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Copyright © 2011 Pearson Education, Inc.
Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 11 Externalities and the Environment
11.1 Negative Externalities: Pollution
1) When studying pollution and the environment, economists
A) have no role to play.
B) concentrate on the physical aspects of the environment.
C) emphasize costs and benefits.
D) attempt to reduce pollution at all costs.
E) think pollution is good if it occurs when production takes place.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
2) Pollution is an example of a ________ externality.
A) negative production
B) positive production
C) negative consumption
D) positive consumption
E) Coasian
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: MR
AACSB: Reflective thinking
3) The production of electricity creates pollution. When deciding how much electricity to buy,
customers ________ the cost of pollution. When deciding how much electricity to buy,
producers ________ the cost of pollution.
A) take into account; take into account
B) do not take into account; do not take into account
C) take into account; do not take into account
D) do not take into account; take into account
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: MR
AACSB: Reflective thinking
2
Copyright © 2011 Pearson Education, Inc.
4) Marginal private cost
A) is always zero if there is an external cost.
B) equals the marginal social cost only if the marginal external cost is positive.
C) is the cost of producing an additional unit of a good or service that is paid by the producer of
that good or service.
D) the cost of producing an additional unit of a good or service that falls on people other than the
producer of that good or service.
E) the cost of producing an additional unit of a good or service that is paid by the entire society.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
5) A private cost is a cost of production that is
A) borne by the producer of a good.
B) measured in marginal terms.
C) borne by someone other than the producer of a good.
D) measured in total terms.
E) the same as an external cost.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
6) The cost of producing an additional unit of a good or service that is borne by the producer of
that good or service is the marginal
A) external cost.
B) private cost.
C) social cost.
D) public cost.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
3
Copyright © 2011 Pearson Education, Inc.
7) The difference between private cost and social cost is that
A) social cost only considers the external cost borne by society.
B) social cost only considers the cost borne by people other than the producer.
C) private cost only considers the cost borne by producers of the good.
D) social cost also includes any external benefit whereas private cost excludes all external
benefits.
E) there is no difference; the terms refer to the same cost.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
8) Harry, the owner of a beauty salon, hires a new hair stylist. The wages paid to the new stylist
are
A) a private cost and not an external cost .
B) an external cost and not a private cost.
C) both a private cost and an external cost.
D) neither a private cost nor an external cost.
E) only a private benefit because people want their hair styled.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
9) Joanne rents a TV production studio to produce an extra hour of a TV show. The rent is
A) a private cost and not an external cost.
B) an external cost and not a private cost.
C) both a private cost and an external cost.
D) neither a private cost nor an external cost.
E) a private benefit because viewers will benefit from watching the extra hour of the show.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
4
Copyright © 2011 Pearson Education, Inc.
10) For a product with an external cost, the supply curve
A) represents the various quantities people can buy.
B) is the same as the marginal private cost curve.
C) is the same as the marginal social cost curve.
D) is the same as the marginal external cost curve.
E) is undefined.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
11) For a firm, its labor costs are
A) a marginal benefit.
B) a private cost.
C) an external cost.
D) Both answers A and C are correct.
E) Both answers A and B are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
12) The cost of producing an additional unit of a good or service that falls on people other than
the producer is the marginal
A) external cost.
B) private cost.
C) social cost.
D) social benefit.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
5
Copyright © 2011 Pearson Education, Inc.
13) A marginal external cost of a product is equal to
A) what the producer has to pay to hire resources to produce another unit.
B) the cost someone other than the producer incurs when another unit is produced.
C) the cost the producer incurs to produce another unit.
D) what the consumer must pay when he or she buys the good or service.
E) None of these answers describes a marginal external cost.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
14) A loud band plays a concert late at night in a neighborhood park. The noise produced by the
band that keeps the neighbors not attending the concert awake is
A) only a private cost.
B) only an external cost.
C) both a private cost and an external cost.
D) neither a private cost nor an external cost.
E) private benefit because the neighbors get to hear the band.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
15) Which of the following is an example of an external cost?
A) taxes
B) the price of a car wash
C) pollution
D) an electricity bill
E) paying a wage that exceeds the minimum wage
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
6
Copyright © 2011 Pearson Education, Inc.
16) A firm dumps dioxin in a river, thereby severely polluting the river. The cost of the water
pollution is
i. zero for the firm.
ii. an external cost.
iii. part of the marginal social cost
A) i only.
B) ii only.
C) iii only.
D) ii and iii.
E) i, ii, and iii.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
17) When logging in the Pacific Northwest destroys forests that hikers would have used for eco-
tourism, the destruction of the trails is an example of
A) an external cost.
B) a private cost.
C) a government cost.
D) an external benefit.
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
18) Which of the following is an example of an external cost?
A) a grove of trees planted in a park in Seattle
B) a library built in Philadelphia
C) a new, faster computer chip
D) an oil spill off the coast of South America
E) a student graduating from college
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
7
Copyright © 2011 Pearson Education, Inc.
19) Jacob pays $5,000 to paint his house because pollution from a nearby factory damaged the
paint. To the factory, the $5,000 cost is
A) a private cost and not an external cost.
B) an external cost and not a private cost.
C) both a private cost and an external cost.
D) neither a private cost nor an external cost.
E) a private benefit because viewers will benefit from watching the extra hour of the show.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
20) A landfill site produces an obnoxious odor. Homes downwind of the site rent for $1000 per
month while homes upwind of the site rent for $1500 per month. If the odor is the only
detectable difference between two neighborhoods, the difference in the rent is the ________ of
the odor.
A) social cost
B) external cost
C) private cost
D) marginal cost-benefit
E) private benefit
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
21) Suppose two neighborhoods (A and B) have identical housing, but neighborhood A has a
strictly enforced deed restriction that prohibits homeowners from parking junk cars in the front
yard. If houses in neighborhood A sell for $105,000 and houses in neighborhood B sell for
$100,000, how would an economist value the external cost of visible junk cars, per house?
A) $205,000
B) $105,000
C) $100,000
D) $5,000
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
8
Copyright © 2011 Pearson Education, Inc.
22) Suppose two neighborhoods with 10 homes each in Buffalo, New York are identical except
one of them is near a toxic waste dump. If homes near the dump sell for an average of $40,000
and the other homes sell for $90,000, the external cost of the dump is
A) $400,000.
B) $1,300,000.
C) $900,000.
D) $500,000.
E) $90,000.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
23) The marginal cost incurred by the entire society to produce a good or service is the
A) marginal external cost.
B) marginal private cost.
C) marginal social cost.
D) marginal social benefit.
E) marginal private benefit.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
24) Marginal social cost is equal to
A) the amount people who buy a product pay for another unit.
B) whatever producers have to pay to produce output.
C) the sum of marginal private cost and the marginal external cost.
D) the average of marginal private cost and the marginal external cost.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
9
Copyright © 2011 Pearson Education, Inc.
25) Marginal social cost is the
A) price a consumer pays for one more unit of a good.
B) cost a producer incurs producing one more unit of a good.
C) cost of producing one more unit of a good that falls on someone other than the producer.
D) sum of the cost a producer incurs from producing one more unit of a good plus the cost of
producing one more unit of a good that falls on someone other than the producer.
E) same as marginal cost only if there is an external cost when the good is produced.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
26) Which of the following equations is correct?
A) MC = MSC + marginal external cost
B) MSC = MC ÷ marginal external cost
C) MSC = MC + marginal external cost
D) MSC = MC × marginal external cost
E) MC = marginal external cost - MSC
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
27) The marginal social cost of producing a good or service is the
A) cost of producing an additional unit borne by the producer.
B) cost of producing an additional unit borne by people other than the producer.
C) sum of the marginal private cost and the marginal external cost.
D) same as marginal external cost.
E) sum of the marginal private cost and the marginal external cost minus the marginal social
benefit.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
10
Copyright © 2011 Pearson Education, Inc.
28) Which of the following is true?
A) MSC = MC + Marginal external cost.
B) MC = Marginal external cost - MSC.
C) MC = Marginal external benefit + MSC.
D) MSC = Marginal external cost + marginal external benefit.
E) MSC = Marginal external cost - marginal external benefit.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
29) If there is no external cost, then marginal social cost
A) increases as output increases.
B) decreases as output increases.
C) is constant regardless of the level of output.
D) is unrelated to output levels.
E) first increases and then decreases as output increases.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
30) If a product has zero external costs, then
A) marginal social cost equals marginal private cost.
B) marginal social cost is greater than marginal private cost.
C) marginal social cost is less than marginal private cost.
D) marginal social cost equals zero.
E) we need more information to determine the relationship between marginal private cost and
marginal social cost.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
11
Copyright © 2011 Pearson Education, Inc.
31) If the marginal external cost of building a children's playground equals zero, then the
i. marginal private cost equals the marginal social cost.
ii. marginal social cost equals zero.
iii. marginal private cost equals zero.
A) i only.
B) ii only.
C) iii only.
D) ii and iii.
E) i and ii.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
32) If the marginal private cost of running a car is $0.30 a mile and the marginal external cost is
$0.10, what is the marginal social cost?
A) $0.20
B) $3.00
C) $0.03
D) $0.40
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
33) If the marginal social cost of generating a kilowatt of electricity is $0.10 and the marginal
private cost is $0.08, what is the marginal external cost?
A) $0.18
B) $0.10
C) $0.08
D) $0.02
E) $0.80
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
12
Copyright © 2011 Pearson Education, Inc.
34) If the marginal social cost of producing a ton of cement is $4,000 and the marginal private
cost is $3,500, then the
A) marginal benefit of a ton of cement will equal $4,000.
B) total cost of producing a ton of cement is $7,500.
C) marginal external cost of producing a ton of cement is $500.
D) marginal external cost of producing a ton of cement is $7,500.
E) marginal external cost of producing a ton of cement is $4,000.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
35) If a good has an external cost, then the marginal private cost curve
A) lies below then the marginal social cost curve.
B) lies above the marginal social cost curve.
C) lies below the horizontal axis.
D) is the same as the marginal external cost curve.
E) is undefined because the firms' costs are not equal to the social costs.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
36) The marginal external cost and marginal private cost
A) are all borne by the seller.
B) are opportunity costs.
C) when added, equal the sum of the marginal private benefit plus the marginal social benefit at
equilibrium.
D) are regulated by the government.
E) must always be equal in equilibrium.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
13
Copyright © 2011 Pearson Education, Inc.
37) If the production of a good causes an external cost, then the efficient quantity is
A) equal to the quantity at which the marginal benefit equals marginal cost.
B) less than the quantity at which the marginal benefit equals the marginal cost.
C) more than the quantity at which the marginal benefit equals the marginal cost.
D) the quantity at which the marginal private benefit is greater than the marginal social benefit.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
38) If a good has an external cost, the
A) unregulated competitive market outcome is efficient.
B) marginal private cost reflects the external cost.
C) unregulated competitive market outcome is inefficient.
D) marginal social benefit is equal to the marginal social cost when the market is in equilibrium.
E) external benefit must equal the external cost.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
39) The basic reason that a competitive unregulated market produces an inefficient amount of a
good with an external cost because
A) producers cannot measure marginal social cost.
B) producers do not pay the external cost.
C) the general public does not care about external costs.
D) external costs are not a political issue.
E) the external cost is paid by consumers rather than producers.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
14
Copyright © 2011 Pearson Education, Inc.
40) When production of a good results in an external cost, the unregulated competitive market
equilibrium quantity is
A) the efficient level of output.
B) greater than the efficient level of output.
C) not zero but is less than the efficient level of output.
D) unattainable.
E) zero.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
41) If producing a good or a service creates pollution, then
A) an unregulated competitive market produces an efficient output.
B) the industry's supply curve includes the extra cost of pollution.
C) at the unregulated, competitive market equilibrium quantity, marginal social cost is greater
than the equilibrium price.
D) at the unregulated, competitive market equilibrium quantity, marginal social benefit and
marginal social cost are equal.
E) at the unregulated, competitive market equilibrium quantity, marginal social benefit is less
than the equilibrium price.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
42) An external cost in the production of a good creates a difference between the
i. costs borne by the producer and the costs borne by society in general.
ii. efficient quantity of output and the equilibrium quantity of output.
iii. marginal social cost and the marginal private cost.
A) i only
B) iii only
C) ii and iii
D) i, ii, and iii
E) i and iii
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
15
Copyright © 2011 Pearson Education, Inc.
43) The deadweight loss associated with producing a product that has an external cost occurs
because
A) too much output is produced.
B) too little output is produced.
C) the price firms charge for the good is too high.
D) not enough resources are allocated to producing the good.
E) the marginal social cost does not equal zero.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
44) When production of a good results in an external cost, the unregulated competitive market
equilibrium is inefficient because ________.
A) MSC = MC
B) MSC = MB
C) MSC > MB
D) MSC < MB
E) MSC is undefined
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
45) For a good whose production creates an external cost, the efficient quantity of output is
A) where the market demand curve and the market supply curve intersect.
B) where the marginal social cost curve and marginal benefit curve intersect.
C) as low as possible.
D) zero.
E) the amount of production so that the marginal social benefit exceeds the marginal social cost
by as much as possible.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: TS
AACSB: Analytical reasoning
16
Copyright © 2011 Pearson Education, Inc.
46) The figure above illustrates the marginal private cost and the marginal social cost to the city
of Seattle for each rock concert that is offered. If 5 concerts are put on, then the
A) marginal external cost will be greater than the marginal social cost.
B) marginal external cost will be greater than the marginal private cost.
C) marginal external cost will equal the marginal private cost.
D) marginal social cost will equal the marginal external cost.
E) marginal external cost will equal zero.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
47) The figure above illustrates the marginal private cost and the marginal social cost to the city
of Seattle for each rock concert that is offered. Suppose the marginal private cost of the 5th
concert is $10,000. Then, for the 5th concert, the
A) marginal external cost equals $30,000.
B) marginal social cost equals $30,000.
C) marginal external cost equals the marginal private cost.
D) marginal external cost equals $40,000.
E) marginal external cost equals $10,000.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
17
Copyright © 2011 Pearson Education, Inc.
48) The figure above illustrates the marginal private cost and the marginal social cost to the city
of Seattle for each rock concert that is offered. At 10 concerts, the
A) marginal private cost equals the marginal external cost.
B) marginal social cost equals $60,000.
C) marginal private cost is more than $40,000.
D) marginal external cost equals $60,000.
E) marginal external cost equals $80,000.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
49) The figure above represents the relationship between output and cost in an industry with an
external cost. Which line represents the marginal private cost (MC) curve?
A) Curve 1
B) Curve 2
C) the dotted line BC
D) the y-axis
E) the dotted line AB
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
18
Copyright © 2011 Pearson Education, Inc.
50) The figure above represents the relationship between output and cost in an industry with an
external cost. When output is at D, what distance represents the marginal external cost?
A) AB
B) BC
C) CD
D) BD
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
51) The figure above shows the marginal social cost of generating electricity and the marginal
private cost. For 4 billion kilowatts, what is the marginal external cost?
A) $0.12
B) $0.08
C) $0.04
D) $0.00
E) $0.20
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
19
Copyright © 2011 Pearson Education, Inc.
52) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The difference between the marginal cost curve and the marginal
social cost curve equals
A) marginal private cost.
B) private cost.
C) external cost.
D) marginal external cost.
E) Coasian cost.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
53) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The marginal cost borne by producers when 100 billion kilowatt
hours are produced is
A) 5¢ per kilowatt.
B) 10¢ per kilowatt.
C) 15¢ per kilowatt.
D) 20¢ per kilowatt.
E) 0¢ per kilowatt.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
20
Copyright © 2011 Pearson Education, Inc.
54) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The marginal cost borne by producers when 200 billion kilowatt
hours are produced is
A) 0¢ per kilowatt.
B) 10¢ per kilowatt.
C) 20¢ per kilowatt.
D) 15¢ per kilowatt.
E) 5¢ per kilowatt.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
55) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The marginal external cost when 100 billion kilowatt hours are
produced is
A) 0¢ per kilowatt.
B) 5¢ per kilowatt.
C) 10¢ per kilowatt.
D) 15¢ per kilowatt.
E) 20¢ per kilowatt.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
56) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The marginal external cost when 200 billion kilowatt hours are
produced is
A) 0¢ per kilowatt.
B) 10¢ per kilowatt.
C) 20¢ per kilowatt.
D) 15¢ per kilowatt.
E) 5¢ per kilowatt.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
21
Copyright © 2011 Pearson Education, Inc.
57) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The marginal cost paid by the producers and everyone else in
society when 100 billion kilowatt hours are produced is
A) 0¢ per kilowatt.
B) 5¢ per kilowatt.
C) 10¢ per kilowatt.
D) 20¢ per kilowatt.
E) 15¢ per kilowatt.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
58) The figure above shows the marginal social cost curve of generating electricity and the
marginal private cost curve. The marginal cost paid by the producers and everyone else in
society when 200 billion kilowatt hours are produced is
A) 0¢ per kilowatt.
B) 10¢ per kilowatt.
C) 20¢ per kilowatt.
D) 15¢ per kilowatt.
E) 5¢ per kilowatt.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
22
Copyright © 2011 Pearson Education, Inc.
Quantity
of steel
(millions
of tons per
week)
Marginal
benefit
(dollars
per ton)
Marginal
social cost
(dollars
per ton)
5 40 20
10 35 25
15 30 30
20 25 35
25 20 40
59) The table above shows information about the costs and benefits of a steel smelter that
pollutes the air of a city. The market is efficient when the quantity of steel produced is ________
tons per week.
A) 5
B) 10
C) 15
D) 20
E) 25
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
60) The table above shows information about the costs and benefits of a steel smelter that
pollutes the air of a city. If the marginal external cost is $10 per ton at every quantity of steel
produced, the equilibrium quantity when the steel industry is unregulated is ________ tons per
week.
A) 5
B) 15
C) 20
D) 25
E) 10
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: MR
AACSB: Analytical reasoning
23
Copyright © 2011 Pearson Education, Inc.
61) The figure above shows the costs and benefits associated with producing paper. What is the
marginal external cost when output is 6 tons?
A) $1,600
B) $1,200
C) $1,000
D) $600
E) $400
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
62) The figure above shows the costs and benefits associated with producing paper. What is the
unregulated competitive market level of output?
A) 0
B) 4 tons
C) 6 tons
D) More than 6 tons
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
24
Copyright © 2011 Pearson Education, Inc.
63) The figure above shows the costs and benefits associated with producing paper. What is the
efficient level of output?
A) 0
B) 4 tons
C) 6 tons
D) More than 6 tons
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
64) The figure above illustrates the marginal private cost and the marginal social cost to the city
of Seattle for each rock concert that is offered. It also illustrates the marginal benefit. There is no
external benefit. If the city of Seattle puts on 5 concerts per year, then the marginal benefit will
A) exceed the marginal social cost.
B) equal the marginal private cost.
C) be less than the marginal social cost.
D) will equal the marginal social cost.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
25
Copyright © 2011 Pearson Education, Inc.
65) The figure above illustrates the marginal private cost and the marginal social cost to the city
of Seattle for each rock concert that is offered. It also illustrates the marginal private benefit.
There is no external benefit. The efficient number of concerts in Seattle is
A) 0.
B) 5.
C) 10.
D) 20.
E) 15.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
66) Legally established titles to ownership, use, and disposal of factors of production and goods
and services, are called ________ rights.
A) government
B) pollution
C) property
D) inefficient
E) private
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
67) Legally established titles to the ownership, use, and disposal of factors of production are
referred to as
A) property rights.
B) Coase rights.
C) pollution rights.
D) emission rights.
E) price-setting rights.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: PH
AACSB: Reflective thinking
26
Copyright © 2011 Pearson Education, Inc.
68) One reason why property rights help achieve an efficient level of pollution is because
property rights
A) force the marginal private cost to equal the marginal social cost.
B) force the marginal social cost to zero.
C) force the marginal external cost to a lower level than marginal private cost.
D) eliminate marginal private costs.
E) change the marginal external cost so that they are equal to the marginal social benefit.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
69) If a producer must pay the cost of his or her pollution because property rights have been
assigned, then
A) pollution will be completely eliminated.
B) the supply curve will shift rightward as the new costs are added.
C) the supply curve will shift leftward as the new costs are added.
D) consumers will now consume more of the good because the external costs are reduced.
E) there is no longer any marginal benefit from the good or service being produced.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
70) The Coase theorem states that
A) the level of pollution should be equal to zero to maximize social net benefit.
B) profit making producers pollute because they are forced to.
C) the efficient level of output is where marginal external cost equals marginal external benefit.
D) if property rights exist and transactions costs are low, private transactions are efficient.
E) the best way to limit pollution is by taxing producers who pollute.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
27
Copyright © 2011 Pearson Education, Inc.
71) The proposition that if property rights exist and are enforced, then private transactions are
efficient is referred to as the
A) Coase theorem.
B) property rights theorem.
C) pollution rights theorem.
D) emission rights theorem.
E) private-market efficiency theorem.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: PH
AACSB: Reflective thinking
72) In part, the Coase theorem is a proposition about
A) assigning property rights.
B) measuring private costs.
C) subsidizing external benefits.
D) taxing external costs.
E) how increasing transactions costs can reduce deadweight losses.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
73) The Coase theorem deals with the problem of pollution by
A) giving the government regulatory power over polluters.
B) making all polluters stop polluting.
C) establishing and enforcing private property rights.
D) having the government take over ownership of all polluting processes.
E) allowing the government to set the proper emission charge.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
28
Copyright © 2011 Pearson Education, Inc.
74) If transactions costs are low, then assigning property rights in a market with external costs
i. increases the deadweight loss.
ii. means private transactions are efficient.
iii. means that only consumers must pay the external costs.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i and ii
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
75) Transactions costs are the
A) costs of using the Coase theorem.
B) opportunity costs of conducting a transaction.
C) external marginal costs of the externality.
D) reason why taxes cannot affect the inefficiency resulting from an external cost.
E) external costs when a firm pollutes.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
76) Which of the following is the best example of a transactions cost?
A) the value of the time spent negotiating a contract
B) the price of a new set of tires
C) the cost associated with producing a golf club
D) the price of labor and materials used to produce a house
E) the price of food
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
29
Copyright © 2011 Pearson Education, Inc.
77) Three methods the government can use to cope with the external cost from pollution are
A) pollution taxes, subsidies, and outright bans.
B) pollution taxes, regulations, and subsidies.
C) marketable permits, pollution subsidies, and pollution taxes.
D) pollution charges, marketable permits, and pollution limits.
E) vouchers, pollution subsidies, and pollution taxes.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
78) Which of the following is a common method used by government to cope with the situation
in which production of a good creates an external cost?
A) removing property rights
B) subsidizing production
C) marketable permits
D) lottery
E) vouchers
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
30
Copyright © 2011 Pearson Education, Inc.
79) Producing leather creates external costs in the form of water pollution. The figure above
illustrates the market for leather. In the absence of any government regulation, how many tons of
leather will be produced?
A) 0 tons
B) 200 tons
C) 300 tons
D) more than 300 tons
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
31
Copyright © 2011 Pearson Education, Inc.
80) Producing leather creates external costs in the form of water pollution. The figure above
illustrates the market for leather. If the government sets a pollution limit that achieves efficiency,
how many tons of leather are produced?
A) 0 tons
B) 200 tons
C) 300 tons
D) more than 300 tons
E) more than 0 tons and less than 200 tons
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
81) Which of the following is true regarding pollution charges?
i. They force a polluter to pay a price for its pollution.
ii. They are based on the marginal external cost of pollution.
iii. The fee that produces the efficient amount of pollution is easily determined.
A) i only
B) i and ii
C) ii and iii
D) i, ii, and iii
E) i and iii
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
82) When using pollution charges to improve efficiency in a market with an external cost,
regulators attempt to set the pollution charge equal to the
A) marginal social cost of production.
B) marginal external cost of production.
C) marginal private cost of production.
D) marginal private benefit of consumption.
E) marginal external benefit minus the marginal external cost.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
32
Copyright © 2011 Pearson Education, Inc.
83) Suppose a firm pollutes a river when it produces a product. To achieve the efficient amount
of output, a government could impose a ________ that equals the ________ of the pollution.
A) pollution charge; marginal social cost
B) pollution charge; marginal external cost
C) pollution tax; marginal social cost
D) pollution tax; marginal external cost
E) pollution subsidy; marginal social cost
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Reflective thinking
84) In order for pollution taxes to be effective in eliminating the deadweight loss resulting from
pollution, the pollution tax must be set equal to the
A) marginal private cost.
B) marginal external cost.
C) marginal social cost.
D) marginal benefit of polluting.
E) price of the good.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
85) To eliminate the inefficiency resulting from pollution that creates an external cost, the
government can impose a pollution tax on producers that is equal to the
A) MSB.
B) MC.
C) marginal external cost.
D) MSC.
E) price.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: PH
AACSB: Reflective thinking
33
Copyright © 2011 Pearson Education, Inc.
86) If the government taxes producers that create pollution, the government's policy
A) allows the producers to pollute more by increasing their costs.
B) results in less production because the producers' costs have risen.
C) eliminates pollution entirely by shifting the supply curve leftward.
D) allows the firms to pass along higher costs but doesn't cut pollution.
E) forbids the firms from passing along higher costs.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
87) A tax on a polluting industry
A) is not desirable because it reduces efficiency.
B) leads to less output in this industry.
C) causes more resources to be used in the polluting industry.
D) shifts the marginal social benefit curve leftward.
E) shifts the marginal social benefit curve rightward.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Reflective thinking
88) If the government taxes an industry that creates pollution, the tax
i. decreases the pollution.
ii. increases the price of the product produced by the firms.
iii. decreases the quantity of the good produced.
A) i only.
B) ii only.
C) ii and iii.
D) i and iii.
E) i, ii, and iii.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
34
Copyright © 2011 Pearson Education, Inc.
89) If a pollution tax in a market with an external cost changes the market so that it produces the
efficient level of output, which of the following occurs?
i. the supply curve shifts leftward
ii. the price increases
iii. the quantity produced decreases
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: TS
AACSB: Analytical reasoning
90) When government levies pollutions taxes on sellers to eliminate the inefficiency from the
cost of pollution, the result is
A) a lower price.
B) a smaller quantity produced.
C) a smaller cost of production.
D) a rightward shift of the supply curve.
E) leftward shifts of the supply and demand curves.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
35
Copyright © 2011 Pearson Education, Inc.
91) The figure above illustrates the gasoline market. There is no external benefit from gasoline.
If this market is left unregulated and no pollution tax is imposed, the equilibrium quantity of
gasoline is
A) 0 gallons.
B) 5 million gallons.
C) 10 million gallons.
D) 20 million gallons.
E) 15 million gallons.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
36
Copyright © 2011 Pearson Education, Inc.
92) The figure above illustrates the gasoline market. There is no external benefit from gasoline.
If a pollution tax equal to the marginal external cost is imposed on gasoline, then the quantity of
gasoline produced and consumed equals
A) 0 gallons.
B) 5 million gallons.
C) 10 million gallons.
D) 20 million gallons.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
93) The figure above illustrates the gasoline market. There is no external benefit from gasoline.
If a tax on gasoline is imposed as shown in the figure, then the total tax revenue earned by the
government equals
A) $24 million.
B) $16 million.
C) $8 million.
D) more than $24 million.
E) less than $8 million.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Analytical reasoning
37
Copyright © 2011 Pearson Education, Inc.
94) The figure above shows the market for the chemical hydrogen sulfide, the production of
which creates an external cost. If the government assesses the marginal external cost correctly,
what is the amount of the pollution tax that eliminates the inefficiency?
A) $2 per pound
B) $3 per pound
C) $4 per pound
D) $1 per pound.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
38
Copyright © 2011 Pearson Education, Inc.
95) The figure above shows the market for the chemical hydrogen sulfide, the production of
which creates an external cost. The government imposes the pollution tax shown in the above
figure. What quantity is produced after the pollution tax is imposed?
A) zero pounds
B) 80 million pounds
C) 160 million pounds
D) more than 160 million pounds
E) more than 80 million pounds and less than 160 million pounds.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
96) The figure above shows the market for the chemical hydrogen sulfide, the production of
which creates an external cost. The government imposes the pollution tax shown in the figure.
How much tax revenue does the government collect?
A) $640 million
B) $320 million
C) $240 million
D) More than $640 million
E) Zero because the government has taxed the firms out of business.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
39
Copyright © 2011 Pearson Education, Inc.
97) The figure above shows a tax imposed on a good with an external cost. The area of the
rectangle abcd equals
A) the MSB.
B) the total tax revenue collected by the government.
C) the amount of pollution tax per ton.
D) the MC.
E) the deadweight loss.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: PH
AACSB: Analytical reasoning
40
Copyright © 2011 Pearson Education, Inc.
98) The figure above shows the marginal social cost curve of generating electricity, the marginal
private cost curve, and the demand curve. The marginal external cost of producing 200 billion
kilowatt hours per day is ________ per kilowatt.
A) 0¢
B) 10¢
C) 20¢
D) 15¢
E) 5¢
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
99) The figure above shows the marginal social cost curve of generating electricity, the marginal
private cost curve, and the demand curve. If the market is competitive and unregulated, the
equilibrium price is ________ per kilowatt hour and the equilibrium quantity is ________
billions of kilowatt hours per day.
A) 10¢; 200
B) 15¢; 150
C) 20¢; 200
D) 20¢; 100
E) 7.5¢; 150
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
41
Copyright © 2011 Pearson Education, Inc.
100) The figure above shows the marginal social cost curve of generating electricity, the
marginal private cost curve, and the demand curve. If the market is competitive and unregulated,
the equilibrium quantity is ________ billions of kilowatt hours per day and the efficient quantity
is ________ billions of kilowatt hours per day
A) 150; 200
B) 200; 150
C) 0; 150
D) 250; 0
E) 150; 150
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
101) The figure above shows the marginal social cost curve of generating electricity, the
marginal private cost curve, and the demand curve. If the Coase theorem can be used in this
market, output equals ________ kilowatt hours per day.
A) 0
B) 150 billion
C) 200 billion
D) 100 billion
E) more than 200 billion
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
102) The figure above shows the marginal social cost curve of generating electricity, the
marginal private cost curve, and the demand curve. If the government imposes a pollution tax to
achieve the efficient level of production, the tax equals ________ per kilowatt hour.
A) 0¢
B) 7.5¢
C) 10¢
D) 15¢
E) 2.5¢
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
42
Copyright © 2011 Pearson Education, Inc.
103) What is the biggest problem of using government actions such as taxes and pollution
charges to control external costs?
A) insufficient legal power to enforce the controls
B) obtaining enough data to determine how much the tax or pollution charge will be
C) in some situations, there is no known way to control the external costs
D) political lobbying and voter disagreement
E) The Coase theorem points out that taxes and pollution charges work only in the short run and
not in the long run.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
104) A problem with pollution charges or taxes as a solution to pollution is that
A) people don't want the government to regulate industry.
B) the necessary information about the polluting industry is costly and usually unavailable.
C) taxes are already too high.
D) pollution would still continue.
E) the producers do not want the property right to their pollution.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
105) Issuing marketable permits to firms that produce a product with external costs will give the
firms the incentive to
A) declare bankruptcy.
B) buy and sell the permits amongst themselves.
C) escape the problem completely.
D) quit producing the output.
E) increase the external cost because they no longer need to deal with the externality.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: TS
AACSB: Reflective thinking
43
Copyright © 2011 Pearson Education, Inc.
106) Firm A and Firm B emit 300 tons of pollution each and each have marketable permits that
allow each to emit 100 tons of pollution. If it costs $5,000 for Firm A to eliminate 100 tons of
pollution and it costs Firm B $6,000 to eliminate 100 tons of pollution, then
A) Firm B sells its permits to Firm A for a price above $6,000.
B) Firm A sells its permits to Firm B for a price below $6,000.
C) Firm A sells its permits to Firm B for a price above $6,000.
D) Firm B sells its permits to Firm A for a price below $6,000.
E) neither Firm A nor Firm B sell permits because neither have extra permits.
Skill: Level 4: Applying models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
107) Which of the following best describes an externality?
A) something that is external to the economy
B) a sales tax on a good in addition to the market price
C) an effect of a transaction felt by someone other than the buyer or seller
D) anything produced in other countries
E) a change from what is normal
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
108) The cost of producing an additional unit of a good or service that is borne by the producer
of that good or service
A) always equals the benefit the consumer derives from that good or service.
B) equals the cost borne by people other than the producer.
C) is the marginal private cost.
D) is the external cost.
E) is the marginal social cost.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
44
Copyright © 2011 Pearson Education, Inc.
109) The cost of producing an additional unit of a good or service that falls on people other than
the producer is
A) the marginal cost.
B) represented by the demand curve.
C) represented by the supply curve.
D) the marginal external cost.
E) the marginal social cost.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
110) Which of the following is an example of an activity that creates an external cost?
i. a smoker emitting second-hand smoke
ii. sulfur emitting from a smoke stack
iii. throwing garbage on the roadside
A) i only
B) i and ii
C) iii only
D) ii and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
111) The marginal cost of production that is borne by the entire society is called the marginal
A) private cost.
B) social cost.
C) external cost.
D) public cost.
E) user cost.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
45
Copyright © 2011 Pearson Education, Inc.
112) If the marginal private cost of producing one kilowatt of power in California is ten cents
and the marginal social cost of each kilowatt is fourteen cents, then the marginal external cost
equals ________ per kilowatt.
A) ten cents
B) nineteen cents
C) four cents
D) zero cents
E) fourteen cents
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Analytical reasoning
113) When the production of a good has a marginal external cost, which of the following occurs
in an unregulated market?
i. Overproduction relative to the efficient level will occur.
ii. The market price is less than the marginal social cost at the equilibrium quantity.
iii. A deadweight loss occurs.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Analytical reasoning
114) The Coase theorem is the proposition that if property rights exist and are enforced, private
transactions are
A) inefficient.
B) efficient.
C) inequitable.
D) illegal.
E) unnecessary.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
46
Copyright © 2011 Pearson Education, Inc.
115) A marketable permit
A) allows firms to pollute all they want without any cost.
B) allows firms to buy and sell the right to pollute at government controlled prices.
C) eliminates pollution by setting the price of pollution permits above the marginal cost of
polluting.
D) allows firms to buy and sell the right to pollute.
E) is the Coase theorem solution to pollution.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Reflective thinking
116) If a polluting producer is forced to pay a pollution charge, what is the effect on the supply
and demand curves for the product?
A) The quantity supplied along the firm's supply curve increases.
B) The firm's demand curve shifts leftward.
C) The firm's supply curve shifts rightward.
D) The firm's supply curve shifts leftward.
E) Both the supply curve and the demand curve shift leftward.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: STUDY GUIDE
AACSB: Analytical reasoning
11.2 Common Resources
1) In which of the following cases does the tragedy of the commons occur?
i) cattle grazing on private ranches
ii) catching lobsters off the coast of Florida
iii) raising salmon on salmon farms
iv) using legal services provided by the courts
A) i only
B) ii only
C) ii and iii
D) i and iv
E) i and iii
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
47
Copyright © 2011 Pearson Education, Inc.
2) The tragedy of the commons arises because ________ exceeds ________ when the resource is
used.
A) marginal social benefit; marginal private benefit
B) marginal private benefit; marginal social benefit
C) marginal private benefit; marginal cost
D) marginal cost; marginal private benefit
E) marginal private cost; marginal social cost
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
3) Which of the following applies to the tragedy of the commons and a common resource?
i. In the absence of government action, there are no incentives to prevent the overuse of the
common resource.
i. When consumers take account of the marginal social benefit and marginal cost, overuse of
the common resource occurs.
iii. Even with government action, it is impossible to achieve the efficient level of use of a
common resource.
A) i only
B) i and ii
C) ii and iii
D) i, ii, and iii
E) ii only
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
4) For a common resource, it is the case that
A) MSC > MC
B) MSC < MC
C) MSB > MB
D) MB > MSB
E) None of the above answers are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
48
Copyright © 2011 Pearson Education, Inc.
5) To achieve the efficient amount of use of a common resource, the use should be such that
________ equals ________.
A) marginal social cost; marginal private cost
B) marginal cost; marginal social benefit
C) marginal private benefit; marginal cost
D) marginal cost; marginal benefit
E) marginal social benefit; marginal private cost
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
6) A common resource is used efficiently if
A) the output is maximized.
B) marginal social benefit equals marginal cost.
C) marginal private benefit equals marginal cost.
D) marginal social benefit is maximized.
E) only the excess of the resource is utilized.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: MR
AACSB: Reflective thinking
7) One way to overcome the tragedy of the commons is to
A) assign property rights so that someone owns the resource.
B) take away property rights so that no one owns the resource.
C) leave the market alone because the market will reach an equilibrium in which the efficient
amount of the resource is used.
D) educate people in order to overcome the problem of rational ignorance.
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
49
Copyright © 2011 Pearson Education, Inc.
8) A government policy that can lead to the efficient use of a common resource is
A) a tax.
B) a quota.
C) an emission fee.
D) a price ceiling.
E) None of the above answers are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: MR
AACSB: Reflective thinking
9) When a quota is used to remedy the tragedy of the commons, then
A) the quota is set so that use of the resource is where marginal private benefit equals marginal
cost.
B) the quota is set so that use of the resource is where marginal private benefit equals marginal
social benefit.
C) the market equilibrium, but not the efficient outcome, is achieved.
D) users of the resource have an incentive to cheat on the quota.
E) previous users of the resource are given the incentive to avoid use of the resource.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
10) When producers are hard to monitor and property rights are too costly, ________ are an
effective method to achieve efficient use of a ________.
A) individual transfer quotas; public good
B) making a government payment equal to the marginal private benefits; public good
C) individual transferable quotas; common resource
D) individual transferable quotas; excludable good
E) making a government payment equal to the marginal private costs; common resource
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Reflective thinking
50
Copyright © 2011 Pearson Education, Inc.
11) The table above gives the number of cows and the milk they can produce on a common
pasture. The marginal cost of allowing a cow to graze is $0 per cow. With no government
intervention, the equilibrium number of cows equals
A) 40.
B) 50.
C) 90.
D) 0
E) More information is needed to determine the equilibrium number of cows.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Analytical reasoning
12) The table above gives the number of cows and the milk they can produce on a common
pasture. The marginal cost of allowing a cow to graze is $0 per cow. The efficient number of
cows equals
A) 5.
B) 25.
C) 45.
D) 90.
E) 0.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Analytical reasoning
51
Copyright © 2011 Pearson Education, Inc.
13) The table above gives the number of cows and the milk they can produce on a common
pasture. The marginal cost of allowing a cow to graze is $0 per cow. With no government
intervention, the equilibrium quantity of milk produced is ________ gallons and the efficient
quantity of milk produced is ________.
A) 110; 110
B) 110 or more; 110 or more
C) 0; 110 or more
D) 20; 70
E) 110 or more; 70
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
Number
of boats
Total catch
(tons per month)
100 7,000
200 12,000
300 15,000
400 16,000
500 15,000
600 12,000
14) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. When 400 boats go fishing in the
Mediterranean Sea, the marginal private benefit of operating a boat is
A) zero.
B) 20 tons of fish per month.
C) 50 tons of fish per month.
D) 40 tons of fish per month.
E) 10 tons of fish per month.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
52
Copyright © 2011 Pearson Education, Inc.
15) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. When 400 boats go fishing in the
Mediterranean Sea, the marginal social benefit of operating a boat is
A) zero.
B) 20 tons of fish per month.
C) 50 tons of fish per month.
D) 40 tons of fish per month.
E) 10 tons of fish per month.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
16) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. With no regulation of fishing in the
Mediterranean Sea, the equilibrium number of boats is
A) 250.
B) 500.
C) 300.
D) 400.
E) 600.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
17) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. The efficient number of fishing boats
in the Mediterranean Sea is
A) 500.
B) 300.
C) 250.
D) 400.
E) 100.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
53
Copyright © 2011 Pearson Education, Inc.
18) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. With no regulation of fishing in the
Mediterranean Sea, the
A) efficient quantity of of fish is produced.
B) market is underproducing by 1,000 tons of fish per month.
C) market is underproducing by 2,250 tons of fish per month.
D) market is overproducing by 1,250 tons of fish per month.
E) market is overproducing by 2,250 tons of fish per month.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
19) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. The efficient quantity of fish will be
produced if a total production quota is set at ________ tons of fish per month.
A) 13,750
B) 9,750
C) 16,000
D) 15,000
E) 7,000
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
54
Copyright © 2011 Pearson Education, Inc.
20) The table above shows how the sustainable catch of fish in the Mediterranean Sea depends
on the number of boats that go fishing. The marginal cost of operating a fishing boat is the same
for all producers , the equivalent of 30 tons of fish a month. If individual transferable quotas
(ITQs) are issued to fishing boats to limit the catch in the Mediterranean Sea to the efficient
quantity, the price of an ITQ will be the equivalent of ________ tons of fish per month.
A) 30
B) 25
C) 15
D) 20
E) 10
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: MR
AACSB: Analytical reasoning
55
Copyright © 2011 Pearson Education, Inc.
21) The above figure shows the sustainable catch of cod, a common resource. The private market
equilibrium with no government intervention is the catch made by ________.
A) 200 or fewer boats
B) 300 boats
C) 400 boats
D) between 400 boats and 500 boats
E) more than 500 boats
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Analytical reasoning
22) The above figure shows the sustainable catch of cod, a common resource. The efficient
outcome is the catch made by ________.
A) 200 or fewer boats
B) 300 boats
C) 400 boats
D) between 400 boats and 500 boats
E) more than 500 boats
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Analytical reasoning
56
Copyright © 2011 Pearson Education, Inc.
23) The above figure shows the sustainable catch of cod, a common resource. A quota to prevent
the overuse of the cod equals the catch made by ________.
A) 200 or fewer boats
B) 300 boats
C) 400 boats
D) between 400 boats and 500 boats
E) more than 500 boats
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Analytical reasoning
24) The above figure shows the sustainable catch of cod, a common resource. Suppose the
government assigns individual transferable quotas (ITQ) set to achieve the efficient outcome.
The market price of an ITQ is ________ tons of cod per month.
A) 20
B) 40
C) 60
D) more than 60
E) less than 20
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CD
AACSB: Analytical reasoning
25) The tragedy of the commons is the absence of incentives to
A) correctly measure the marginal cost.
B) prevent under use of the common resource.
C) prevent overuse and depletion of the common resource.
D) discover the resource.
E) prevent the free-rider problem.
Skill: Level 1: Definition
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
57
Copyright © 2011 Pearson Education, Inc.
26) For a common resource such as fish, the marginal private benefit of an additional boat is the
________ and the marginal social benefit is the ________.
A) catch per boat; quantity of fish that one more boat catches
B) catch per boat; change in the total catch from an additional boat
C) change in the total catch from an additional boat; catch per boat
D) change in the total catch from an additional boat; change in the total catch from an additional
boat
E) catch per boat; catch per boat
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
27) For a common resource, the marginal private benefit curve ________ and the marginal social
benefit curve ________.
A) slopes upward; slopes upward
B) slopes upward; slopes downward
C) slopes downward; slopes upward
D) slopes downward; slopes downward
E) is vertical; is horizontal
Skill: Level 1: Definition
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
28) For a common resource, the marginal private benefit of the resource is
A) greater than the marginal social benefit.
B) equal to the marginal social benefit.
C) less than the marginal social benefit.
D) not comparable to the marginal social benefit.
E) not defined because the resource is nonexcludable.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
58
Copyright © 2011 Pearson Education, Inc.
29) For a common resource, the equilibrium with no government intervention is such that
________ equals ________.
A) marginal private benefit; marginal cost
B) marginal social benefit; marginal cost
C) marginal private benefit; marginal social benefit
D) social benefit; cost
E) total social benefit; total social cost
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
30) For a common resource, efficiency requires that the ________ equals the ________.
A) marginal private benefit; marginal cost
B) marginal social benefit; marginal cost
C) marginal private benefit; marginal social benefit
D) marginal social cost; marginal cost
E) marginal private benefit; marginal social cost
Skill: Level 1: Definition
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
31) If the government assigns private property rights to a common resource, then the
A) resource is under-utilized.
B) marginal private benefit becomes equal to the marginal social benefit.
C) government needs to set a quota to achieve efficiency.
D) resource becomes subject to the free riding problem.
E) resource cannot be utilized.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
59
Copyright © 2011 Pearson Education, Inc.
32) The market price of an individual transferable quota is equal to the
A) marginal private benefit.
B) marginal social benefit.
C) marginal private benefit minus the marginal cost.
D) marginal social benefit minus the marginal cost.
E) marginal private benefit plus the marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Author: STUDY GUIDE
AACSB: Reflective thinking
60
Copyright © 2011 Pearson Education, Inc.
11.3 Chapter Figures
A chemical factory dumps waste into a river. The figure above shows the demand curve for the
chemical (D) and the marginal private cost (MC) and marginal social cost (MSC) of producing it.
1) In the figure, the unregulated market equilibrium occurs at a price of ________ a ton and
quantity of ________ tons.
A) $100; 4,000
B) $150; 2,000
C) $150; 4,000
D) $225; 4,000
E) $100; 2,000
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CO
AACSB: Analytical reasoning
61
Copyright © 2011 Pearson Education, Inc.
2) In the figure above, when the market is unregulated and in equilibrium, marginal social cost
________ marginal benefit, and the quantity of chemical produced is ________.
A) exceeds; above the efficient quantity
B) exceeds; below the efficient quantity
C) is below; above the efficient quantity
D) is below; below the efficient quantity
E) equals; efficient
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CO
AACSB: Analytical reasoning
3) In the figure above, when the market is unregulated and in equilibrium, the deadweight loss is
________ thousand per month.
A) $250
B) $125
C) $150
D) $50
E) zero
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CO
AACSB: Analytical reasoning
4) Based on the figure above, if the factory owned the river then at the equilibrium, marginal
social cost would ________ marginal benefit, and the quantity of chemical produced would be
________.
A) exceed; above the efficient quantity
B) exceed; below the efficient quantity
C) be below; above the efficient quantity
D) be below; below the efficient quantity
E) equal; efficient
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CO
AACSB: Analytical reasoning
62
Copyright © 2011 Pearson Education, Inc.
5) In the figure above, if a pollution tax is imposed that is equal to the marginal external cost of
pollution, then at the equilibrium, marginal social cost would ________ marginal benefit, and the
quantity of chemical produced would be ________.
A) exceed; above the efficient quantity
B) exceed; below the efficient quantity
C) be below; above the efficient quantity
D) be below; below the efficient quantity
E) equal; efficient
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CO
AACSB: Analytical reasoning
6) In the figure above, if a pollution tax is imposed that is equal to the marginal external cost of
pollution, then when the market is in equilibrium, the deadweight loss is ________ thousand per
month.
A) $250
B) $125
C) $150
D) $50
E) zero
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CO
AACSB: Analytical reasoning
63
Copyright © 2011 Pearson Education, Inc.
The figure above shows marginal cost curve (MC) and marginal private benefit curve (MB) of
fishing for cod in the North Atlantic Ocean.
7) In the figure above, the private, unregulated market equilibrium total catch is ________
thousand tons per month.
A) 250
B) 160
C) 20
D) 100
E) 800
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
64
Copyright © 2011 Pearson Education, Inc.
8) In the figure above, when the number of boats increases from 3,000 to 4,000, the marginal
social benefit per boat is ________ tons per month.
A) 30
B) 60
C) 20
D) 70
E) 50
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
9) In the figure above, the efficient sustainable total catch is ________ thousand tons per month.
A) 240
B) 160
C) 20
D) 250
E) 60
Skill: Level 5: Critical thinking
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
10) In the figure above, the efficient sustainable catch is ________ tons per boat.
A) 60
B) 50
C) 20
D) 100
E) 40
Skill: Level 5: Critical thinking
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
65
Copyright © 2011 Pearson Education, Inc.
11) In the figure above, at the private market equilibrium, the marginal social benefit is
A) negative.
B) 20 tons per month.
C) greater than the marginal cost.
D) 60 tons per month.
E) zero.
Skill: Level 3: Using models
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
12) In the figure above, at the private market equilibrium, the number of boats is
A) 4,000 above the efficient number.
B) efficient.
C) 2,000 above the efficient number.
D) 2,000 below the efficient number.
E) 1,000 below the efficient number.
Skill: Level 5: Critical thinking
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
13) In the figure above, if the government decides to use a quota, to achieve the efficient level of
production, it should issue fishing licenses to ________ boats with a limit of ________ tons of
fish per boat per month.
A) 4000; 60
B) 8000; 20
C) 3000; 50
D) 7000; 30
E) 5000; 50
Skill: Level 5: Critical thinking
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
66
Copyright © 2011 Pearson Education, Inc.
14) Based on the figure above, if the government issues individual transferable quotas (ITQs)
that ensure the efficient level of production, the market price of an ITQ will be the equivalent of
A) 40,000 tons of fish per month.
B) 20,000 tons of fish per month.
C) 60,000 tons of fish per month.
D) 30,000 tons of fish per month.
E) 50,000 tons of fish per month.
Skill: Level 5: Critical thinking
Section: Checkpoint 11.2
Author: CO
AACSB: Analytical reasoning
11.4 Integrative Questions
1) In a market with an external cost, government action
A) cannot decrease the amount of the deadweight loss from the external cost.
B) can sometimes help to achieve an efficient outcome.
C) cannot alter firms' cost curves.
D) Both answers A and C are correct.
E) Both answers B and C are correct.
Skill: Level 2: Using definitions
Section: Integrative
Author: SA
AACSB: Reflective thinking
2) A competitive, unregulated market would
A) produce too much pollution because pollution is an external cost.
B) produce too little education because education has an external benefit.
C) fail to achieve equilibrium if there are externalities present.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Skill: Level 3: Using models
Section: Integrative
Author: SA
AACSB: Reflective thinking
67
Copyright © 2011 Pearson Education, Inc.
3) When property rights are assigned and transactions costs are low
A) all costs and benefits are taken into account by the transacting parties so the transaction is
efficient.
B) externalities will result in market failure.
C) the marginal social benefit curve shifts leftward and the marginal social cost curve does not
shift.
D) the marginal social cost curve shifts rightward and the marginal social benefit curve does not
shift.
E) the marginal social cost curve shifts rightward and the marginal social benefit curve also
shifts rightward.
Skill: Level 3: Using models
Section: Integrative
Author: MR
AACSB: Reflective thinking
4) Which of the following is true?
i. If there is an external cost, producers take it into account and produce the efficient quantity.
ii. Marginal social cost equals marginal private cost plus marginal external cost.
iii. A copper mine is an example of a common resource.
A) Only i
B) Only ii
C) Only iii
D) i and ii
E) ii and iii
Skill: Level 3: Using models
Section: Integrative
Author: CO
AACSB: Reflective thinking
68
Copyright © 2011 Pearson Education, Inc.
5) Which of the following is true?
i. In an unregulated market with an external benefit, consumers don't take it into account and
consume less than the efficient quantity.
ii. Marginal social cost equals marginal private cost minus marginal external cost.
iii. An unregulated market produces more than the efficient quantity of a good with an external
cost.
A) Only i
B) Only ii
C) Only iii
D) i and ii
E) i and iii
Skill: Level 3: Using models
Section: Integrative
Author: CO
AACSB: Reflective thinking
6) Which of the following is true?
i. Sometimes it is possible to overcome a negative externality by assigning a property right.
ii. When there are external costs, an unregulated market produces more than the efficient
quantity.
iii. In an unregulated market, common resources are underutilized.
A) Only i
B) Only ii
C) Only iii
D) i and ii
E) i and iii
Skill: Level 3: Using models
Section: Integrative
Author: MR
AACSB: Reflective thinking
7) To construct the marginal social benefit curve for a common resource,
A) vertically sum the individual marginal social benefit curves.
B) vertically sum the marginal private benefit curves.
C) horizontally sum the individual marginal benefit curves.
D) vertically sum the marginal private cost curves.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
69
Copyright © 2011 Pearson Education, Inc.
8) Which of the following is true?
i. A common resource is a resource that is nonrival and nonexcludable.
ii. Imposing a tax equal to the marginal external cost means that the marginal costs paid by
producers (including the tax) equals the marginal social cost.
iii. In an unregulated market, a common resource is used to the point at which marginal private
benefit equals marginal cost.
A) Only i
B) Only ii
C) Only iii
D) i and ii
E) ii and iii
Skill: Level 3: Using models
Section: Integrative
Author: CO
AACSB: Reflective thinking
11.5 Essay: Negative Externalities: Pollution
1) What is marginal external cost? Give an example.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Communication
2) Discuss the difference between a private cost and a social cost.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Communication
70
Copyright © 2011 Pearson Education, Inc.
3) When a forest is logged, it is possible for the logging to create "soil runoff," a situation in
which the soil, no longer protected by trees, erodes and silts a river miles downstream from the
logging area. Is soil runoff created by logging in Montana that ruins a river an example of a
private cost to the lumbering company or an external cost?
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: JC
AACSB: Communication
4) Explain why a producer who is causing external costs does not have the incentive to reduce
these costs.
Skill: Level 5: Critical thinking
Section: Checkpoint 11.1
Author: WM
AACSB: Communication
5) If the production of a good creates an external cost, is the supply curve the same as the
marginal social cost or the same as the marginal private cost curve or both?
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: SA
AACSB: Communication
6) The marginal social cost of burning garbage in Houston is the sum of the marginal private cost
and the marginal external cost." Is this assertion correct or incorrect?
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: JC
AACSB: Reflective thinking
71
Copyright © 2011 Pearson Education, Inc.
7) Why does an external cost lead to inefficient overproduction?
Skill: Level 4: Applying models
Section: Checkpoint 11.1
Author: SB
AACSB: Communication
8) Why is it not efficient to eliminate all pollution?
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Communication
9) What is the Coase theorem? What conditions need to be present for this theorem to work?
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: SA
AACSB: Communication
72
Copyright © 2011 Pearson Education, Inc.
10) "According to the Coase theorem, if Gabriel wants the local television station to cease
having helicopters fly over his house at night, he will be more likely to be able to reach an
agreement with the station if the property right to the airspace is clearly defined and the
transaction costs of negotiating are high." Is this statement true or false? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Communication
11) What do we mean by "property rights" and why are they important?
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Communication
12) If the production of a good causes pollution (an external cost) is the unregulated competitive
market equilibrium of that product efficient?
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SA
AACSB: Communication
73
Copyright © 2011 Pearson Education, Inc.
13) Burning coal to generate electricity can create pollution. If the market for generating
electricity is competitive and is allowed to operate without any government intervention, is the
equilibrium quantity of coal burned equal to, more than, or less than the efficient quantity?
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: JC
AACSB: Communication
14) "If production of a good creates an external cost, then, when production is such that the
marginal private costs are equal to the marginal private benefits, the market outcome will be
inefficient." Explain whether this assertion is correct or incorrect.
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Communication
15) Use the idea of external costs to explain why some cities have laws against late-night rock
concerts.
Skill: Level 4: Applying models
Section: Checkpoint 11.1
Author: JC
AACSB: Communication
74
Copyright © 2011 Pearson Education, Inc.
16) List and briefly define the three methods government can use to cope with an external cost,
such as pollution.
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: PH
AACSB: Communication
17) What are marketable permits? Suppose there are two firms in an area, each emitting tons of
sulfur. The government decides on a target level of 200 tons of sulfur, and gives each firm a
permit to emit 100 tons of sulfur. Suppose Firm A is very efficient and can reduce pollution by
100 tons with an abatement cost of $500. Firm B has an older plant, so it will cost Firm B $1,000
to reduce emissions by 100 tons. What will occur with marketable permits?
Skill: Level 4: Applying models
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
18) The production of paper creates pollution, an external cost. What happens to the production
of paper if the government imposes a tax on paper producers equal to the marginal external cost
of the pollution?
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: WM
AACSB: Reflective thinking
75
Copyright © 2011 Pearson Education, Inc.
19) How has air quality changed in the United States since 1980?
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SB
AACSB: Reflective thinking
20) If the marginal social cost of a good is $70 and the marginal external cost is $20, what does
the marginal private cost equal?
Skill: Level 1: Definition
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
76
Copyright © 2011 Pearson Education, Inc.
21) The table above gives the private costs and external costs of producing paper.
a. Complete the table by finding the marginal social cost at each level of production.
b. If the market is competitive and is left unregulated and 400 tons of paper are produced, what
is the price of a ton of paper?
c. If the government imposes a tax equal to the external cost at each level of production, what
price would be charged if 400 tons are produced?
Skill: Level 2: Using definitions
Section: Checkpoint 11.1
Author: SA
AACSB: Analytical reasoning
77
Copyright © 2011 Pearson Education, Inc.
22) Suppose unregulated production of pesticides results in an equilibrium price and quantity of
$400 and 1,000 tons per day, respectively, and a marginal external cost of $10 a ton.
a. If the government were to eliminate the external cost by using pollution charges, what should
the pollution charge be set at?
b. If the government were to eliminate the external cost by using taxes, what should the tax
equal?
c. Would the government actions described above affect the quantity of pesticides produced? If
yes, how? If no, why not?
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
78
Copyright © 2011 Pearson Education, Inc.
23) Use the figure above to answer this question. Explain what the marginal social cost curve
and the marginal external cost mean. In the figure, if the market is competitive and unregulated,
what is the equilibrium price and quantity? What is the efficient amount of output? Illustrate the
deadweight loss.
79
Copyright © 2011 Pearson Education, Inc.
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: CD
AACSB: Analytical reasoning
24) The above figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs
off into neighboring streams and ponds, killing fish and creating an external cost.
a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive
market?
b. What is the efficient quantity of fertilizer?
c. Suppose government imposes a tax equal to the marginal external cost. What is the
equilibrium price paid by consumers and the equilibrium quantity after implementation of the
tax?
d. At the output level in part (c), how much is the tax?
e. How much tax revenue does government collect?
f. What is the deadweight loss borne by society if the externality is left uncorrected?
Skill: Level 4: Applying models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
80
Copyright © 2011 Pearson Education, Inc.
25) The figure above shows the market for steel, the production of which creates pollution.
a. What point represents the equilibrium price and what point represents the equilibrium
quantity in an unregulated, competitive market?
b. What area represents the deadweight loss of the unregulated, competitive market outcome?
c. What point represents the efficient quantity?
d. If the output level in part (c) was achieved through the use of a government imposed tax,
what price would consumers pay? What price would the producers receive? What distance
represents the amount of the tax?
e. If government successfully uses marketable permits to eliminate the external cost, what point
represents how much output would be produced?
Skill: Level 3: Using models
Section: Checkpoint 11.1
Author: SB
AACSB: Analytical reasoning
81
Copyright © 2011 Pearson Education, Inc.
11.6 Essay: Common Resources
1) What is the tragedy of the commons?
Skill: Level 1: Definition
Section: Checkpoint 11.3
Author: CD
AACSB: Communication
2) "The problem with a common resource is that no one gets to use the resource." Comment on
the preceding assertion.
Skill: Level 1: Definition
Section: Checkpoint 11.3
Author: MR
AACSB: Communication
3) Why are fish in the ocean an example of a resource that suffers from the tragedy of the
commons but cattle grazing in a farmer's pasture do not suffer from the tragedy of the commons?
Skill: Level 3: Using models
Section: Checkpoint 11.3
Author: MR
AACSB: Communication
82
Copyright © 2011 Pearson Education, Inc.
4) How does the marginal social benefit curve of a common resource compare to the marginal
private benefit curve of the common resource? If there is a difference, why is there a difference?
If there is not a difference, why is there not a difference?
Skill: Level 2: Using definitions
Section: Checkpoint 11.3
Author: MR
AACSB: Communication
5) How does the government determine the quota amount that will produce an efficient use of a
common resource?
Skill: Level 2: Using definitions
Section: Checkpoint 11.3
Author: CD
AACSB: Communication
6) What is an individual transferable quota (ITQ)?
Skill: Level 1: Definition
Section: Checkpoint 11.3
Author: CD
AACSB: Reflective thinking
