1. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep
the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 – 100P and
QS = –100 + 100P. The market equilibrium quantity is
a.
400
b.
450
c.
500
d.
550
2. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep
the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 – 100P and
QS = –100 + 100P. The total dollar value damage to society is
a.
400
b.
450
c.
500
d.
550
b
1
3. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep
the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 – 100P and
QS = –100 + 100P. The price consumers would have to pay for the market to achieve the socially optimal level of
production is
a.
5
b.
5.5
c.
6
d.
6.5
c
1
4. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep
the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 – 100P and
QS = –100 + 100P. The tax that would have to exist to achieve the socially optimal level of production would be
a.
$0
b.
$.50
c.
$1
d.
$2
c
1
5. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep
the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 – 100P and
QS = –100 + 100P. The “optimal” amount of environmental damage would be
a.
b.
b
1
c.
d.
6. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep
the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 – 100P and
QS = –100 + 100P. If regulators limited production to 200 bushels, the deadweight loss relative to the option of setting the
optimal tax would be would be
a.
$0
b.
$200
c.
$500
d.
$1000
c
1
7. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A)
people who value flood control more than the 1000 (type B) people.
Type A Demand QD = 100 − P
Type B Demand QD = 50 − P
Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of
Toadhop did not work together the amount of flood control purchased would be
a.
0
b.
10
c.
25
d.
70
a
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8. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A)
people who value flood control more than the 1000 (type B) people.
Type A Demand QD = 100 − P
Type B Demand QD = 50 − P
Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of
Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, they
will pick Q equal to
a.
0
b.
10
c.
25
d.
70
c
1
9. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A)
b
1
people who value flood control more than the 1000 (type B) people.
Type A Demand QD = 100 − P
Type B Demand QD = 50 − P
Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of
Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, how
much will type B individuals contribute per unit of flood control?
a.
25
b.
50
c.
75
d.
100
10. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A)
people who value flood control more than the 1000 (type B) people.
Type A Demand QD = 100 − P
Type B Demand QD = 50 − P
Where Q measures the quality of flood control. If the price of a unit of flood control is $100000 and the citizens of
Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, how
much will each type A individual contribute in total?
a.
b.
c.
d.
1
11. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A)
people who value flood control more than the 1000 (type B) people.
Type A Demand QD = 100 − P
Type B Demand QD = 50 − P
Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of
Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, how
much will each type B individual contribute in total?
a.
b.
c.
d.
d
1
12. In the case of a negative externality, the social marginal cost will
a.
exceed the private marginal cost.
1
b.
be equal to private marginal cost.
c.
fall short of private marginal cost.
d.
bear no significant relation to private marginal cost.
13. A perfectly competitive steel mill that produces large amounts of pollution (a negative externality) will, from a social
point of view,
a.
produce too little steel.
b.
produce the socially optimal quantity of steel.
c.
produce too much steel.
d.
produce too much steel only if it installs pollution control equipment.
1
14. In the case of a positive externality, social marginal cost will
a.
exceed private marginal cost.
b.
be equal to private marginal cost.
c.
fall short of private marginal cost.
d.
have no specific relation to private marginal cost.
1
15. Each of the following provides incentives to reduce a negative externality except:
a.
a merger with affected firms.
b.
subsidizing consumption of the good being produced.
c.
bargaining among firms.
d.
taxation of the externality.
b
1
16. To reach an economically efficient output level, the size of an excise tax imposed on a firm generating a negative
externality should be
a.
the firm’s marginal cost.
b.
the social marginal cost.
c.
the difference between the social marginal cost and the firm’s marginal cost.
d.
the sum of the social marginal cost and the firm’s marginal cost.
1
17. Which of the following “externalities” does not distort the allocation of resources?
I.
An individual’s unwillingness to cut his or her own lawn in an otherwise immaculately kept neighborhood.
II.
Smoke produced by a new firm in an area that raises the costs of other firms.
III.
A new firm’s bidding up skilled wages in an area, thus raising costs of other firms.
IV.
An individual’s unwillingness to obtain job training, thereby lowering the total GNP.
a.
I, III, and IV.
1
b.
III and IV.
c.
III only.
d.
IV only.
18. In perfect competition, environmental externalities need not distort the allocation of resources providing
a.
transactions costs are zero.
b.
average costs are constant for all output levels.
c.
firms install pollution control equipment.
d.
the government sets realistic pollution standards.
a
1
19. In drilling a new oil well in an existing oil field, the fact that output on existing wells is reduced means that
a.
existing wells have negatively sloped marginal cost curves.
b.
existing wells and new wells are owned by different people.
c.
existing wells and new wells are owned by the same people.
d.
there is a discrepancy between private and social marginal costs.
d
1
20. Bargaining costs are generally high in cases involving environmental externalities because
a.
there are strong incentives to be a free rider.
b.
many individuals may be affected by the externalities.
c.
it is difficult to measure the costs of the externalities.
d.
all of the above.
d
1
21. Externalities between two firms can be “internalized” if:
I.
The two firms merge.
II.
Bargaining costs are zero.
III.
The externalities affect each firm equally.
IV.
Marginal costs for both firms are constant.
Which statement(s) correctly complete(s) the sentence?
a.
Only II.
b.
All except III.
c.
I and II, but not III and IV.
d.
I and IV, but not II and III
c
1
22. Common property
a.
is owned by specific people.
b.
is inexhaustible.
c.
refers strictly to land resource.
b
1
d.
refers to goods “owned” by society at large and freely usable by anyone.
23. If bargaining is costless, the assignment of property rights for an externality
a.
has no impact on the possibility of an efficient outcome and no distributional impact.
b.
has no impact on the possibility of an efficient outcome but does have a distributional impact.
c.
does have an impact on the possibility of an efficient outcome but has no distributional impact.
d.
does have an impact on the possibility of an efficient outcome and does have a distributional impact.
b
1
24. A nonexclusive good is a good that
a.
is sold in low price markets.
b.
is impossible to keep people from enjoying the benefits the good provides.
c.
is produced by a perfectly competitive firm.
d.
is produced at the lowest possible cost.
b
1
25. A nonrival good is a good that
a.
is produced by a monopoly.
b.
is produced by a cartel.
c.
can provide benefits to additional users at a zero marginal cost.
d.
is sold in a single market.
1
26. Left to their own, private markets tend to
a.
under-allocate resources to public goods.
b.
allocate the economically efficient amount of resources to public goods.
c.
over-allocate resources to public goods.
1
27. Perfectly competitive markets will tend to under-allocate resources to nonexclusive public goods because
a.
these goods are produced under conditions of increasing returns to scale.
b.
no single individual can appropriate the total benefits provided by the purchase of such goods.
c.
these goods are best produced under conditions of monopoly.
d.
no private producer can provide the capital necessary to produce such goods.
b
1
28. Efficient production of a public good requires
a.
that individuals pay for such goods according to benefits received.
b.
that each individual’s MRS be equal to the RPT of public goods for private goods.
d
1
c.
that the sum of individuals’ MRSs be equal to the RPT of public goods for private goods.
d.
that governments produce at the low point of the average cost curve for the public good.
29. The “free-rider problem” of public goods refers to
a.
individuals’ refusal to pay taxes.
b.
individuals’ attempts to hide their preferences for collective goods and to avoid paying for them.
c.
individuals’ overuse of collective goods.
d.
the inelasticity of individuals’ demands for public goods.
b
1
30. If preferences are one-dimensional and preferences are single peaked, majority rule will result in selection of the
project most favored by
a.
no one.
b.
the median voter.
c.
the average voter.
d.
everyone.
b
1
31. Special interest groups often
a.
represent broad questions of public interest.
b.
pursue rent-seeking behavior.
c.
do not use lobbying techniques.
d.
have no effect on the political process.
b
1
32. Consider four possible benefits of a water resources project:
I.
Provides employment to construction workers currently building houses.
II.
Provides electric power to the market.
III.
Provides reduced flood risk to individuals living along the river.
IV.
Raises the profits of MacDonald’s stands in the area that serve construction workers.
Which of these are social benefits of the project?
a.
All of them.
b.
I, II, and III, but not IV.
c.
I and III, but not II and IV.
d.
II and III, but not I and IV.
d
1
33. In evaluating public projects, a higher interest rate (r) will favor those projects which
a.
have costs and benefits occurring in the more distant future.
b.
have costs and benefits occurring in the more immediate future.
c.
have benefits occurring in the more immediate future and costs occurring in the more distant future.
c
1
d.
have benefits occurring in the more distant future and costs occurring in the more immediate future.
34. The opportunity cost doctrine suggests that which of the following are not costs of government educational programs?
a.
The wages of teachers.
b.
The foregone earnings of participants.
c.
Stipends paid to participants.
d.
Materials used by students.
1
1