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95) An external benefit is a benefit from a good or service that someone other than the ________
receives.
A) seller of the good or service
B) government
C) foreign sector
D) consumer
E) market maker
96) When Ronald takes another economics class, other people in society benefit. The benefit to
these other people is called the marginal ________ benefit of the class.
A) social
B) private
C) external
D) Coasian
E) extra
97) Marginal social benefit equals
A) marginal external benefit.
B) marginal private benefit.
C) marginal private benefit minus marginal external benefit.
D) marginal private benefit plus marginal external benefit.
E) marginal external benefit minus marginal private benefit.
98) If an external benefit is present, then the
A) marginal private benefit curve lies above the marginal private cost curve.
B) marginal social benefit curve lies above the marginal private benefit curve.
C) marginal social cost curve lies above the marginal private benefit curve.
D) marginal social benefit is equal to the marginal social cost.
E) marginal social benefit curve is the same as the marginal private benefit curve.
99) In an unregulated market with an external benefit, the
A) quantity produced is greater than the efficient quantity.
B) price charged is too high for efficiency.
C) quantity produced is less than the efficient quantity.
D) producer is causing pollution but not paying for it.
E) government might impose a tax to help move the market toward the efficient amount of
production.
100) If tuition at a college is $30,000 and the external benefit of graduating from this college is
$10,000, then
i. in the absence of any government intervention, the number of students graduating is less than
the efficient number.
ii. the government could increase the number of graduates by giving the college a $10,000
subsidy per student.
iii. the government could increase the number of graduates by giving the students $10,000
vouchers.
A) i only
B) i and ii
C) i and iii
D) ii and iii
E) i, ii, and iii
101) Which of the following is an example of a voucher?
A) the postal service
B) police services
C) social security
D) food stamps
E) a patent on a pharmaceutical drug
10.4 Chapter Figures
The figure above shows the marginal benefit curve (MB) and marginal cost curve (MC) of
surveillance satellites that provide national defense services.
1) In the figure above, the efficient quantity of satellites to produce is
A) 200, because this is where marginal benefit equals marginal cost.
B) 200, because this is where the market is in equilibrium.
C) anywhere below 200, i.e. where marginal benefit exceeds marginal cost.
D) anywhere above 200, i.e. where marginal benefit is below marginal cost.
E) zero, because no one is willing to pay for satellites.
2) In the figure above, a private market will most likely produce
A) no satellites because of the free-rider problem.
B) 200 satellites because at this point marginal benefit equals marginal cost.
C) less than 200 satellites because over this output range marginal benefit exceeds marginal cost.
D) more than 200 satellites because over this output range marginal benefit is below marginal
cost.
E) 200 satellites because at this point the market will be in equilibrium.
3) Using the figure above, suppose there are two political parties, the Hawks and the Doves,
which agree on all issues except for the quantity of defense satellites. The Hawks want 300
satellites and the Doves want 100 satellites. The voters are well informed and know what is best
for them. The parties run a voter survey and discover the marginal benefit curve (MB). They also
know the marginal cost curve (MC). What quantity of satellites will most likely result from this
political process?
A) 200, because unless each party proposes 200 satellites, the other party can beat it in an
election
B) 300, because the Hawks are more likely to win
C) 100, because the Doves are more likely to win
D) 200, because the parties will strike a deal: each will agree to give up 100 satellites
E) Zero, because given the marginal benefit and the marginal cost of satellites, none should be
provided
4) Suppose that satellites are publicly provided. The voters are rationally ignorant, while the
Defense Ministry is well informed. Using the figure above, which of the following quantities of
satellites is most likely to be provided?
A) 300
B) 200
C) 150
D) 100
E) Zero
5) the figure above shows that the unregulated market equilibrium occurs at a tuition of
________ a year and ________ million students.
A) $15,000; 7.5
B) $25,000; 15
C) $15,000; 15
D) $25,000; 7.5
E) $38,000; 7.5
6) The figure above shows that at the unregulated market equilibrium, marginal social benefit
________ marginal cost, and the number of students enrolled 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
7) Based on the figure above, when the market is unregulated and is in equilibrium, the
deadweight loss is
A) $86.25 million per year.
B) $56.25 million per year.
C) $48.75 million per year.
D) $37.50 million per year.
E) zero.
8) Using the figure above, suppose education is provided by public colleges, where tuition is set
at $10,000 a year. Then, ________ million students are enrolled, and the taxpayers cover
________ of marginal cost per student.
A) 15; $15,000
B) 7.5; $5,000
C) 3.5; none
D) 15; $25,000
E) 7.5; $15,000
9) Using the figure above, suppose education is provided by public colleges, where tuition is set
at $10,000 a year. When the market is in equilibrium, the marginal social benefit is ________,
the marginal cost is ________, and the number of students enrolled is ________.
A) $25,000; $25,000; efficient
B) $25,000; $10,000; inefficient
C) $15,000; $25,000; inefficient
D) $15,000; $15,000; efficient
E) $25,000; $15,000; inefficient
10) Using the figure above, suppose education is provided by public colleges. At what level
should tuition be set to ensure the efficient number of students?
A) $10,000
B) $5,000
C) $20,000
D) $25,000
E) $15,000
11) Using the figure above, suppose a subsidy of $15,000 per student is provided to private
colleges. Then, the market equilibrium occurs at a tuition of ________ a year and ________
million students.
A) $10,000; 15
B) $25,000; 15
C) $15,000; 15
D) $15,000; 7.5
E) $20,000; 20
12) Using the figure above, suppose a subsidy of $15,000 per student is provided to private
colleges. When the market is in equilibrium, marginal social benefit ________ marginal cost,
and the number of students enrolled 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
13) In the figure above, suppose a subsidy is provided to private colleges. What amount of
subsidy will ensure the efficient number of students?
A) $10,000
B) $25,000
C) $15,000
D) $5,000
E) $20,000
14) In the figure above, suppose the government provides vouchers worth $15,000 per student
per year. Then the market equilibrium occurs at a tuition of ________ a year and ________
million students.
A) $10,000; 15
B) $25,000; 15
C) $15,000; 15
D) $15,000; 7.5
E) $20,000; 20
15) In the figure above, suppose the government provides vouchers worth $15,000 per student
per year. When the market is in equilibrium, marginal social benefit ________ marginal cost,
and the number of students enrolled 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
10.5 Integrative Questions
1) A noisy party that keeps neighbors awake is an example of a
A) negative production externality.
B) positive production externality.
C) negative consumption externality.
D) positive consumption externality.
E) Both answers B and C are correct.
2) An externality can be a cost or benefit arising from the production of a good that falls upon
A) consumers but not producers.
B) producers but not consumers.
C) both the consumer and the producer.
D) someone other than the consumer or producer.
E) no one so it goes unpaid.
3) Externalities
A) are important in the areas of environment and education.
B) only have a negative impact on people.
C) deal with issues that are not our internal issues.
D) affect the people who are responsible for production.
E) are nonexistent in unregulated, competitive markets.
4) Which of the following can be rival and excludable?
i) a good
ii) a service
iii) a resource
A) i and ii
B) i and iii
C) ii and iii
D) i, ii and iii
E) only i
5) National defense is a ________ because ________.
A) public good; it can be an overused resource
B) public good; it is nonrival and nonexcludable
C) common resource; no one has the incentive to pay for his or her share
D) private good; no one has an incentive to conserve the good
E) common resource; it suffers from the tragedy of the commons
6) Fish in the ocean are an example of ________ because they are ________.
A) public good; nonexcludable and nonrival
B) public good; rival and excludable
C) common resource; rival and nonexcludable
D) common resource; nonrival and nonexcludable
E) private good; caught by private fishermen
7) A natural monopoly, such as the Internet, is
A) nonrival and excludable.
B) rival and excludable.
C) nonrival and nonexcludable.
D) rival and nonexcludable.
E) None of the above answers are correct.
8) The free-rider problem applies
A) to rival and excludable goods.
B) to common resources.
C) to nonrival and nonexcludable goods.
D) when marginal social benefit exceeds marginal private benefit.
E) when marginal social cost equals marginal private cost.
9) The marginal benefit curve of a public good is calculated by ________ individual marginal
________ curves.
A) averaging; cost/benefit
B) horizontally summing; cost
C) averaging; benefit
D) vertically summing; benefit
E) horizontally summing; benefit
10) The reason that private provision of a public good often leads to inefficiency is because
A) private property rights are too costly to enforce.
B) marginal private benefits are too costly to calculate.
C) no one has the incentive to pay for the good.
D) no one has an incentive to conserve the good.
E) the tragedy of the commons occurs and too many public goods are provided.
11) Which of the following is true?
i. A public good is a good or service that is nonrival and nonexcludable.
ii. A private good creates a free-rider problem: no one has a private incentive to pay for it.
iii. Health care services frequently have external costs.
A) Only i
B) Only ii
C) Only iii
D) i and ii
E) i and iii
12) Which of the following is true?
i. The efficient level of provision of a public good is that at which marginal benefit exceeds
marginal cost.
ii. Competition between political parties can lead to the efficient scale of provision of a public
good.
iii. Vouchers given to students can help make the market for education more efficient.
A) Only i
B) Only ii
C) Only iii
D) i and ii
E) ii and iii
13) When people decide whether or not to get a flu vaccination, they ignore the ________ and as
a result ________.
A) marginal private benefit; too few vaccinations are given
B) external benefit; too few vaccinations are given
C) private cost; too many vaccinations are given
D) marginal external cost; vouchers must be provided
E) social cost; too many vaccinations are given
10.6 Essay: Classifying Goods and Resources
1) What does it mean for a good to be "nonexcludable"? Are private goods nonexcludable? Are
public goods nonexcludable? Are common resources nonexcludable?
2) When describing goods and services, what is meant by the terms "rival" and "nonrival?" Are
private goods rival or nonrival? Are public goods rival or nonrival? Are common resources rival
or nonrival?
3) A few years back, The Wall Street Journal reported that the government of Thailand "plans to
launch a chain of more than 3,000 Thai restaurants world-wide over the next five years, with the
largest number, more than 1,000, slated for the United States." The Thai government will have a
30 percent minority stake in the restaurants and the rest will be given to Thai owners. The
country's deputy commerce minister explains that the government will play an active role in
drawing up menus, making sure that genuine Thai food is served and ensuring that 70 percent of
supplies for the restaurants are imported from Thailand. Because the Thai government will be
part owner of these restaurants, are these restaurants public goods?
4) Is a sailboat purchased in Victoria, British Columbia, a private good or a public good?
5) What are the differences between public goods and private goods?
6) You are studying with a friend and your friend says, "private goods are excludable and
nonrival, while public goods are nonexcludable and rival." Do you agree?
