Public Goods and Externalities 509 Test Bank Chapter.20 - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 13e
Chapter Number: 20
Question Type: Multiple Choice
1. Which of the following characteristics can be associated with a museum charging entry fees to all the visitors above 12 years of age?
a. Nonexclusion
b. Positive externality
c. Exclusion
d. Negative externality
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
2. A defining attribute of a public good is that:
a. to consume this good, consumers must reduce consumption of other goods.
b. consumers can easily enforce ownership rights over such goods.
c. it is not possible to exclude people from the enjoyment of this good.
d. the consumption by one person influences the consumption of others.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
3. A Web site which allows users to share music at no cost is an example of a(n):
a. good characterized by rivalry and exclusion.
b. inferior good.
c. luxury good.
d. good that is nonrival in consumption.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
4. An uncongested, non-toll road is characterized by:
a. nonexclusion and nonrivalry in consumption.
b. nonexclusion and rivalry in consumption.
c. exclusion and nonrivalry in consumption.
d. exclusion and rivalry in consumption.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
5. A congested, non-toll road is characterized by:
a. nonexclusion and nonrivalry in consumption.
b. nonexclusion and rivalry in consumption.
c. exclusion and nonrivalry in consumption.
d. exclusion and rivalry in consumption.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
6. An uncongested, toll road is characterized by:
a. nonexclusion and nonrivalry in consumption.
b. nonexclusion but rivalry in consumption.
c. exclusion and nonrivalry in consumption.
d. exclusion but rivalry in consumption.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
7. A congested, toll road is characterized by:
a. nonexclusion and nonrivalry in consumption.
b. nonexclusion and rivalry in consumption
c. exclusion and nonrivalry in consumption.
d. exclusion and rivalry in consumption.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
8. In case of a good that is nonrival in consumption, the quantity of the good produced:
a. increases with the increase in consumption.
b. decreases with the increase in consumption
c. is not affected by the change in consumption.
d. is not affected by changes in the cost of production of the good.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
9. Which of the following categories of goods is nonrival in consumption and satisfies the nonexclusion condition?
a. Inferior goods
b. Private goods
c. Common resources
d. Public goods
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
10. Which of the following problems can be associated with goods characterized by nonexclusion?
a. Externality
b. Decreasing returns to scale
c. Adverse selection problem
d. Free riding
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
11. A swimming club charges membership fees to all the members. This implies that a pool at this club would be characterized by:
a. nonrivalry in consumption and nonexclusion.
b. rivalry in consumption and nonexclusion.
c. nonrivalry in consumption and exclusion.
d. rivalry in consumption and exclusion.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
12. Which of the following statements is true?
a. A good that is nonrival in consumption must necessarily be characterized by nonexclusion.
b. A good characterized by nonexclusion is always a natural resource and cannot be produced.
c. A good that is nonrival in consumption will neither be produced by private firms nor will it be provided by the government.
d. A good that is nonrival in consumption and has high exclusion costs, will not be produced by private firms.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
13. For which of the following goods will the free rider problem arise?
a. A private golf course
B. Cable television
c. Movie theatres
d. A toll-free highway
Difficulty: Medium
Source: What are Public Goods?
Type: 573
14. A beautiful sunset can be categorized as a good that is characterized by:
a. nonrivalry in consumption and nonexclusion.
b. rivalry in consumption and nonexclusion.
c. nonrivalry in consumption and exclusion.
d. rivalry in consumption and exclusion.
Difficulty: Easy
Section Reference: What are Public Goods?
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
15. Which of the following is an example of a good characterized by exclusion and nonrivalry in consumption?
a. National defense
b. A toll free interstate highway
c. Cable television
d. A sedan
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
16. Which of the following is the best example of a public good?
a. A museum funded by government taxes
b. All-you-can-eat buffet
c. Satellite television
d. A lighthouse
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
17. The good for which the characteristics of exclusion and rivalry in consumption do not apply is referred to as a:
a. public good.
b. common resource.
c. inferior good.
d. normal good.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
18. The severity of the free rider problem that arises in case of a public good:
a. is lower if the good is provided by the government.
b. varies directly with the cost of producing it.
c. is overstated in expensive public projects.
d. varies directly with the number of people who consume it.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
19. The free rider problem associated with the provision of a public good becomes unsustainable with a(n):
a. increase in the number of beneficiaries.
b. decrease in the accessibility of the good.
c. increase in the elasticity of supply of the good.
d. decrease in the budget deficit.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
20. Identify the correct statement.
a. The marginal cost of producing a public good is zero.
b. Any good that is provided by the government can be considered as a public good.
c. A public good is often under consumed as supply usually exceeds demand.
d. The consumers of a public good tend to underestimate the value of the good.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
21. Free rider behavior is:
a. always irrational since the individual who free rides causes a misallocation of resources.
b. a rational behavior in the case of public goods.
c. more likely to cause a problem if it is provided by private firms.
d. less likely to cause a problem if it is consumed by a large number of people.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
22. The free-rider problem occurs because:
a. it is easy to exclude others from consuming the good.
b. consumption is rival in nature, and the consumption of a product by one individual diminishes that available for others.
c. exclusion is costly or impossible, so that a consumer or producer can use the good without having to pay for it.
d. the consumption of a good imposes costs on others who not directly involved in the transaction.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
23. The government can overcome the free rider problem in the provision of a public good by:
a. encouraging private firms to produce it.
b. producing the good at a zero marginal cost.
c. providing the goods only to those who pay taxes.
d. subsidizing the production of public goods.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
24. Which of the following helps to achieve efficiency in production?
a. Altruistic production and consumption behavior
b. Sufficient information to measure total social costs and benefits
c. Additional capital per worker
d. A rigid monetary and fiscal policy
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
25. Government financing of a public good with taxes:
a. leads to a more efficient allocation of resources compared to private markets.
b. reveals accurately the society’s demand for the public good.
c. leads to deficit in the current account of the trade balance.
d. inevitably results in a budget surplus.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
26. The efficient output of a public good is determined at the point where:
a. the average revenue curve intersects the marginal cost curve.
b. the total benefit curve is at its maximum.
c. the social marginal benefit curve intersects the marginal cost curve.
d. the social total cost curve intersects the social benefit curve.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
27. The efficient output of a public good occurs at the point where the:
a. curve formed by the horizontal summation of marginal benefit curves of users intersects the marginal cost curve.
b. curve formed by the horizontal summation of the individual demand curves intersects the marginal cost curve.
c. curve formed by the vertical summation of all users' demand curves intersects the marginal cost curve.
d. curve formed by the vertical summation of the social cost curves intersects the social benefit curve.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
28. The combined or market demand curve for a public good is:
a. the locus of the quantity demanded of the public good by a user at different price levels.
b. formed by the horizontal summation of all the individual demand curves.
c. formed by the vertical summation of all the individual demand curves.
d. the positively sloping portion of the community indifference curve.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
29. Suppose good A is a public good. The marginal cost of providing 5 units of this good is $300. The marginal benefit derived from the consumption of 5 units by 3 individuals X, Y, and Z are $75, $125, and $100 respectively. Assuming that X, Y, and Z are the only consumers of good A, which of the following will hold true?
a. Good A will be overproduced in the economy.
b. Good A will be underproduced in the economy.
c. Producing 5 units of A is efficient.
d. More than 5 units of good A must be produced to make the outcome efficient.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
30. Suppose that an economy has four people, A, B, C, and D, whose reported marginal benefits from a public good are $30, $40, $50, and $60, respectively. If the marginal cost of the public good is $150, then the quantity of the public good produced should be:
a. increased even if none of the individuals are excluded.
b. increased only if individual A can be excluded.
c. decreased even if none of the individuals are excluded.
d. decreased unless individual A or B can be excluded.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
31. Suppose that an economy has four people, A, B, C, and D, whose reported marginal benefits from a public good are $30, $40, $50, and $60, respectively. If the marginal cost of producing the public good is $200, then the quantity of the public good should be:
a. increased even if none of the individuals can be excluded.
b. increased only if individual A can be excluded.
c. decreased if none of the individuals can be excluded.
d. decreased unless individual A or B can be excluded.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
32. Which of the following is true with respect to the rationing problem in case of a public good?
a. The rationing problem associated with a public good is greater than a private good.
b. The rationing problem does not exist in case of a public good.
c. The rationing problem in case of a public good can be solved through taxation.
d. The rationing problem increases with an increase in the number of people consuming the public good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
33. Which of the following aspects of the free-rider problem is overcome by government financing of a public good?
a. The problem of overproduction
b. The external cost associated with production
c. The tendency of people to withhold payment
d. The high search cost associated with the consumption of the good
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
34. A _____ gives the inventor the right to make a new product or use a new process typically for 17 years.
a. service mark
b. brand name
c. patent
d. trade mark
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
35. Which of the following statements is true of patents?
a. Patents should be granted for such inventions which cannot be immediately imitated.
b. The cost of granting patents to private firms is more than the benefit, if the goods produced by them are characterized by nonexclusion.
c. In the absence of patents the amount of new knowledge produced will not be socially optimal.
d. A patent grants permanent monopoly power to an inventor.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
36. Which of the following is true of patents?
a. Patents encourage unlimited investment in research and development.
b. Patents have no associated costs.
c. Patents grant temporary monopoly power.
d. Patents are not binding unless the product is a luxury good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
37. Patents generally encourage firms to invest in research and development when:
a. the marginal cost of the invention is greater than the marginal benefit.
b. the invention has nonrival benefits but exclusion is not possible.
c. the private cost of the invention is less than the social benefit.
d. the private cost of invention is equal to the social cost.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
38. A socially efficient quantity of a good is said to be produced, if at that output level:
a. the marginal external cost equals the marginal social benefit.
b. the private marginal cost equals the marginal social benefit.
c. the marginal private costs are equal to external costs.
d. the difference between the private marginal cost and social marginal benefit is maximized.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
39. The economic efficiency argument for patents is to:
a. ensure the profitability of firms with patent protection.
b. enable people and firms to internalize the external benefits of their inventions.
c. raise sufficient revenue for the firms so that they can at least break even.
d. ensure that the benefits of discoveries and inventions are entirely transferred to society at-large.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
40. Competitive markets are unlikely to produce the efficient quantity of a public good because:
a. public goods are nonrival in consumption but exclusion costs are low.
b. public goods are nonrival and are characterized by nonexclusion.
c. the marginal benefit derived from a public good is less than the marginal cost of producing the good.
d. the marginal benefit of a public good increase with an increase in consumption of the good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
41. The cost imposed by an economic activity on others, who are not directly involved in the transaction, is referred to as:
a. a sunk cost.
b. an implicit cost.
c. an external cost.
d. resource overutilization.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
42. When an economic activity generates a benefit for those who are not directly involved in it a(n) _____ is said to exist.
a. competitive advantage
b. marginal benefit
c. external benefit
d. tragedy of commons problem.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
43. A firm produces a product valued by many loyal customers. In the process of producing the product, the firm produces a by-product that benefits the growth of fish and other aquatic life in the near-by stream. The impact of the firm’s production on aquatic life is an example of:
a. a moral hazard.
b. an external benefit.
c. an opportunity cost.
d. a free rider advantage.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
44. Which of the following activities is most likely to generate a positive externality?
a. Tony plants roses in the large flowerbed in front of his condominium.
b. Terry buys a cheeseburger from McDonalds.
c. Pat installs a new CD player in his sedan.
d. Sam shovels the snow from the porch of his house.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
45. When do externalities arise?
a. When the explicit costs of producing a good or service are not borne by the producer
b. When an economic activity imposes a burden on them who are not directly involved in it
c. When the government produces such goods and services which are consumed by only a particular class of people
d. When goods of mass consumption are not produced as they do not yield profit for the producers
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
46. The social cost of producing a commodity is equal to the:
a. the sum of fixed and variable costs.
b. the difference between the total cost and opportunity cost.
c. the sum of private and external costs.
d. the difference between the private and external cost.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
47. Which of the following activities entails an external cost?
a. Bob chooses engineering as a major because engineers earn more than other professionals.
b. Sarah gets in her car and drives to the beach.
c. Tom paints the walls of his room.
d. Victoria purchases tomatoes from the local grocery store.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
48. Which of the following is true of externalities?
a. Positive externalities arise when an economic activity imposes costs on others who are not directly involved in the activity.
b. Negative externalities can be internalized by offering subsidies to the agents who generate such externalities.
c. Like public goods, externalities always result in a free rider problem.
d. Externalities may arise from either production or consumption of a good or service.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
49. Which of the following is a point of similarity between public goods and the goods that generate an external benefit?
a. Both are overproduced
b. A free rider problem arises in case of both the goods
c. Both result in inefficient allocation of resources
d. Both can be produced at zero marginal cost
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
50. When the entire costs and benefits of a transaction are borne by the participants of that transaction:
a. the market outcome will be inefficient.
b. then private costs and social costs are identical.
c. an external cost is imposed on the society.
d. an external benefit is generated in the society.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
51. A competitive market will generally _____ a good that involves an external cost.
a. underproduce
b. overproduce
c. produce the optimal amount of
d. produce no units of
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
52. If there is an external cost associated with the production or consumption of a good in a competitive industry, then:
a. the output of the good produced will be too small compared to its demand in the market.
b. in equilibrium, the social marginal cost of production will be greater than the private marginal benefit to the consumers.
c. private benefits derived from the consumption of the good will exceed the private cost of producing the good.
d. the efficient level of output is given by the point where the private marginal cost curve intersects the private marginal benefit curve.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
53. When externalities occur, economic agents:
a. disregard the external effects of their actions, but the market outcome is efficient.
b. disregard the external effects of their actions, and the market outcome is inefficient.
c. consider the external effects of their actions, and the market outcome is efficient.
d. consider the external effects of their actions, but the market outcome is inefficient.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
54. When a producer does not internalize the negative externality associated with the production of a good, then:
a. the socially optimal quantity of output must be larger than the market output.
b. the socially optimal quantity of output must be less than the market output.
c. the socially optimal quantity of output must be equal to the market output.
d. the socially optimal quantity of output can be either larger or smaller than the market output.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
55. When a positive externality generated from the production of a good has not been internalized, then:
a. the socially optimal quantity of output must be larger than the market level of output.
b. the socially optimal quantity of output must be less than the market level of output.
c. the socially optimal quantity of output must be equal to the market level of output.
d. the socially optimal quantity of output can be either larger or smaller than the market level of output.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
56. Suppose a competitive industry generates some sort of pollution while producing its output. In order to internalize the externality, the government may:
a. impose a tax equal to the marginal external cost of pollution.
b. offer a subsidy equal to the marginal external benefit derived from the consumption of the good.
c. impose a quota that reduces output to the point where private marginal costs of production equal marginal revenue.
d. impose a price floor on the good produced by the industry.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
57. What would happen if the government tries to internalize an externality, generated from the production of a commodity, through taxation?
a. The commodity will be overproduced
b. The commodity will definitely be underproduced
c. The market level of output will coincide with the efficient level
d. The price of the commodity will decline
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
58. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
We can infer that the efficient output is:
a. 900 units.
b. 500 units.
c. 400 units.
d. 600 units.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
59. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
When the efficient output is being produced, the price of the good must be:
a. $90.
b. $108.
c. $100.
d. $40.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
60. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
The efficient output is ______ than the equilibrium output by _____ units.
a. more; 400
b. less; 400
c. more; 100
d. less; 200
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
61. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
A comparison between the efficient outcome and the market equilibrium reveals that:
a. the price when the outcome is efficient is higher than the price at the market equilibrium by $30.
b. the price when the outcome is efficient is lower than the price at the market equilibrium by $10.
c. the price when the outcome is efficient is lower than the price at the market equilibrium by $40.
d. the price when the outcome is efficient is higher than the price at the market equilibrium by $20.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
62. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
Which of the following policies can be adopted by the government to increase production from the equilibrium level to the efficient level?
a. Provide a subsidy of $30 per unit
b. Impose a tax of $100 per unit
c. Provide a subsidy of $100 per unit
d. Impose a tax of $20 per unit
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
63. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
The marginal external cost at the equilibrium output level is:
a. $0.
b. $40.
c. $10.
d. $28.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
64. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
If the government levies a tax of $28 per unit of output, then:
a. the marginal social benefit will exceed the marginal social cost and the good will be underproduced.
b. marginal social cost will exceed the marginal social benefit and the good will be underproduced.
c. marginal social benefit will exceed the marginal social cost and the good will be overproduced.
d. marginal social cost will exceed the marginal social benefit and the good will be overproduced.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
65. In the figure given below, D1 and S1 are the private demand and supply curves, of a commodity produced by a competitive firm. S2 reflects the social marginal cost of production, while S0 represents the external marginal cost.
If the government levies a tax of $8 per unit of output, then:
a. the marginal social benefit will exceed the marginal social cost and the good will be underproduced.
b. marginal social benefit will not exceed the marginal social cost and the good will not be overproduced.
c. marginal social benefit will exceed the marginal social cost and the good will be overproduced.
d. marginal social cost will exceed the marginal social benefit and the good will be overproduced.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
66. A tax used to internalize an external cost is unlike most other taxes because it:
a. creates a deadweight loss.
b. moves the output level away from the socially optimal level.
c. drives the output level toward the socially optimal level.
d. distorts incentives.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
67. The marginal social cost and marginal private cost curves of an economic activity coincide:
a. when there are no negative externalities.
b. if the marginal social cost is a ray from the origin.
c. when marginal external benefits are small, but positive.
d. at very high output levels.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
68. When there are external costs to production, output produced in a competitive market:
a. is less than the efficient level.
b. is more than the efficient level.
c. increases with an imposition of a tax on the commodity.
d. eventually falls to zero.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
69. Reducing automobile pollution beyond a certain point is not efficient when:
a. the marginal benefit from reduced pollution is less than the marginal cost of reducing the pollution.
b. the marginal cost of reducing pollution is less than the marginal benefit from reduced pollution.
c. the marginal private cost of producing automobiles is less than the marginal social cost.
d. the marginal external cost of pollution is zero.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
70. If the production of a certain commodity generates external benefits for those who do not participate directly in the production process, then:
a. too large a quantity of the good will be produced.
b. at equilibrium, the marginal social benefit is less than the cost of producing an extra unit.
c. the government can subsidize consumption of the good and improve efficiency.
d. a government intervention in this market will cause the marginal social benefit to exceed the marginal social cost.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
71. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
The efficient output is:
a. 700 units.
b. 400 units.
c. 300 units.
d. 0 units.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
72. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
If the efficient output is being produced, the market price of the commodity must be:
a. $12.
b. $17.
c. $20.
d. $24.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
73. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
The efficient output is _____ than the market equilibrium output by _____ units.
a. more; 300
b. less; 300
c. more; 100
d. less; 100
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
74. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
The price level when the efficient output is being produced is _____ than the price level when the market equilibrium output is being produced by _____.
a. less; $8
b. more; $4
c. less; $3
d. more; $3
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
75. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
We can conclude that to help the market attain the efficient level of output, the government should:
a. provide a subsidy of $8 per unit to the producer.
b. impose a tax of $4 per unit of production.
c. provide a subsidy of $3 per unit to the producer.
d. impose a tax of $3 per unit of production.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
76. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
If the government provides a subsidy of $8 per unit of output, then the:
a. marginal social benefit will exceed the marginal social cost and the good will be underproduced.
b. marginal social cost will exceed the marginal social benefit and the good will be underproduced.
c. marginal social benefit will exceed the marginal social cost and the good will be overproduced.
d. marginal social cost will exceed the marginal social benefit and the good will be overproduced.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
77. In the figure given below, the competitive supply curve of a commodity is given by S1, the private marginal benefit curve is D1, the marginal social benefit curve is D2, and the MBE curve reflects the marginal external benefits.
If the current level of output is 700 units, then the marginal social benefit is:
a. more than the marginal social cost and the output is more than the socially optimum level.
b. more than the marginal social cost and the output is less than the socially optimum level.
c. less than the marginal social cost and the output is more than the socially optimum level.
d. equal to the marginal social cost and the output is equal to the socially optimum level.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
78. Which of the following statements is most consistent with Ronald Coase’s theory of externalities?
a. “If a factory pollutes, a tax imposed on the polluter by the government that is equal to the unit cost of the damage from the pollution brings about an efficient outcome.”
b. “When a firm emits pollutants it is imposing a cost on the rest of society, which makes us worse off. Taxes are therefore needed to eradicate pollution.”
c. “An externality occurs when firm A, while producing something for firm C, imposes costs on firm B. By imposing a tax on firm C, we can achieve the efficient level of production.”
d. “An externality occurs when two parties conflict over the use of a common resource. An efficient outcome will result if property rights are defined and the two parties can bargain.”
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
79. Externalities mainly arise because:
a. consumers have more market power than sellers.
b. producers have more market power than consumers.
c. of inadequate provision of public goods.
d. of inappropriate assignment of property rights.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
80. Which of the following will hold true when property rights are not well defined or are not appropriately assigned?
a. Goods that generate external costs will be overproduced.
b. Goods that generate external costs will be underproduced.
c. Goods that generate external benefits will be overproduced.
d. Goods that generate external benefits will be produced only by the government.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
81. All of the following statements are true in the context of the Coase theorem, except:
a. private bargaining will not always produce an efficient outcome.
b. as long as the property rights are clearly defined and enforced, bargaining between the parties can ensure an efficient outcome.
c. the initial assignment of property rights has distributional implications but will not affect the attainment of an efficient outcome, as long as there is a small number of parties involved.
d. government intervention is necessary to achieve an efficient outcome in the presence of externalities.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
82. The Coase theorem states that when transaction costs are low and property rights are enforced, then:
a. bargaining between parties will never lead to an efficient outcome.
b. bargaining between parties will lead to an efficient outcome only if liability is placed on the party that is responsible for the externality.
c. bargaining between parties will lead to an efficient outcome only if the liability is placed on the people affected by the externality.
d. bargaining between parties will lead to an efficient outcome regardless of where liability is placed.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
83. The Red List of Threatened Species, compiled by the World Conservation Union, gives details of over 10,000 species of animals and plants that are known to be at risk of extinction. Among the 10 animals that are of most concern, because of their commercial value, is the hawksbill sea turtle, which is threatened because of the demand for its beautiful shell. The species is the sole source of “tortoiseshell” used to make curios and jewelry. Which of the following most closely explains/supports the information given above?
a. Resources that generate external benefits are always overpriced.
b. Resources are overused if private property rights over the resources are not ensured.
c. Government intervention in the market for tortoiseshell will fail to rectify this market imperfection.
d. A tax imposed by the government on the producers of curios will definitely prevent the extinction of hawksbill sea turtles.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
84. Jack benefits from keeping four dogs whose barking bothers his neighbor Jane. If Jane has the legal right to a quiet neighborhood, and mutual bargaining is expensive, which of the following will hold true?
a. Government intervention, in this case, is a necessity for achieving an efficient outcome.
b. If Jack’s benefit exceeds Jane’s cost, Jane pays Jacks to keep his dogs.
c. If Jack’s benefit is less than Jane’s cost, Jane pays Jack to keep his dogs.
d. Jack pays Jane to compensate for the external cost generated by him.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
85. Which of the following is true of the Coase theorem?
a. The market generally ensures an efficient allocation of resources.
b. The assignment of property rights determines the allocation of resources.
c. Bargaining between parties can lead to an efficient allocation of resources if property rights are well defined.
d. Private benefits exceed social benefits when property rights are ensured.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
86. Perfect competition in an industry ensures:
a. both production and output efficiency.
b. production efficiency but not necessarily output efficiency.
c. output efficiency but not necessarily production efficiency.
d. external benefits but not external costs.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
87. Perfect competition ensures efficiency in industry output if:
a. the demand and supply curves are perfectly inelastic.
b. the marginal cost of producing the good is zero.
c. the demand and supply curves properly reflect the marginal benefits and costs.
d. the market price of the commodity truly reflects the private costs of production.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
88. A uniform per-unit tax on pollution achieves abatement in the least costly manner because:
a. the government is completely informed about the marginal costs of installing environment friendly equipment to the firms.
b. the government subsidizes the equipment required for pollution control.
c. each firm will ensure that reduce pollution to zero.
d. each firm reduces pollution until the marginal cost of abatement equals the per-unit tax.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
89. Taxes imposed on polluting firms, for internalizing the externalities created by them, may not always lead to an efficient solution because:
a. the taxes lowers the firms’ incentives to reduce pollution
b. it is difficult to determine the appropriate level of the tax that will result in an efficient output.
c. firms that cannot earn positive economic profits after the tax is imposed will go out of business.
d. the tax imposed by the government results in an increase in the average price level.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
90. Which of the following pollution abatement policies of the government is based on the Coasean approach?
a. Subsidizing less pollution generating firms
b. Tradable permits
c. Command and control
d. Pollution tax
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
91. Assume that the current price of a marketable permit to emit one ton of sulfur dioxide is $60. For firm A, the marginal cost of reducing one ton of sulfur dioxide is $50. For firm B, the marginal cost of reducing one ton of sulfur dioxide is $70. Under a tradable-permit scheme:
a. both firms will buy a permit and emit one more ton of sulfur dioxide.
b. firm A will buy a permit and emit one more ton of sulfur dioxide, whereas firm B will reduce its emissions of the gas by one ton.
c. firm B will buy a permit and emit one more ton of sulfur dioxide, whereas firm A will reduce its emissions of the gas by one ton.
d. both firms will reduce their emissions of sulfur dioxide by one ton.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
92. Tradable pollution permits achieve a given emission target efficiently because:
a. firms can bargain over the price of the permits.
b. permits will be purchased by the firms that incur the least abatement cost.
c. permits will be purchased by the firms that incur high abatement costs.
d. the polluting firms will eventually go out of business.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
93. Tradable permits that establish a maximum amount of pollution and then allow firms to trade pollution quota permits among them:
a. works most efficiently if the polluting industries are dominated by a large firm.
b. tend to work better than taxes but only when the government originally allocates the permits to
the biggest polluters.
c. tend to not work because firms don’t have an incentive to minimize their pollution.
d. tend to work better than taxes because firms with higher costs of eliminating pollution buy permits from firms with lower costs of eliminating pollution.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
Question Type: True/False
94. A good that is nonrival in consumption must necessarily be characterized by nonexclusion.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
95. A good characterized by nonexclusion is always a natural resource and cannot be produced.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
96. A good that is nonrival in consumption will neither be produced by private firms nor will it be provided by the government.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
97. A good that is nonrival in consumption and has high exclusion costs, will not be produced by private firms.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
98. The marginal cost of producing a public good is zero.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
99. Any good that is provided by the government can be considered as a public good.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
100. A public good is often under consumed as supply usually exceeds demand.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
101. The consumers of a public good tend to underestimate the value of the good.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
102. The rationing problem associated with a public good is greater than a private good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
103. The rationing problem does not exist in case of a public good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
104. The rationing problem in case of a public good can be solved through taxation.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
105. The rationing problem increases with an increase in the number of people consuming the public good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
106. Patents should be granted for such inventions which cannot be immediately imitated.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
107. The cost of granting patents to private firms is more than the benefit, if the goods produced by them are characterized by nonexclusion.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
108. In the absence of patents the amount of new knowledge produced will not be socially optimal.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
109. A patent grants permanent monopoly power to an inventor.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
110. Patents encourage unlimited investment in research and development.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
111. Patents have no associated costs other than the fees paid to obtain the patents.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
112. Patents grant temporary monopoly power.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
113. Patents are not binding unless the product is a luxury good.
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
114. Positive externalities arise when an economic activity imposes costs on others who are not directly involved in the activity.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
115. Negative externalities can be internalized by offering subsidies to the agents who generate such externalities.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
116. Like public goods, externalities always result in a free rider problem.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
117. Externalities may arise from either production or consumption of a good or service.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
118. When property rights are not well defined or are not appropriately assigned, goods that generate external costs will be overproduced.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
119. When property rights are not well defined or are not appropriately assigned, goods that generate external costs will be under produced.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
120. When property rights are not well defined or are not appropriately assigned, goods that generate external benefits will be overproduced.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
121. When property rights are not well defined or are not appropriately assigned, goods that generate external benefits will be produced only by the government.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
122. In the context of the Coase theorem, private bargaining will not always produce an efficient outcome.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
123. In the context of the Coase theorem, as long as the property rights are clearly defined and enforced, bargaining between the parties can ensure an efficient outcome.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
124. In the context of the Coase theorem, the initial assignment of property rights has distributional implications but will not affect the attainment of an efficient outcome, as long as there is a small number of parties involved.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
125. In the context of the Coase theorem, government intervention is necessary to achieve an efficient outcome in the presence of externalities.
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
126. As the group size increases, it is more likely that everyone will behave like a free rider, and the public good will not be provided.
Learning Objective: Explain what economists mean by the term public goods and the free-rider problem.
127. With a public good, there is no rationing problem.
Learning Objective: Describe efficiency in the provision and distribution of a public good.
128. Externalities are likely to lead to an inefficient allocation of resources.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
129. All public goods are produced by the government.
Learning Objective: Explain what economists mean by the term public goods and the free rider-rider problem.
Question Type: Essay
130. Assume that the economy of Wonderland has only two individuals: Rhea and Ron. The table given below shows the marginal benefit received by these two individuals from the consumption of different units of a public good. Given that the marginal cost of producing the public good is $500, calculate the efficient amount of the public good to be produced. Also illustrate your answer graphically.
Units | Rhea | Ron |
0 | 400 | 700 |
1 | 300 | 600 |
2 | 200 | 500 |
3 | 100 | 400 |
4 | 0 | 300 |
5 | 0 | 200 |
6 | 0 | 100 |
7 | 0 | 0 |
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
131. Answer the following:
a) Explain how the free rider problem might apply to the research and development of new technologies, medicine, and processes if research and development were only financed by private funds.
b) How does the government combat the free-rider problem in new ideas?
Learning Objective: Describe the efficiency in the provision and distribution of a public good.
132. Explain with the help of a suitable figure, why the government needs to subsidize inoculation against a viral infection.
Learning Objective: Define external benefits and external costs and show how their presence results in nonoptimal output levels for goods characterized by such aspects.
133. Explain with the help of a suitable real life example how common resources are depleted if property rights are not ensured?
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
134. A local band practices next door to Joe, who enjoys a peaceful and quiet environment. The benefit (in present value terms) to the band of practicing is $100 and the cost (in present value terms) to Joe of the band practicing is $150.
a) What will happen if the band is held legally liable for their noise damage? Assume this is the only place they can practice.
b) What will happen if the band is not held legally liable for their noise damage? Assume this is the only place they can practice.
c) Now let the benefit (in present value terms) to the band of practicing be $150 and the cost (in present value terms) to Jack of the noise be $100. What will happen when the band is held legally liable for their noise damage and when they are not? Assume this is the only place they can practice.
d) Again let the benefit (in present value terms) to the band of practicing be $100 and the cost (in present value terms) to Jack of the noise be $150. But now the band can pay to make their apartment soundproof at a cost of $40. What will happen when the band is held legally liable for their noise damage and when they are not?
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
135. Mention some of the situations in which the Coase Theorem will not ensure an efficient outcome?
Learning Objective: Show how clearly defined and enforced property rights can resolve externality problems and thereby ensure an efficient outcome.
136. Suppose an electric utility company expects to earn $1 million in profit each year. In the process of producing electricity, pollutants emitted by the firm’s smokestacks impose costs of $50 per year on each of 10,000 neighboring residents. A smokestack scrubber that would eliminate 80% of the damage can be purchased for $200,000, but needs to be replaced each year.
a) Should the utility remain in business? Explain.
b) What is the least costly method of achieving an efficient outcome with respect to pollution?
c) If the right to the air (to remain clean) is assigned to the adjacent homeowners, what obstacles are likely to deter an efficient solution?
d) If the right to the air (to pollute it) is assigned to the utility company, what obstacles are likely to deter an efficient solution? Be specific.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
Difficulty Level: Medium
137. Suppose there are two chemicals manufacturing firms, A and B, in the city of Maltova which release 10 units and 8 units of toxic wastes every year in the absence of any restriction. The government of Maltova then imposes a tax of $5,000 per million ton of toxic waste on the factories. Explain with the help of a suitable figure that although the same tax is imposed on both the factories, and the government is unaware of each firm’s marginal costs, the government is able to reduce pollution by 11 units with minimum cost.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
138. Suppose there are steel manufacturing firms (firm A and firm B. in a city which release 20 units and 16 units of pollutants every year in the absence of any restriction. The government then issues tradable permits to pollute to each of the firms. The overall emission level allowed through the permits was set at 6 units for each firm. Explain with the help of a suitable figure that how the government achieves a target of reducing pollution by 24 units in the least costly way.
Learning Objective: Demonstrate how air pollution can more efficiently be controlled through the establishment of an overall industry pollution target and the assignment of tradable emissions permits to the industry's firms.
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Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan