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
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
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
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
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
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
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
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
10) In the figure above, the efficient sustainable catch is ________ tons per boat.
A) 60
B) 50
C) 20
D) 100
E) 40
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.
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.
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
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.
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.
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.
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.
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
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
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
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.
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
11.5 Essay: Negative Externalities: Pollution
1) What is marginal external cost? Give an example.
2) Discuss the difference between a private cost and a social cost.
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?
4) Explain why a producer who is causing external costs does not have the incentive to reduce
these costs.
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?
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?
7) Why does an external cost lead to inefficient overproduction?
8) Why is it not efficient to eliminate all pollution?
9) What is the Coase theorem? What conditions need to be present for this theorem to work?