Which 1. of the following illustrates the concept of external cost? a) Margaret purchases all her food and clothing in the big city outside her residence. b) A small business owner frequently buys raw materials by using her bank's line of credit. c) Raymond cannot open his windows at times because he lives downwind from a mushroom farm. d) Felicia, an economics major, asks the most insightful questions in class. Answer: _____
2. Antibiotics may be ________, since people only consider their ________. a) b) c) d) underused; private costs of consumption not the social costs overused; private costs of consumption not the social costs underused; external costs of consumption not the private costs overused; external costs of consumption not the private costs
Answer: _____
3. An external cost: a) causes markets to allocate resources efficiently. b) affects producers but not consumers. c) is a cost paid by people other than the producer or consumer trading in the market. d) leads to economic efficiency only when private costs are greater than external costs. Answer: _____
4. A chemical bathroom cleaner has an ingredient X which allows the cleaner to lather well and removes stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that is washed down the drain escapes into the environment and releases allergens which cause respiratory problems for people. What is the social cost of a bottle of this cleaner? a) $5.50 b) the cost paid by other people as a result of the use of such a bottle of bathroom cleaner c) $5.50 plus the external cost of such a bottle of bathroom cleaner d) $3.60 Answer: _____
5. When patients or farmers choose whether to use more antibiotics, they compare: a) b) c) d) their private benefits with the social cost. their private benefits with the market price. the social benefits with the social cost. the social benefits with the market price.
Answer: _____
6. Since the price of antibiotics does not include all the costs of using antibiotics, the price is too: a) b) c) d) high, and so antibiotics are overused. high, and so antibiotics are underused. low, and so antibiotics are overused. low, and so antibiotics are underused.
Answer: _____
7. Suppose that the private cost of using antibiotics is less than its social costwe would then expect people to ________ antibiotics, leading to an ________ market outcome. a) b) c) d) overuse; inefficient underuse; inefficient overuse; efficient efficient use of; equilibrium
Answer: _____
8. If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will: a) emit a lower level of sulfur dioxide than is socially efficient. b) emit a higher level of sulfur dioxide than is socially efficient. c) emit an acceptable level of sulfur dioxide d) not emit any sulfur dioxide in an attempt to avoid paying the entire cost. Answer: _____
9. External costs caused by the use of antibiotics are the costs to people who are: a) buying antibiotics. b) selling antibiotics.
c) either buying or selling antibiotics. d) neither buying nor selling antibiotics. Answer: _____
10. If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be: a) b) c) d) higher than the marginal cost to antibiotic sellers. less than the marginal cost to antibiotic sellers. higher than the marginal benefit to the antibiotic buyers. less than the marginal benefit to the antibiotic buyers.
Answer: _____
11. Which of the following is an example involving an external benefit? a) b) c) d) the pollution of a stream a person littering a public highway air pollution a nice garden in front of your neighbor's house
Answer: _____
12. Because there are external benefits from higher education: a) private markets will over-supply college classes. b) government intervention cannot improve the market for college classes. c) the government should impose a tax on college students. d) private markets will under-supply college classes. Answer: _____
13. The Centers for Disease Control and Prevention (CDC) wants at least 90% of the population vaccinated against preventable diseases, since the chance of a disease outbreak decreases as vaccine coverage increases. We can conclude that: a) the external benefits of vaccination likely decrease as more and more people are vaccinated. b) the private benefits of vaccination increase with vaccine coverage. c) vaccines create a negative externality once the vaccine covers 90% of the population. d) vaccines create a positive externality once the vaccine covers 90% of the population. Answer: _____
14. The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which of the following is correct? a) The social government to b) The social government to c) The social government to d) The social government to Answer: _____ benefit of Good X is $13.75, a justification for the give buyers a $3.00 subsidy. benefit of Good X is $7.75, a justification for the give buyers a $3.00 subsidy. benefit of Good X is $7.75, a justification for the tax sellers $13.75 per unit. benefit of Good X is $13.75, a justification for the tax sellers $3.00 per unit.
15. Edgar's expected private benefit from the flu shot is $15.00, and it would cost him $20 to get vaccinated. Therefore, which of the following is correct? a) It is socially optimal for Edgar to get the flu shot if the social benefits of the shot exceed $20. b) The external benefits of the flu shot equal $5.00 ($20.00 15.00). c) Even without a government subsidy, Edgar is certain to be vaccinated. d) The deadweight loss is eliminated if Edgar is vaccinated and the external benefits are $4.00. Answer: _____
16. Fewer people get flu shots than is efficient because: a) people usually perceive that the private cost of getting flu shots is higher than their private benefit. b) people usually perceive that the private benefit of getting flu shots is higher than their private cost. c) the cost of producing flu shots is too high in relation to profits. d) there are always more people taking take flu shots than the amount of flu shots available. Answer: _____
17. The paper industry and brewery industry each emit 60 tons of particulates into the air. It costs the paper industry $1,000 to remove 1 ton of particulates and it costs the brewery industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate pollution, the government gives each industry tradeable allowances worth 50 tons of particulates. We would expect that:
a) the paper industry will buy tradeable allowances from the brewery industry at a cost between $1,000 and $1,400 per allowance. b) the paper industry will buy tradeable allowances from the brewery industry at a cost greater than $1,400 per allowance. c) the brewery industry will buy tradeable allowances from the paper industry at a cost between $1,000 and $1,400 per allowance. d) the brewery industry will buy tradeable allowances from the paper industry at a cost greater than $1,400 per allowance. Answer: _____
18. Which of the following illustrates the concept of a negative externality? a) A college professor plays a vigorous game of racquet ball with the racquet he recently purchased. b) A flood wipes out a farmer's corn crop. c) A college student plays loud music on his new stereo system at 2:00 a.m. d) A janitor eats a hamburger during his lunch break. Answer: _____
19. Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality, a) the supply curve would adequately reflect the marginal social cost of production. b) consumers will be required to pay a higher price for steel than they would have if the externality were internalized. c) the market equilibrium quantity will not be the socially optimal quantity. d) producers will produce less steel than they otherwise would if the externality were internalized. Answer: _____
20. Suppose that electricity producers create a negative externality equal to $5 per unit. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced? a) They are equal. b) The equilibrium quantity is greater than the socially optimal quantity. c) The equilibrium quantity is less than the socially optimal quantity. d) There is not enough information to answer the question.
Answer: _____
21. Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette market, then a) the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked. b) the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked. c) the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked. d) There is not enough information to answer the question. Answer: _____
22. Which of the following is an example of a positive externality? a) A college student buys a new car when she graduates. b) The mayor of a small town plants flowers in the city park. c) Local high school teachers have pizza delivered every Friday for lunch. d) An avid fisherman buys new fishing gear for his next fishing trip. Answer: _____
23. Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes? a) They are equal. b) The after-tax equilibrium quantity is greater than the socially optimal quantity. c) The after-tax equilibrium quantity is less than the socially optimal quantity. d) There is not enough information to answer the question. Answer: _____
24. University researchers create a positive externality because what they discover in their re-search labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced? a) tax university researchers b) offer grants to university researchers c) eliminate subsidized student loans
d) nothing Answer: _____
25. Suppose that cookie producers create a positive externality equal to $2 per dozen. Further suppose that the government offers a $2 per-dozen subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced? a) The equilibrium quantity is greater than the socially optimal quantity. b) The equilibrium quantity is less than the socially optimal quantity. c) They are equal. d) There is not enough information to answer the question. Answer: _____
26. Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit a) 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. b) 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. c) 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air. d) 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. Answer: _____
27. In which of the following cases is the Coase theorem most likely to solve the externality? a) Ed is allergic to his roommate's cat. b) from Chemicals manufacturing plants in the Midwest are causing acid rain in Canada. c) Polluted water runoff from farms is making residents of a nearby town sick. d) Industrialization around the world is causing global warming.
Answer: _____
28. Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theo-rem? a) Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. b) Mary pays Cathy $16 so that Mary can smoke. c) Mary pays Cathy $14 so that Mary can smoke. d) Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke. Answer: _____
29. A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome? a) The radio station puts up a shield, which b) The radio station puts up a shield, which c) Neither the radio station nor the dentist equipment. d) The dentist gets a new drill; it does not it. Answer: _____ it pays for. the dentist pays for. purchase additional matter who pays for
30. Monte owns a dog; the dog's barking annoys Monte's neighbor, Teresa. Suppose that the benefit of owning the dog is worth $200 to Monte and that Teresa bears a cost of $400 from the barking. As-suming Monte has the legal right to keep the dog, a possible private solution to this problem is that a) Teresa pays Monte $150 to give the dog to his parents who live on an isolated farm. b) Monte pays Teresa $350 for her inconvenience. c) Teresa pays Monte $300 to give the dog to his parents who live on an isolated farm. d) There is no private transaction that would improve this situation. Answer: _____
31. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane
bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a) b) an c) an d) Dick pays Jane $600 for her inconvenience. Jane pays Dick $400 to give the dog to his parents who live on isolated farm. Jane pays Dick $550 to give the dog to his parents who live on isolated farm. The current situation is efficient.
Answer: _____
32. Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct? a) If Dick's benefit exceeds Jane's cost, government intervention is necessary. b) Dick will pay to keep his dog if his benefit exceeds Jane's cost. c) If Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog. d) If Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial. Answer: _____
33. Sally's cat causes Mike to sneeze. Sally values her cat's companionship at $300 per year. The cost to Mike of tissues and her allergy medication is $350 per year. Based on the Coase theorem, a) b) c) d) Sally should pay Mike $400 so that she may keep her cat. Sally should pay Mike $350 for tissues and allergy medication. Mike should pay Sally $325 to give away her cat. Mike should move.
Answer: _____
34. Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to a) stop her messy habits or else move out. b) pay you at least $100 but less than $200 to live with the clutter. c) continue to be messy and force you to move out. d) demand payment of at least $100 but no more than $200 to clean up after herself.
Answer: _____
35. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a) The railroad will continue to operate but will pay the farmer $1,500 in damages. b) The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c) The farmer will incur $1,500 in damages to his crops. d) The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur. Answer: _____
36. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a) The railroad will continue to operate but will pay the farmer $1,500 in damages. b) The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c) The farmer will incur $1,500 in damages to his crops. d) The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur. Answer: _____
37. Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs? a) Sam continues to smoke because he has a right to smoke in the smoking section. b) Charles offers Sam between $15 and $40 not to smoke. Sam
accepts, and both parties are better off. c) Charles offers Sam between $15 and $40 not to smoke. Sam declines because he has a right to smoke in the smoking section. d) Only a government policy banning smoking in restaurants will solve this problem. Answer: _____
38. Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution? a) Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). b) Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. c) Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section. d) Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. Answer: _____
39. John lives in an apartment building and gets a $700 benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the music coming from John's stereo, bears a $1,000 cost from the noise. At which of the following offers from Mary could both Mary and John benefit from the silencing of John's stereo? a) b) c) d) $200 $600 $900 $1,100
Answer: _____
40. Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears a $350 cost from the noise. Mary would like to offer Alexander some money to turn down the volume on his stereo. If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement?
a) an amount less than $100 b) an amount between $100 and $250 c) an amount between $250 and $350 d) Any amount could result in both parties benefiting from the agreement. Answer: _____
41. Max lives in an apartment building and gets a benefit from playing his stereo. Lily, who lives next door to Max and often loses sleep due to the loud music coming from Max's stereo, bears a cost from the noise. Lily is threatening to call the police to force Max to turn down his stereo. Under which of the following conditions would Max be able to offer Lily some amount of money to keep her from calling the police and to allow him to continue to play his stereo loudly? a) The cost of the noise to Lily must exceed the benefit of the music to Max. b) The benefit of the music to Max must exceed the cost of the noise to Lily. c) The Coase Theorem guarantees that Lily and Max will always be able to come to an agreement that keeps Lily from calling the police regardless of the individual benefits and costs. d) The cost of the noise to Lily must exceed the benefit of the music to Max by an amount greater than the transaction costs associated with the agreement. Answer: _____
42. Ed is a writer who works from his home. Ed lives next door to Ricky, the drummer for a local band. Ricky needs lots of practice to earn his share of the bands profits, $250. Ed gets distracted by Ricky's drumming but needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution? a) Ricky offers Ed $499 to allow Ricky to continue drumming. Ed accepts and both are better off. b) Ricky offers Ed $249 to allow Ricky to continue drumming. Ed accepts and both are better off. c) Ed offers Ricky $251 to stop practicing his drumming. Ricky agrees and both are better off. d) Ed offers Ricky $501 to stop practicing his drumming. Ricky agrees and both are better off. Answer: _____
43. Emma is a writer who works from her home. Emma lives next door to Clay, the drummer for a local band. Clay needs lots of practice to earn his share of the band's profit, which will amount to $250. Emma gets distracted by Clay's drumming but needs to get her writing done to earn $500 for her current article. If Emma needs to hire a lawyer to help
her reach an agreement with Clay, then what price is Emma willing to pay the lawyer? a) b) c) d) less less less less than than than than $250 $450 $500 $750
Answer: _____
44. Suppose a paper mill is located on the banks of a trout stream. The mill must decide whether to discharge high or low amounts of chemical waste from paper making into the stream. If it chooses a high discharge rate, the mill is more valuable (because it can dispose of waste at a low private cost) and the fishery is less valuable because there the trout are fewer and smaller. If it chooses a low discharge rate, the mill is less valuable but the fishery is more valuable. The values of the mill and fishery as a function of the mill's pollution decision are given in the table. If the Mill has the right to pollute as much as it wants and bargaining is not costly then ____ . Decision High Discharge Low Discharge Mill Value $3000 $1000 Fishery Value $2000 $6000
A. The Fishery will pay the Mill something over $2000 to switch to low discharge. B. The Fishery will not be able to reach a bargain resulting in low discharge. C. The Fishery will go out of business because of pollution. D. The Fishery will pay the Mill something over $4000 to switch to low discharge.