Refer to the accompanying figure. The socially optimal quantity in this market could be
achieved by imposing a ______ equal to the vertical distance ______.
a.
subsidy; LM
b.
tax; LN
c.
tax; LM
d.
subsidy; LN
A subsidy equal to the vertical distance between social demand and private demand will
generate the socially optimal equilibrium price and quantity.
Question 2
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Suppose that a government agency is trying to decide between two pollution-reduction
policy options. Under the permit option, 100 pollution permits would be sold, each allowing
emission of one unit of pollution. Firms would be forced to shut down if they produced any
units of pollution for which they did not hold a permit. Under the pollution tax option, firms
would be taxed $250 for each unit of pollution emitted. The regulated firms all currently
pollute and face varying costs of pollution reduction, though all face increasing marginal
costs of pollution reduction. Because firms face increasing marginal costs to reduce
pollution, the demand curve for pollution permits will be
a.
perfectly inelastic.
b.
perfectly elastic.
c.
downward sloping.
d.
upward sloping.
The benefit of a pollution permit is the reduction in costs associated with being able to
pollute one more unit. Because of the increasing marginal cost of pollution reduction, this
benefit will decline as the firm purchases more permits.
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For a fixed percent reduction in pollution emissions to be economically efficient, it would
have to be the case that
a.
the marginal cost of pollution control is the same across all firms.
If all firms have the same marginal cost of pollution abatement, then it is efficient for all
firms to reduce pollution by the same amount. Otherwise, it is efficient for firms with the
lowest cost of pollution abatement to reduce pollution the most.
b.
enforcement is vigorous.
c.
all firms be the same size.
d.
large polluters reduce emissions by more than small polluters.
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If the government wants to increase economic efficiency, it should
a.
tax goods that entail positive externalities.
b.
never tax goods.
c.
subsidize goods that entail positive externalities.
If a good entails a positive externality, then the government can increase total economic
surplus by subsidizing the good.
d.
never subsidize goods.
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The optimal quantity of a negative externality is zero if
a.
the marginal cost of reducing the externality is zero.
An action should be taken only as long as the additional benefit exceeds the additional cost.
If the marginal cost of reducing a negative externality is zero, then the externality should be
reduced until the marginal benefit of reducing the externality is zero, which occurs when the
externality is completely eliminated.
b.
the majority of voters decide to eliminate the externality.
c.
it imposes a high enough cost on society.
d.
it is costly for people to negotiate with each other.
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Consider two restaurants located next door to each other: Quick Burger and The Sunshine
Café. If Quick Burger opens a drive-through window, the increased traffic and noise will
bother customers seated outside at The Sunshine Café. The accompanying table shows the
monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does
not operate a drive-through window.
Quick Burger Operates a
Quick Burger Does Not
Drive-Through Window Operate Drive-Through Window
$ 15,000
Quick Burger $ 24,000
$ 23,000
The Sunshine Café $ 11,000
If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The
Sunshine Cafécannot negotiate with each other, then will Quick Burger operate a drivethrough window?
a.
Yes, because Quick Burger’s payoff is higher when it operates a drive-through.
b.
No, because it would lower the payoff for The Sunshine Café.
c.
It cannot be determined.
d.
No, because it is not socially efficient to operate a drive-through.
If Quick Burger and The Sunshine Café cannot negotiate with each other, then Quick Burger
will choose to operate a drive-through window because Quick Burger’s payoff is higher
when it operates a drive-though.
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This graph shows the marginal cost and marginal benefit associated with roadside litter
cleanup. Assume that the marginal benefit curve and marginal cost curve each have their
usual slope.
Suppose the state highway department has picked up 15 bags of litter. Protesters have
staged a demonstration demanding that the highway department return to pick up the
remaining litter. From an economic efficiency perspective, the protesters have a ______ claim
because ______.
a.
faulty; the additional resources needed to remove more litter could be better used
elsewhere
b.
faulty; the government is not responsible for taking care of private property
c.
legitimate; the government has a responsibility to take action when private market
incentives do not yield the socially optimal outcome
The socially optimal level of litter removal is 15 bags per day. The marginal cost of
additional litter removal is greater than the marginal benefit.
d.
legitimate; litter generates a negative externality
Question 8
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If an activity generates a positive externality, the government can increase total economic
surplus by ______ the activity, and if an activity generates a negative externality, the
government can increase total economic surplus by ______ the activity.
a.
subsidizing; taxing
Subsidies are used to increase provision of activities with positive externalities and taxes are
used to decrease provision of activities that generate negative externalities.
b.
publicizing; taxing
c.
subsidizing; banning
d.
taxing; banning
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Suppose that in most car collisions between cars of unequal size, the smaller car sustains the
most damage and its occupants suffer the most injury. In answering the following question,
assume that, on average, smaller cars generate less air pollution than larger cars and that
every person in the economy drives at least one car. Suppose the size of all cars increased
by 25 percent. Collisions between two cars would cause ______ and air pollution would
______.
a.
less injury; increase
Since the relative size of the cars has not changed, collision outcomes will not change, but
the environmental costs will increase.
b.
neither greater nor less injury; remain the same
c.
neither greater nor less injury; increase
d.
greater injury; increase
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Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river.
While the firm benefits from dumping waste into the river, the waste reduces fish and bird
reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie
Textiles can filter out the toxins, in which case local fishermen and bird watchers will not
suffer any damage. The relevant gains for the three parties are listed in the accompanying
table.
With Without
Filter
Filter
$ 200,000 $ 400,000
Erie
Fishermen 180,000 50,000
Bird watchers 130,000 25,000
When Erie Textiles operates with a filter, the total gain by all three parties is
Gains to
a.
$475,000.
b.
$510,000.
Erie's benefits are $200,000, the fishermen's are $180,000, and the bird watchers' are
$130,000.
c.
$600,000.
d.
$985,000.
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If the production of a good generates a negative externality, then at the market equilibrium
quantity, the marginal cost to society of another unit of the good will be
a.
negative due to the external cost.
b.
less than the marginal benefit of another unit.
c.
greater than the marginal benefit of another unit.
Firms do not consider negative externalities when making their production decisions. Thus,
at the market equilibrium quantity, the marginal cost to society of another unit will be
greater than its marginal benefit.
d.
equal to the marginal benefit of another unit.
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Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river.
While the firm benefits from dumping waste into the river, the waste reduces fish and bird
reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie
Textiles can filter out the toxins, in which case local fishermen and bird watchers will not
suffer any damage. The relevant gains for the three parties are listed in the accompanying
table.
With Without
Filter
Filter
$ 200,000 $ 400,000
Erie
Fishermen 180,000 50,000
Bird watchers 130,000 25,000
Gains to
Suppose you observe that Erie has not added a filter. You could conclude that the Coase
theorem failed to solve the externality problem because
a.
regulators prevent application of the Coase theorem when the environment is at stake.
b.
negotiation with many individual fishermen and bird watchers was too costly.
The Coase theorem only applies if it is not costly to negotiate.
c.
Erie's benefits to operating without a filter are greater than the benefits of a filter to the
fishermen and bird watchers.
d.
Erie has a property right to the river.
Question 13
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Consider two restaurants located next door to each other: Quick Burger and The Sunshine
Café. If Quick Burger opens a drive-through window, the increased traffic and noise will
bother customers seated outside at The Sunshine Café. The accompanying table shows the
monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does
not operate a drive-through window.
Quick Burger Operates a
Quick Burger Does Not
Drive-Through Window Operate Drive-Through Window
$ 27,500
Quick Burger $ 24,000
$ 23,000
The Sunshine Café $ 27,500
If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The
Sunshine Café CANNOT negotiate with each other, then will Quick Burger operate a drivethrough window?
a.
No, because it is not socially efficient to operate a drive-through.
b.
No, because Quick Burger's payoff is lower when it operates a drive-through.
If Quick Burger and The Sunshine Café cannot negotiate with each other, then Quick Burger
will not choose to operate a drive-through window because Quick Burger’s payoff is lower
when it operates a drive-through.
c.
The answer depends on the equilibrium market price.
d.
Yes, because it would raise the payoff for The Sunshine Café.
Question 14
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Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river.
While the firm benefits from dumping waste into the river, the waste reduces fish and bird
reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie
Textiles can filter out the toxins, in which case local fishermen and bird watchers will not
suffer any damage. The relevant gains for the three parties are listed in the accompanying
table.
With Without
Filter
Filter
$ 200,000 $ 400,000
Erie
Fishermen 180,000 50,000
Bird watchers 130,000 25,000
Gains to
Suppose that Erie Textiles can only negotiate with one of the affected groups. Will Erie
operate with a filter?
a.
Yes, if they negotiate with the fishermen, but not if they negotiate with the bird watchers.
b.
Yes, regardless of which group they negotiate with.
c.
Yes, if they negotiate with the bird watchers, but not if they negotiate with the fishermen.
d.
No, regardless of which group they negotiate with.
Erie will require compensation of at least $200,000 and neither of the affected groups alone
benefits by that much.
Question 15
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Suppose there are three power-generating plants, each of which has access to 5 different
production processes. The accompanying table summarizes the cost of each production
process and the corresponding number of tons of smoke emitted each.
Process (smoke/day)
Cost to Firm X
($/day)
Cost to Firm Y
($/day)
Cost to Firm Z
($/day)
A (4
tons/day)
B (3
tons/day)
C (2
tons/day)
D (1
tons/day)
E (0
tons/day)
$ 500
$ 514
$ 530
$ 555
$ 585
400
420
445
480
520
300
325
360
400
550
Suppose the government requires each firm to reduce pollution to 2 tons of smoke per day,
so that total daily smoke emission is 6 tons. The total cost to society of this policy will be
______ per day.
a.
$135
Going from 4 to 2 tons of smoke would cost Firm X $30 per day, Firm Y $45 per day, and
Firm Z $60 per day, for a total of $135 per day.
b.
$59
c.
$230
d.
$42
Question 16
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When one's performance is judged relative to others' performance and not by an absolute
standard
a.
the incentive to sabotage the other players is lessened.
b.
players will overinvest in performance enhancements.
When the reward is based on doing better than others, there is incentive to take steps to
surpass others.
c.
players will underinvest in performance enhancements.
d.
a positional externality is not possible.
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Suppose there are three power-generating plants, each of which has access to 5 different
production processes. The accompanying table summarizes the cost of each production
process and the corresponding number of tons of smoke emitted each.
Process (smoke/day)
Cost to Firm X
($/day)
A (4
tons/day)
$ 500
B (3
tons/day)
$ 514
C (2
tons/day)
$ 530
D (1
tons/day)
$ 555
E (0
tons/day)
$ 585
Process (smoke/day)
Cost to Firm Y
($/day)
Cost to Firm Z
($/day)
A (4
tons/day)
B (3
tons/day)
C (2
tons/day)
D (1
tons/day)
E (0
tons/day)
400
420
445
480
520
300
325
360
400
550
Suppose the government decides to impose a tax on each ton of smoke emitted. What
would be the lowest tax, in whole dollars, that would reduce emissions to 6 tons per day?
a.
$21 per ton
b.
$26 per ton
c.
$36 per ton
The lowest tax in whole dollars that would reduce pollution to 6 tons per day would be $26.
Under this tax, Firm X would emit 1 ton, Firm Y would emit 2 tons and Firm Z would emit 3
tons.
d.
$41 per ton
Question 18
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Which of the following would be most vulnerable to the tragedy of the commons?
a.
Restrooms in a restaurant
b.
Timber on public land
The tragedy of the commons is most likely to arise when nobody owns a resource, so
nobody has an incentive to use it optimally.
c.
Cattle on a ranch
d.
Apples in Phoebe's apple orchard
Question 19
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When the government imposes a tax on a good, total economic surplus will
a.
never change.
b.
only increase if the good entails a negative externality.
c.
only increase if the good entails a positive externality.
d.
always fall.
If a good entails a negative externality, then the government can increase total economic
surplus by taxing the good.
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Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon,
the buffet is picked over, and by 12:30, there are very few popular items left. The garbage
bins, though, are full of food. Over time, you would expect that students would
a.
stop eating so much at lunch because they would notice that it generates waste.
b.
be pickier in their selections from the buffet.
c.
start distributing themselves more evenly over the lunch hours to avoid long lines.
d.
come earlier and earlier for lunch in order to have a better selection from which to choose.
Private incentives encourage students to overgraze at the buffet. Coming earlier means
there is more to choose from.