1. In the case of a negative externality, the social marginal cost will:
a.
exceed the private marginal cost.
b.
be equal to private marginal cost.
c.
fall short of private marginal cost.
d.
bear no significant relation to private marginal cost.
2. A perfectly competitive steel mill that produces large amounts of a pollution (a negative externality) will, from a social
point of view, produce:
a.
b.
c.
d.
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3. Each of the following provides incentives to reduce a negative externality except:
a.
merger with affected firms.
b.
subsidizing consumption of the good being produced.
c.
bargaining among firms.
d.
taxation of the externality.
b
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4. 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.
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5. Which of the following purported externalities in fact 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 which raises the costs of other firms.
III. A new firm’s bidding up skilled wages in an area, thereby raising costs of other firms.
IV. An individual’s unwillingness to obtain job training, thereby lowering the total GNP.
Possible choices:
a.
I, III, and IV.
b.
III and IV.
c.
III only.
d.
IV only.
b
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6. 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.
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7. A negative externality is present on a market, leading social marginal cost, , to exceed marginal cost
as perceived by producers, which is also the supply curve in this competitive market. Inverse demand
in the market is . The optimal corrective tax should be set to the difference between:
a.
price and marginal cost at the competitive quantity.
b.
price and social marginal cost at the competitive quantity.
c.
price and marginal cost at the socially optimal quantity.
d.
marginal social cost and marginal cost at the socially optimal quantity
d
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8. 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 MC 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
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9. 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
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10. 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 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
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11. If bargaining is costless and an externality exists:
a.
an efficient outcome may be reached depending on which party is assigned property rights.
b.
an efficient outcome will be reached regardless of which party is assigned property rights.
c.
an efficient outcome will not be reached without government intervention.
d.
an efficient outcome can never be reached.
b
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12. 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
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13. A nonexclusive good is a good which:
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
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14. A non-rival good is a good which:
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.
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15. 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.
d.
produce no public goods.
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16. 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
17. 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.
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.
c
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18. 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’ over-use of collective goods.
d.
the inelasticity of individuals’ demands for public goods.
b
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19. Society’s demand curve for a public good:
a.
is given by the horizontal summation of individual demand curves.
b.
is given by the vertical summation of individual demand curves.
c.
cannot be derived from individual demand curves due to the nature of a public good.
d.
is given by the average citizen’s individual demand curve.
b
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20. Condorcet’s Paradox occurs when:
a.
majority rule voting cycles among alternatives.
b.
majority rule voting results in decisions that are not Pareto optimal.
c.
point voting yields indeterminate results.
d.
point voting results in decisions that are not Pareto optimal.
a
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21. 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
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22. 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
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23. Some economists have hypothesized that government bureaucracies seek to maximize:
a.
social well-being.
b.
gross national product.
c.
fringe benefits for bureaucrats.
d.
their own budgets.
d
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24. 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 which serves construction workers.
Which of these are true 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
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25. Median voter decisions may not yield efficient allocations of resources because:
a.
votes are allocated differently than income.
b.
externalities may cause private and social costs to diverge.
c.
free riders will cause too few public goods to be produced.
d.
the median voter may not be the same as the mean voter.
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