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A.
the display creates negative externalities.
80.
The socially optimal amount of pollution abatement occurs where society's marginal
81.
The marginal benefit to society of reducing pollution declines with increases in pollution
abatement because of the law of
4-42
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
eliminate every last bit of a negative externality such as air pollution.
Test Bank: I
Topic:
Societys Optimal Amount of Externality Reduction
82.
The marginal cost to society of reducing pollution rises with increases in pollution
abatement because of the law of
83.
Refer to the diagram. From society's perspective, if MB1 and MC2 are relevant,
D.
Q4 represents too little pollution abatement.
4-43
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Di ffi cu l ty:
02 Medium
Learning Objective: 04-05 Show why we normally won't want to pay what it would cost to
eliminate every last bit of a negative externality such as air pollution.
Test Bank: I
To pi c:
Societys Optimal Amount of Externality Reduction
84.
Refer to the diagram. From society's perspective, if MB2 and MC1 are relevant,
A. Q4 represents too little pollution abatement.
4-44
85.
Refer to the diagram. With MB1 and MC1, society's optimal amount of pollution abatement is
D.
Q4.
86.
Refer to the diagram. Which one of the following might shift the marginal cost curve from MC1
to MC2?
87.
Refer to the diagram. Which one of the following might shift the marginal benefit curve from
MB1 to MB2?
4-46
88.
The MC curves in the diagram slope upward because of the law of
89.
The MB curves in the diagram slope downward because of the law of
4-47
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A.
conservation of matter and energy.
B.
diminishing returns.
C. diminishing marginal utility.
D. increasing cost.
90.
(Consider This) Suppose that a new band, "Balin and the Wolf Riders," tries to sell its music
on the Internet. Economists would expect
of Augi's music have been poor due to Internet piracy. However, concerts are regularly sold out
and merchandise (such as T-shirts) sells well. If Augi wants to enhance
profits, economists
would most likely recommend that she
4-48
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 04-03 Describe free riding and public goods, and illustrate why private
firms cannot normally produce public goods.
Test Bank: I
To pi c:
Public Goods
92.
(Consider This) According to the Coase theorem,
93.
(Consider This) Darcy and Rachel live down the hall from each other in the same dorm.
Darcy likes to play her music loudly down the hall, and Rachel finds the music annoying. A
Coase theorem solution for this problem would be for
94.
(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the
lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This
situation describes
95.
(Last Word) In a cap-and-trade program,
96.
(Last Word) A cap-and-trade program
4-50
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-05 Show why we normally won't want to pay what it would cost to
eliminate every last bit of a negative externality such as air pollution.
Test Bank: I
Topic:
Societys Optimal Amount of Externality Reduction
97.
(Last Word) Because there are so many sources of carbon dioxide, making monitoring
difficult and costly, many economists
98.
Supply-side market failures occur because it is impossible in certain cases for sellers to
charge consumers what they are willing to pay for a product.
99.
When a supply-side market failure occurs, the costs are greater than the benefits for the last
unit(s) of output produced.
100.
Along a demand curve, product price and consumer surplus are inversely related.
101.
Along a supply curve, product price and producer surplus are inversely related.
102.
Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds
minimum acceptable price by the greatest amount.
103.
Allocative efficiency occurs where the collective sum of consumer and producer surplus is
at a maximum.
104.
That government that has the smallest budget is the most efficient in the economic sense.
105.
A demand curve for a public good is determined by summing horizontally the individual
demand curves for the public good.
4-53
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-03 Describe free riding and public goods, and illustrate why private
firms cannot normally produce public goods.
Test Bank: I
To pi c:
Public Goods
106.
The optimal quantity of a public good occurs where the marginal benefit of the citizen who
has the highest preference for the good just equals the good's marginal cost.
107.
Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the
full benefits of a public good or service.
108.
Society's optimal amount of pollution abatement is where society's marginal benefit of
abatement is zero.
4-54
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-05 Show why we normally won't want to pay what it would cost to
eliminate every last bit of a negative externality such as air pollution.
Test Bank: I
Topic:
Societys Optimal Amount of Externality Reduction
109.
An improvement in the technology of pollution control is likely to increase society's
optimal amount of pollution abatement.
110.
Society's marginal cost of pollution abatement curve slopes upward because of the law of
diminishing marginal utility.
111.
(Consider This) The principle that private negotiation can resolve potential externalities
without resorting to government intervention is known as the Coase theorem.
4-55
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 04-04 Explain how positive and negative externalities cause under- and
overallocations of resources.
Test Bank: I
Topic:
Externalities
Multiple Choice Questions
112.
Where there is asymmetric information between buyers and sellers,
A.
product shortages will occur at the equilibrium price.
113.
Buyers will opt out of markets in which
A.
there are significant negative externalities.
114.
Sellers will opt out of markets in which
4-56
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
sellers.
115.
As it applies to insurance, the moral hazard problem is the tendency for
A.
those most likely to collect on insurance to buy it.
116.
As it applies to insurance, the adverse selection problem is the tendency for
D.
sellers to restrict output and charge high prices.
117.
Suppose a firm offers its workers a cafeteria plan in which it allows workers to allocate a
set amount of fringe benefit money toward specific insurance. Mary, who has five kids needing
braces, selects the family dental coverage. This is an example of the
118.
Because the federal government typically provides disaster relief to farmers, many farmers
do not buy crop insurance even through it is federally subsidized. This illustrates
banks deemed "too big to fail." Critics of this action argued that this would create the prospect
of future bailouts and encourage banks to be fiscally irresponsible in the future. This
illustrates
4-58
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify
government intervention in some markets.
Test Bank: I
Topic:
Appendix: Information Failures
120.
Upon buying a car with airbags, Indy begins to drive recklessly. This is an example of the
121.
Professional buyers of antiques often have more information about the value of antique
objects than do the sellers. This illustrates
122.
Upon learning that his auto transmission is about to fail, Ray Roma sells his car to an
unsuspecting buyer. This circumstance illustrates the
123.
In a television advertisement for AFLAC supplemental health insurance, an ice skater says
to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have
AFLAC." This response illustrates the
124.
Owners of defective used cars have more information about the condition of their vehicles
than potential buyers of those used cars. This is an example of
4-60
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l t y :
02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify
government intervention in some markets.
Test Bank: I
To pi c:
Appendix: Information Failures
125.
Suppose an insurance company decided to offer divorce insurance. Based on the concept of
moral hazard, economists would expect
126.
Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers
that the car is of good quality. These warranties help reduce the chance of what occurring?
127.
Product reviews help to alleviate problems associated with
