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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
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
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¢
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.
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.
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.
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.
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
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.
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.
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
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.
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
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
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.
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.
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.
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
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
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
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.
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
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.
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.
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.
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.
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
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.
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.
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
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.
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.
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.
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.
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.
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
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
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
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
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
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
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.
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
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
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.
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
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
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.
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.
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
