B. must work because the market solution is always the best solution.
C. may still work when the transaction cost is small.
D. may still work when the gain from market exchange is greater than the transaction
cost.
Answer: D
Question code: B3C17Q050
Internalisation means that
A. firms solve externalities via their internal divisions.
B. firms reduce or remove harmful externalities through integration with each other.
C. firms or people involved in harmful externalities will find their own ways to
reduce or remove externalities.
D. firms or people gain from internal economies of scale.
Answer: C
Question code: B3C17Q051
In Hong Kong, some bus operators try to reduce air pollution by buying new bus
models which emit fewer pollutants. This is an example of
A. market exchange.
B. integration.
C. self-restraint.
D. government intervention.
Answer: C
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Question code: B3C17Q052
A cattle raiser erects a fence to prevent the cattle from damaging his neighbour’s
crops. This is an example of
A. subsidisation.
B. substitution.
C. integration.
D. internalisation.
Answer: D
Question code: B3C17Q053
The problem of externality can be solved by combining separate firms into one under
the same ownership because
A. the combined firm will enjoy economies of scale.
B. private costs become external costs.
C. the combined firm must be under public ownership and so it will be concerned
about society.
D. the new firm will try to maximise the total gain from all activities under its
control.
Answer: D
Question code: B3C17Q054
There is emission trading (排污交易) between Country A (a developing country) and
Country B (a developed country). Which of the following is correct?
A. To achieve efficiency, most of the pollution permits should be assigned to Country
A as it does not have money to buy the permits.
B. It is fair for Country A to have more pollution permits as the pollution level in
Country A should be lower.
C. If the transaction costs are negligible, the initial assignment of pollution permits
will not affect the result of resource allocation.
D. None of the above
Answer: C
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Question code: B3C17Q055
To attract more customers, a stall at a book fair employs a young model to distribute
its free gift. Which of the following is correct?
A. To achieve efficiency, all other stalls at the book fair should pay the stall
mentioned as they enjoy the external benefits from the employment of the young
model.
B. As the stall mentioned attracts customers from other stalls, it should compensate
other stalls for their losses.
C. The activity mentioned is just a means of non-price competition. Thus, no
externality exists.
D. None of the above
Answer: D
Question code: B3C17Q056
To attract more customers, a stall at a book fair employs a young model to distribute
its free gift. This attracts a group of amateur photographers to take photographs of the
young model. Some stalls claim that the photographers disturb their business
operation. Which of the following is correct?
A. The stall which employs the young model should pay compensation to the
affected stalls.
B. If the transaction cost of obtaining compensation is extremely high, the affected
stalls may choose to do nothing.
C. If the affected stalls have the right to compensation, the problem of harmful
externality must be solved.
D. There is a divergence between private and social costs as the group of amateur
photographers can take photographs of the young model free of charge.
Answer: B
Explanation
Option D is not correct. The reason for the existence of the divergence between
private and social costs is not based on the price charged for taking photographs. Even
the photographers need to pay a positive money price, if their actions harm other
parties but if they do not pay compensation to the affected parties, the divergence
between private and social costs will exist.
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Question code: B3C17Q057
To attract more customers, a stall at a book fair employs lots of young models to
distribute its free gift. This attracts a group of amateur photographers who take
photographs of the young models. Some stalls claim that the photographers disturb
their business operations. Suppose the transaction costs involved are negligible and
property rights are well-defined. Which of the following is correct?
A. If the photographers have the right to take photographs and do not need to
compensate the affected stalls, then they will take more photographs at the book
fair.
B. If the affected stalls have the right to compensation from the photographers, no
photographer will appear at the book fair.
C. Regardless of the assignment of the property right, the problem of harmful
externality can be solved by market exchange.
D. Regardless of the assignment of the property right, the affected stall will be
efficient and receive the same amount of compensation.
Answer: C
Question code: B3C17Q058
Suppose there is no beneficial externality and the transaction costs involved are
negligible. A factory’s production now pollutes a fish farm. Which of the following is
correct?
A. The production will not be efficient if the potential gain from correcting the
externality is small.
B. The factory will stop polluting the fish farm.
C. However the property rights are assigned, if the rights are well-defined, the
production will be efficient.
D. If the factory has the right to pollute, it will ignore the fish farm and continue to
emit pollutants. This leads to deadweight loss.
Answer: C
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Question code: B3C17Q059 (new)
Andy owns a factory that pollutes a small pool. Which of the following statements is
correct?
A. This is an example of a public good as the small pool can be used by all
individuals at the same time.
B. Inefficiency exists because the government does not impose a regulation to restrict
Andy’s behaviour.
C. Nearby residents can request compensation from Andy.
D. The problem of harmful externalities may not exist if Andy owns the pool.
Answer: D
Question code: B3C17Q060
Government intervention is justified if
A. the market fails to allocate resources efficiently.
B. the resource allocation favours the rich.
C. it can increase income levels.
D. None of the above
Answer: D
Explanation
Option A is incorrect. Government intervention may not be efficient if the cost of
government intervention is greater than its benefit.
Question code: B3C17Q061 (new)
Even if there is a problem of externalities, it is not necessary for the government to
intervene. This is because
A. government intervention involves a high cost.
B. a market solution is preferred by the public.
C. government intervention may not be the least costly method.
D. it is impossible for the government to allocate resources efficiently.
Answer: C
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Question code: B3C17Q062
When there is a negative externality,
A.
B.
C.
D.
the private cost is higher than the social cost.
the government must intervene.
the government can subsidise production.
output is higher than the efficient level.
Answer: D
Question code: B3C17Q063
If there is a divergence between private and social benefits,
A.
B.
C.
D.
the private benefit is smaller than the external benefit.
an external cost exists.
inefficiency may exist due to underproduction.
the government must take action to correct it.
Answer: C
Question code: B3C17Q064
Which of the following statements is correct?
(1) When tackling the problem of externalities, market solutions are preferred to
A.
B.
C.
D.
government intervention.
(2) The cost of government intervention may be greater than the reduction in
deadweight loss due to the government intervention.
(3) Market solutions to the problem of externalities cannot take place if private
property rights are not well-defined.
(1) and (2) only
(1) and (3) only
(2) and (3) only
(1), (2) and (3)
Answer: C
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Question code: B3C17Q065 (new)
A private good is
A.
B.
C.
D.
owned by private individuals.
produced by private enterprises.
rival in consumption.
a positive-priced good.
Answer: C
Question code: B3C17Q066 (new)
A public good is
A.
B.
C.
D.
a good with an excess supply at zero price.
a good whose consumption involves zero cost.
a good that is difficult to prevent non-payers from using.
All of the above
Answer: C
Question code: B3C17Q067 (new)
Which of the following is true?
A. A private good is a consumer good.
B. A public good is not scarce.
C. A private good can only be consumed by the buyer.
D. A public good can be consumed concurrently by many people.
Answer: D
Question code: B3C17Q068 (new)
Which of the following is INCORRECT?
A. A private good is scarce.
B. A public good is scarce.
C. There is no competition in the provision of public goods.
D. There may be no competition in the consumption of public goods.
Answer: C
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Question code: B3C17Q069
Private goods are goods of which
A.
B.
C.
D.
one’s consumption reduces the amount produced.
one’s consumption increases the amount available for others’ consumption.
one’s consumption will not increase the amount available for others’ consumption.
one’s consumption reduces the amount available for others’ consumption.
Answer: D
Question code: B3C17Q070
Public goods are goods which are
A.
B.
C.
D.
provided by the government.
distributed freely.
consumed by the public.
non-rival and non-excludable in consumption.
Answer: D
Question code: B3C17Q071 (new)
Which of the following is a private good provided by public enterprises?
A. Public hospital services
B. National defence
C. TV programmes provided by the government
D. An article written by Bill Gates
Answer: A
Question code: B3C17Q072 (new)
Which of the following is a public good provided by the private sector?
A. A fireworks show held by the government
B. A bottle of distilled water
C. An economics textbook
D. Microsoft Office software
Answer: D
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Question code: B3C17Q073 (new)
Which of the following comes closest to a private good?
A.
B.
C.
D.
A song sung by Joey Yung
A smartphone
Philosophical articles written by Henry David Thoreau
A well-maintained garden
Answer: B
Question code: B3C17Q074 (new)
Which of the following is the closest to a public good?
A. A Jan Lamb (林海峰) talk show
B. The manuscript prepared for Jan Lamb’s talk show
C. A video recording of Jan Lamb’s talk show
D. Souvenirs sold at Jan Lamb’s talk show
Answer: C
Question code: B3C17Q075
Which of the following comes closest to a public good?
A. A hot dog
B. Beatles’ songs
C. A television set
D. A public fish pond
Answer: B
Question code: B3C17Q076
Which of the following comes closest to a private good?
A. A TV programme
B. Wi-Fi wireless internet access services
C. Newspapers distributed at MTR stations
D. An advertisement on a bus
Answer: C
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Question Bank (Chapter 17)
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© Pearson Education Asia Limited 2015
Question code: B3C17Q077
Stephy has dinner with her boyfriend and pays the bill. This is an example of
A.
B.
C.
D.
an externality because Stephy’s boyfriend does not pay for his dinner.
a free good because Stephy’s boyfriend can have his dinner for free.
a public good because Stephy shares her money with her boyfriend.
distributing output by prices because Stephy enjoys her dinner and pays the bill.
Answer: D
Question code: B3C17Q078
Public goods are goods which are
A.
B.
C.
D.
rival and excludable.
rival and non-excludable.
non-rival and excludable.
non-rival and non-excludable.
Answer: D
Question code: B3C17Q079 (new)
A public computer in a library is a _____________ because ____________.
A. private good … it is produced by private firms
B. private good … it is rival in consumption
C. public good … it is placed in public areas
D. public good … everyone can use it
Answer: B
Question code: B3C17Q080
National defence is an example of a public good because
A. all citizens are willing to pay for it.
B. it can be consumed by all citizens at the same time.
C. it is paid for with public funds.
D. it is provided by the government.
Answer: B
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Question code: B3C17Q081
Suppose an MP3 song by Andy Lau is now downloadable at his official website free
of charge, and Andy Lau announces that all his fans may freely distribute the song to
anyone. Which of the following is correct?
A. The song is not a public good because it can only be freely shared on the internet.
B. The song can be regarded as a private good because Andy Lau holds the private
property rights to it.
C. The song is a public good as it can be consumed by nearly all individuals at the
same time.
D. The song is a private good because a computer is needed to store it and play it.
Answer: C
Question code: B3C17Q082 (new)
We would NOT regard a good as a ‘public good’ if
A. it is not provided by the government.
B. it is not consumed by the public.
C. it is not financed by public funds.
D. rivalry exists in its consumption.
Answer: D
Question code: B3C17Q083 (new)
The City Forum (城市論壇) in Victoria Park can be regarded as a public good
because
A. the audience can participate free of charge.
B. the speakers do not receive any payment.
C. only a few individuals are interested in the Forum.
D. it can serve many individuals at the same time.
Answer: D
Question code: B3C17Q084
Which of the following is the best example of public goods?
A. Computers in a public library
B. A public park
C. An apple tree
D. An economic theory
Answer: D
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Question code: B3C17Q085
Which of the following is an example of public goods?
A.
B.
C.
D.
Free music on the web
Fish in the sea
Medical services
A public library
Answer: A
Question code: B3C17Q086
A public good
A. is a free good.
B. may be used by non-payers because it is too difficult to exclude or prevent people
from consuming it.
C. should be provided by the government.
D. All of the above
Answer: B
Short Questions
Question code: B3C17Q301
Mary says, ‘Without government intervention, when a perfectly competitive market is
in equilibrium, efficiency in resource allocation must be achieved.’ Do you agree?
Explain your answer.
(7 marks)
Answers:
• No.
(1 mark)
• Market equilibrium is attained when the price has no tendency to change, i.e., at
the intersection point of the demand and supply curves.
(1 mark)
• Efficiency in resource allocation is achieved when total social surplus is
•
•
•
maximised.
(1 mark)
When there is an externality, market equilibrium will be attained when marginal
private benefit is equal to marginal private cost.
(1 mark)
However, the condition for efficiency occurs when marginal social benefit is equal
to marginal social cost.
(1 mark)
As economic agents only consider their own interests and ignore the gain or loss
of the third party, their output level will be different from the efficient level and
deadweight loss exists even at market equilibrium. In this case, attaining market
equilibrium may not achieve efficiency in resource allocation.
(2 marks)
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Question code: B3C17Q302
‘If inefficiency exists due to a problem of harmful externalities, the government must
take action to correct the market.’
Do you agree? Briefly explain your answer.
(2 marks)
Answers:
No. The cost of government intervention may be higher than its potential benefit (i.e.,
the reduction in deadweight loss). Thus, the government’s action to correct the market
may lead to a greater loss to society.
(2 marks)
Question code: B3C17Q303
What is market failure? Explain your answer with the concept of externality.
(3 marks)
Answers:
• Market failure is a situation in which the market fails to allocate resources
efficiently, i.e., total social surplus is not maximised.
(1 mark)
• When there is an externality, economic agents will ignore the effect of their
actions on other parties. Thus, they will overproduce or underproduce and so total
social surplus will not be maximised. Market failure exists.
(2 marks)
Question code: B3C17Q304 (new)
State TWO private costs of drink-driving (酒後駕駛) and TWO external costs of
drink-driving.
(4 marks)
Answers:
Private costs:
• Possible injuries to the driver himself
• Possible fines to be paid if one gets caught
• Possible repair expenses incurred from car accidents
(Any TWO of the above of other reasonable answers. 1 mark × 2 = 2 marks)
External costs:
• Possible injuries affecting other road users
• Possible road blockage that results from car accidents
• Possible repair expenses of other drivers’ cars as the result of accidents
(Any TWO of the above of other reasonable answers. 1 mark × 2 = 2 marks)
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Question Bank (Chapter 17)
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Question code: B3C17Q305 (new)
What is an external benefit? Give ONE example.
(3 marks)
Answers:
An external benefit exists when someone’s action benefits others but he receives no
payment.
(2 marks)
Examples:
• The creation of new knowledge
• Education
(Any ONE of the above of other reasonable answers. 1 mark)
Question code: B3C17Q306 (new)
An elderly person talks loudly to a security guard every morning. This annoys
residents on the lower floors.
Suggest THREE possible ways to solve the problem.
(3 marks)
Answers:
• Paying the elderly person to lower his voice
• Relocating the affected residents to other flats
• Encouraging the elderly person to lower his voice / Encouraging the elderly
person to talk in other places
• Installing soundproof windows in the affected flats
(Any THREE of the above of other reasonable answers. 1 mark × 3 = 3 marks)
Question code: B3C17Q307 (new)
A magician practises his tricks on a train. Nearby passengers enjoy his tricks.
Explain the problem of externalities in this case. Suggest ONE possible ways to solve
the problem.
(3 marks)
Answers:
There is a beneficial externality. Some passengers enjoy the magician’s tricks but they
do not pay the magician.
Possible ways to solve the problem:
• Paying the magician for his magic tricks
• Providing subsidies to encourage more magic tricks
(Any ONE of the above of other reasonable answers. 1 mark)
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(2 marks)
© Pearson Education Asia Limited 2015
Question code: B3C17Q308 (new)
Suggest ONE solution to the problem of beneficial externalities using a real life
example.
(2 marks)
Answers:
• Subsidisation, e.g., innovation funds
• Market exchange, e.g., the inventor receives a patent and possesses the exclusive
right to derive income from it
(Any ONE of the above or other reasonable answers with ONE relevant example.
2 marks)
Question code: B3C17Q309 (new)
Suggest ONE government solution to the problems of externalities. Also state ONE
real-life example.
(2 marks)
Answers:
• Taxation, e.g., duty on tobacco, plastic bag levy
• Subsidisation, e.g., subsidies to medical services, research grants
• Restriction or removal by regulation, e.g., requiring a factory to move to other
places
• Public ownership, e.g., schools owned and run by the government
(Any ONE of the above with ONE relevant example. 2 marks)
Question code: B3C17Q310 (new)
In Hong Kong, if a person over 18 years old commits a murder, he will be sentenced
to life in prison (終身監禁).
Student A says, ‘There is a divergence between private and social costs in a murder
case.’
Explain whether the student is correct.
(3 marks)
Answers:
The statement is correct. The private cost of a murder is equal to the value to the
murderer of being in prison for life. However, society also has to bear an external cost
for the murder, i.e., the value of the victim’s life and the cost to put the murderer into
prison. Thus, there is a divergence between private and social costs.
(3 marks)
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Question Bank (Chapter 17)
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Question code: B3C17Q311
Explain why smoking can be an example of negative externality.
(3 marks)
Answers:
• When a person smokes, he only considers his private costs, such as the cost of
buying cigarettes.
(1 mark)
• His smoke may harm the health of other people and pollute the environment.
(1 mark)
• However, he does not compensate the affected people or pay for his pollution.
(1 mark)
Question code: B3C17Q312
A neighbour frequently eats durians (榴槤). He always eats with his door and window
opened.
(a) Explain why his behaviour can be an example of divergence between private and
social costs.
(2 marks)
(b) Explain why his behaviour can be an example of divergence between private and
social benefits.
(2 marks)
Answers:
(a) The neighbour only considers his private costs, such as the price of durians, and
does not compensate nearby residents who hate durians and are bothered by the
smell of durians.
(2 marks)
(b) The neighbour only considers his private benefits such as the taste of durians and
does not receive payments from nearby residents who love durians and enjoy
their smell.
(2 marks)
Question code: B3C17Q313
‘Private cost is a cost borne by a private firm, while social cost is a cost borne by a
social enterprise.’ Use the definitions of private cost and social cost to explain why the
statement is INCORRECT.
(4 marks)
Answers:
• Private cost is the cost borne by the economic agent taking the action.
(1 mark)
• Social cost is the cost borne by society as a whole.
(1 mark)
• Thus, both the private cost and social cost may be borne by a private firm and a
social enterprise. The main difference is that the private cost includes only the cost
borne by the economic agent taking the action, while the social cost includes both
private cost and the external cost borne by other economic agents affected by the
action.
(2 marks)
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Question code: B3C17Q314
‘Private cost is a part of the social cost, but the social cost may not be the private
cost.’ Do you agree? Briefly explain your answer.
(3 marks)
Answers:
• Yes.
(1 mark)
• As the economic agent taking the action is a member of society, his cost should be
included in the social cost.
(1 mark)
• When an external cost exists, the social cost will be greater than the private cost.
Thus, the social cost may not be the private cost.
(1 mark)
Question code: B3C17Q315
‘There is a negative externality if a social cost exists.’ Do you agree? Briefly explain
your answer.
(3 marks)
Answers:
• No.
(1 mark)
• Social cost is the cost borne by society as a whole. It is equal to the sum of the
private cost and the external cost.
(1 mark)
• Thus, a social cost exists even if a negative externality does not exist. It is equal to
the private cost in this case.
(1 mark)
Question code: B3C17Q316
‘Although a factory pollutes the surrounding environment, it may still be efficient if it
needs to bear all the costs involved in its production.’ Do you agree? Briefly explain
your answer.
(3 marks)
Answers:
• Yes.
(1 mark)
• Provided that the factory considers the cost of polluting the environment, there
will be no divergence between the private cost and the social cost. Thus, even if
there is pollution, the factory may still be efficient.
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(2 marks)
© Pearson Education Asia Limited 2015
Question code: B3C17Q317
‘Education must be subsidised because it generates beneficial externalities.’
Do you agree? Briefly explain your answer.
(4 marks)
Answers:
• No. Subsidisation may not be efficient if:
(1 mark)
 it is not the least costly method for solving the problem of externalities; or
(1 mark)
 the benefit from subsidisation is smaller than its cost.
(1 mark)
• It is possible that subsidisation may lead to a greater loss to society. For example,
the government may have insufficient information to determine how much of a
subsidy should be provided. Thus, the cost involved in the provision of a subsidy
may be higher than the potential benefit from it.
(1 mark)
Question code: B3C17Q318
Explain why a deadweight loss exists if there is a divergence between private and
social costs.
(3 marks)
Answers:
• An economic agent will consume/produce at the quantity where MPB = MPC.
(1 mark)
•
When there is a divergence between private and social costs, MSC > MPC.
Therefore, MSB < MSC (assuming MPB = MSB). There is a deadweight loss due
to overproduction.
(2 marks)
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Question code: B3C17Q319
List TWO government solutions to the problem of externalities. Discuss ONE
potential problem in implementing each solution.
(4 marks)
Answers:
• Taxation or subsidisation:
 The government needs to know the levels of divergence between private and
social costs (or benefits) but the cost of obtaining this information may be
high.
 Government officials may be more concerned about their own interests. They
may accept bribes to implement policies favourable to the bribers, such as
providing a privileged tax exemption or too much of a subsidy.
• Restriction or removal: The government needs to know the efficient output level
but the cost of obtaining this information may be high.
• Public ownership:
 This may be implemented through legislation. The cost involved may be high
and may outweigh the potential benefit from this solution.
 The government may lack incentives to run the firms efficiently.
 Some government officials may accept bribes to greatly increase takeover
prices.
(Any TWO of the above with ONE relevant problem for each solution. 2 × 2 marks =
4 marks)
Question code: B3C17Q320
Louis has opened a music studio in a flatted factory (工廠大廈). Recently, a printing
company has moved in. The printing company generates a lot of noise and disturbs
Louis’s creative work. To solve the problem, John decides to take over the printing
company.
(a) Explain why the output level of the printing company is NOT efficient. (3 marks)
(b) Explain whether the takeover can help solve the problem in (a).
(3 marks)
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Answer:
(a) The printing company disturbs Louis’s work without compensating him. Thus,
there is an external cost / divergence between private and social costs. The
marginal social cost will be greater than the marginal social benefit. As a result,
the output level of the printing company is greater than the efficient output level.
Therefore, the production of the printing company is not efficient.
(3 marks)
(b) Yes.
(1 mark)
After the takeover, the extra cost of noise pollution imposed upon the music studio
will become the private cost of the newly combined firm. Louis will try to
maximise the sum of gains from both the music studio and the printing company.
As a result, the problem of externality can be solved and efficiency can be
achieved.
(2 marks)
Question code: B3C17Q321
Briefly explain how taxation and subsidisation can solve the problem of externalities.
(8 marks)
Answers:
• The government can correct the problem of harmful externalities by taxation. It
should impose a unit tax which is equal to the marginal external cost at the
efficient output level.
(2 marks)
•
•
•
•
•
After the imposition of the unit tax, the MPC of production is increased by the
amount of the unit tax.
(1 mark)
The producers will decrease their output to the efficient level.
(1 mark)
The government can correct the problem of beneficial externalities by
subsidisation. It should provide a unit subsidy which is equal to the marginal
external benefit at the efficient output level.
(2 marks)
After the provision of the unit subsidy, the MPC of production is decreased by the
amount of the unit subsidy.
(1 mark)
The producers will increase their output to the efficient level.
(1 mark)
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Question code: B3C17Q322
In 2009, the Hong Kong Government introduced an environmental levy of $0.5 per
bag on plastic shopping bags. In terms of efficiency, explain the rationale behind this.
(5 marks)
Answers:
• Plastic bags are harmful to the environment. People usually do not take this into
account when they use plastic bags.
(1 mark)
• The private cost of using or disposing of a plastic bag is less than the social cost.
(1 mark)
• Negative externality and overproduction exist.
(1 mark)
•
The environmental levy can increase the private cost of using plastic bags. As a
result, people will use fewer plastic bags and the amount of plastic bags used can
be closer to the efficient level.
(2 marks)
Question code: B3C17Q323
What are the prerequisites for using market exchange to solve the problem of
externalities? Briefly explain your answer.
(4 marks)
Answers:
• Property rights are well-defined.
•
(2 marks)
Transaction costs are smaller than the potential benefits from market exchange.
(2 marks)
Question code: B3C17Q324 (new)
Are street lights a public good? Explain.
(5 marks)
Answers:
• Yes.
(1 mark)
• Street lights are non-rival in consumption because many people can enjoy the light
concurrently.
(2 marks)
•
Street lights are non-excludable in consumption. It is costly to exclude non-payers
from enjoying the light.
(2 marks)
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Question code: B3C17Q325 (new)
What is a public good? Give TWO examples.
(4 marks)
Answers:
Public goods are goods which are non-rival and non-excludable in consumption.
(2 marks)
Examples:
• National defence
• Lighthouses
• Traffic lights
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)
Question code: B3C17Q326
‘Books in a public library are public goods because they can be borrowed by any
Hong Kong citizen.’ Is this statement correct? Explain.
(4 marks)
Answers:
• No.
(1 mark)
• Public goods are goods which are non-rival and non-excludable in consumption.
(1 mark)
• Books in a public library cannot be consumed by all people at the same time.
•
They are rival in consumption and so are not public goods.
(1 mark)
(1 mark)
Question code: B3C17Q327
‘All economic goods are private goods.’ Do you agree with this statement? Explain.
(4 marks)
Answers:
• No.
(1 mark)
• Economic goods are goods whose available quantities are insufficient to satisfy all
human wants for them.
(1 mark)
• Private goods are goods which are rival and excludable in consumption. (1 mark)
• Some economic goods are not private goods, e.g., national defence and free TV
programmes. They are non-rival in consumption but their available quantities are
insufficient to satisfy all human wants for them.
(1 mark)
Thus, economic goods may not be private goods.
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Question code: B3C17Q328
What are public goods? Explain their features and give an example of them. (5 marks)
Answers:
• Public goods are goods which are non-rival and non-excludable in consumption.
(2 marks)
• Non-rivalry in consumption means that one’s consumption does not reduce the
amount available for other’s consumption / they can be consumed by all
individuals at the same time / the marginal cost of serving an additional consumer
is zero.
(1 mark)
• Non-excludability in consumption means that it is too costly to exclude or prevent
•
non-payers from consuming the good.
(1 mark)
Examples of a public good: national defence, free TV programmes, lighthouse
services and stage performances.
(Any ONE or other correct answer, 1 mark)
Structured Questions
Question code: B3C17Q501 (new)
Before the sale of their properties, some property developers pay to repair and
maintain the external walls of nearby buildings.
(a) Explain if the repair and maintenance of external walls involves externalities.
(3 marks)
(b) Explain if the above practice of property developers involves externalities.
(3 marks)
(c) (i) What is a public good?
(2 marks)
(ii) Are the external walls of properties a public good? Explain.
(5 marks)
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Answers:
(a) Yes.
(1 mark)
Passersby benefit from the reduced danger. However, they do not compensate the
property owners for the repair and maintenance work.
(2 marks)
(b) No.
(1 mark)
Although the property developers benefit from repaired and maintained external
walls, they have paid for it.
(2 marks)
(c) (i) Public goods are goods which are non-rival and non-excludable in
consumption.
(2 marks)
(ii) No.
(1 mark)
The external walls are rival in consumption. For example, once an
advertisement is posted on the external walls, other advertisements cannot be
posted.
(2 marks)
The external walls are excludable in consumption. The property owners can
exclude non-payers from using the external walls.
(2 marks)
Question code: B3C17Q502
It has been found that agriculture is responsible for about 14% of the world's
greenhouse gases (溫室氣體). Most emissions from agriculture are methane (甲烷),
which comes from ruminant animals (反芻動物) (e.g., cows). Methane is produced
during digestion. Thus, if we consume more beef, more cows will graze and so more
methane will be emitted.
(a) Explain briefly why the beef market is inefficient.
(3 marks)
(b) To protect domestic agriculture, the government of Country A provides a huge unit
subsidy to agriculture.
Student A says, ‘The provision of a subsidy will benefit society.’
Explain whether Student A is correct.
(3 marks)
(c) Countries in Virtual Earth hold a climate change conference to settle their
problems. Suppose all countries have perfect information. Can the following
policies help solve the problem in (a)? Briefly explain your answer.
(i) All countries impose unit taxes on the production of beef.
(ii) All countries set a restriction on the number of grazing cows.
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(3 marks)
(3 marks)
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Answers:
(a) • The market for beef is inefficient because there is a divergence between
•
(b) •
•
private and social costs.
(1 mark)
The producers of beef ignore the external cost (the emission of methane) they
impose on the rest of the world. Thus, they overproduce beef and this leads to
a deadweight loss.
(2 marks)
The provision of a subsidy will increase the output level. As there is a negative
externality in the beef market, the increase in output level will worsen the
problem of overproduction.
(2 marks)
Therefore, Student A is not correct.
(1 mark)
(c) (i) As governments have perfect information, the unit tax will be equal to MEC at
the efficient output level. The marginal private costs of beef producers will
increase by the amount of the unit tax. Then, the output level for beef will
decrease to the efficient level where MSB = MSC. Thus, the policy can help
solve the overproduction problem.
(3 marks)
(ii) As governments have perfect information, the quota will be set at the efficient
output level. Then, the output level of beef will decline to the efficient level
where MSB = MSC. Thus, the policy can help solve the overproduction
problem.
(3 marks)
Question code: B3C17Q503 (new)
Some politicians have called on the HKSAR government to resume the building of
Home Ownership Scheme (HOS) flats. However, some property developers argue that
the provision of HOS flats is inefficient and harmful to the property market as well as
society.
(a) State ONE private cost and external cost of building HOS flats.
(2 marks)
(b) State ONE private benefit and external benefit of building HOS flats. (2 marks)
(c) Are HOS flats public goods? Explain.
(3 marks)
*(d) Suppose the government decides to change the use of some land from private
residential use to HOS flats. Explain under what situation the building of HOS
flats would lower private property prices.
(3 marks)
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Answers:
(a) Private cost:
•
•
Wages to construction workers
Value to the government from the highest valued alternative use of the
construction site
(Any ONE of the above or other reasonable answers. 1 mark)
External cost:
• Noise pollution suffered by neighbours
• Temporary decrease in revenue of nearby shops
(Any ONE of the above or other reasonable answers. 1 mark)
(b) Private benefit:
• Revenue from selling HOS flats
• Increased popularity of the government
(Any ONE of the above or other reasonable answers. 1 mark)
External benefit:
• Future increase in revenue of nearby shops
• Development of the transport system
(Any ONE of the above or other reasonable answers. 1 mark)
(c) No.
(1 mark)
HOS flats are rival and excludable in consumption.
(2 marks)
(d) Building HOS flats will lower the demand for private property.
(1 mark)
Changing the use of land will lower the supply of private property.
(1 mark)
Private property prices will fall if the decrease in demand is greater than the
decrease in supply.
(1 mark)
NSS Exploring Economics 3 (2nd edition)
Question Bank (Chapter 17)
41
© Pearson Education Asia Limited 2015
Question code: B3C17Q504
Many years ago, no one owned the elephants in Kenya (肯亞) and Zimbabwe (津巴布
韋). A large number of elephants were hunted for their ivory (象牙).
In 1977, Kenya banned the hunting of elephants. However, the country’s elephant
population declined from 75,300 in 1977 to just 16,000 in 1989.
In Zimbabwe, the right to benefit from, dispose of, and manage natural resources
(including the right to allow safari hunting) devolved (下放) to the local level in 1989.
Between 1989 and 2005, the total elephant population more than doubled from 37,000
to 85,000.
(a) Explain briefly why the killing of elephants is inefficient without government
intervention.
(4 marks)
(b) Suppose Kenya’s ban against elephant hunting had been perfectly enforced and no
illegal hunting existed. Explain under what situation the ban can be inefficient.
(2 marks)
(c) Based on the information above, explain why the number of elephants has
increased in Zimbabwe.
(3 marks)
Answers:
(a) • When a person kills elephants, he only considers his private costs (e.g.,
expenses for bullets and time cost).
(1 mark)
• He does not take his damage to the ecological environment (e.g., extinction of
•
elephants) into account and does not need to pay compensation.
(2 marks)
Therefore, his private cost is less than the social cost and so the number of
elephants being killed is greater than the efficient level.
(1 mark)
(b) The ban will reduce the quantity of elephants being hunted to zero. Provided that
the marginal social benefit from hunting an elephant is greater than the marginal
social cost, this level of output is not efficient.
(2 marks)
(c) As people can earn income from selling the right to hunt the elephants, they have
an incentive to expend resources on protecting the elephants as the elephants are
valuable to them. They may even try to hasten reproduction by the elephants.
(3 marks)
NSS Exploring Economics 3 (2nd edition)
Question Bank (Chapter 17)
42
© Pearson Education Asia Limited 2015