1. An action creates an externality if it:
D. affects someone with whom the decision-maker has not engaged in a related market
transaction and affects only those individuals engaged in the market transaction.
2. A negative externality is created if:
D. an action harms or benefits someone not involved in the market transaction.
3. A positive externality is created if:
D. an action harms or benefits someone not involved in the market transaction.
4. Activities that create water pollution are best associated with:
A. inferior goods.
5. A beautiful garden that increases the value of the homes in the neighborhood is
considered:
D. a normal good.
6. An external cost is:
A. the cost of a warehouse.
7. The marginal social cost of production is:
A. the sum of the total cost to the producer and the total external cost.
8. When a firm ignores external costs:
A. it fails to maximize its profits.
9. Three hundred paper mills compete in the paper market. The total cost of production (in
dollars) for each mill is given by the formula
TC
= 1,000
Qmill
+ (
Qmill
)2, where
Qmill
indicates the
mills annual production in thousands of tons. The marginal external cost of a mill’s production (in
dollars) is given by the formula
MEC
= 200 + 2
Qmill
. Finally, annual market demand (in thousands
of tons) is given by the formula
Q
d
= 200,000 – 100
P
. Which of the following gives the market
supply curve?
A.
Q
s
= 200,000 – 100
P
10. Three hundred paper mills compete in the paper market. The total cost of production (in
dollars) for each mill is given by the formula
TC
= 1,000
Qmill
+ (
Qmill
)2, where
Qmill
indicates the
mills annual production in thousands of tons. The marginal external cost of a mill’s production (in
dollars) is given by the formula
MEC
= 200 + 2
Qmill
. Finally, annual market demand (in thousands
of tons) is given by the formula
Q
d
= 200,000 – 100
P
. What is the competitive price?
D. $1995
11. Three hundred paper mills compete in the paper market. The total cost of production (in
dollars) for each mill is given by the formula
TC
= 1,000
Qmill
+ (
Qmill
)2, where
Qmill
indicates the
mills annual production in thousands of tons. The marginal external cost of a mill’s production (in
dollars) is given by the formula
MEC
= 200 + 2
Qmill
. Finally, annual market demand (in thousands
of tons) is given by the formula
Q
d
= 200,000 – 100
P
. What is the competitive market quantity?
D. 0
12. Three hundred paper mills compete in the paper market. The total cost of production (in
dollars) for each mill is given by the formula
TC
= 1,000
Qmill
+ (
Qmill
)2, where
Qmill
indicates the
mills annual production in thousands of tons. The marginal external cost of a mill’s production (in
dollars) is given by the formula
MEC
= 200 + 2
Qmill
. Finally, annual market demand (in thousands
of tons) is given by the formula
Q
d
= 200,000 – 100
P
. Which of the following gives the function for
the marginal social cost?
A.
MSC
= 1,200 – 4
Q
13. Three hundred paper mills compete in the paper market. The total cost of production (in
dollars) for each mill is given by the formula
TC
= 1,000
Qmill
+ (
Qmill
)2, where
Qmill
indicates the
mills annual production in thousands of tons. The marginal external cost of a mill’s production (in
dollars) is given by the formula
MEC
= 200 + 2
Qmill
. Finally, annual market demand (in thousands
of tons) is given by the formula
Q
d
= 200,000 – 100
P
. What is the efficient price?
D. $1,200
14. Three hundred paper mills compete in the paper market. The total cost of production (in
dollars) for each mill is given by the formula
TC
= 1,000
Qmill
+ (
Qmill
)2, where
Qmill
indicates the
mills annual production in thousands of tons. The marginal external cost of a mill’s production (in
dollars) is given by the formula
MEC
= 200 + 2
Qmill
. Finally, annual market demand (in thousands
of tons) is given by the formula
Q
d
= 200,000 – 100
P
. What is the efficient quantity?
D. 90,000
15. The economic gain that a positive externality provides to others is called:
D. an internal cost.
16. The economist who won the Nobel Prize in Economics for his path-breaking analysis of
the ways in which property rights, transaction costs and institutions affect the allocation of
economic resources is:
A. John Nash.
17. The Coase Theorem states that:
A. if bargaining is difficult, then regardless of how property rights are assigned, voluntary
agreements between parties will remedy the market failures associated with externalities and
restore economic efficiency.
18. Limitations of bargaining include:
D. All of the responses are correct.
19. Limitations of bargaining include:
D. All of the responses are correct.
20. Limitations of bargaining include:
A. contracts may not need enforcing.
21. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $
A
. The effects of the pollution are confined to a single farmer who earns
$400,000 if the water he uses from the river is clean and $300,000 if it’s polluted. What is the
combined profit of both firms without abatement?
D. $1,400,000
22. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $
A
. The effects of the pollution are confined to a single farmer who earns
$400,000 if the water he uses from the river is clean and $300,000 if it’s polluted. Which of the
following expressions gives the combined profit of both firms with abatement?
D. $(1,700,000 –
A
)
23. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $
A
. The effects of the pollution are confined to a single farmer who earns
$400,000 if the water he uses from the river is clean and $300,000 if it’s polluted. If _______, then
abatement would be efficient.
A.
A
< 300,000
24. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $75,000. The effects of the pollution are confined to a single farmer who
earns $400,000 if the water he uses from the river is clean and $300,000 if it’s polluted. Suppose
there is no law preventing the firm from polluting the river. Which of the following describes an
efficient outcome in this case?
A. The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
25. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $75,000. The effects of the pollution are confined to a single farmer who
earns $400,000 if the water he uses from the river is clean and $300,000 if it’s polluted. Suppose
the law guarantees the farmer access to clean water from the river. Which of the following
describes an efficient outcome in this case?
D. The farmer pays the owner of the mill $87,500 to stop polluting.
26. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $120,000. The effects of the pollution are confined to a single farmer who
earns $400,000 if the water he uses from the river is clean, and $300,000 if it’s polluted. Suppose
there is no law preventing the firm from polluting the river. Which of the following describes an
efficient outcome in this case?
D. The farmer pays the owner of the mill $90,000 to stop polluting.
27. Suppose a paper mill earns $1,000,000 in profits when it pollutes a river, and it can abate
pollution at a cost of $120,000. The effects of the pollution are confined to a single farmer who
earns $400,000 if the water he uses from the river is clean, and $300,000 if it’s polluted. Suppose
the law guarantees the farmer access to clean water from the river. Which of the following
describes an efficient outcome in this case?
A. The owner of the mill is unable to pay the farmer enough to secure his permission to pollute
the river.
28. Pigouvian taxation:
D. requires that victims of an externality pay a tax to the producers of the externality.
29. Pigouvian subsidization:
D. requires that victims of an externality pay a tax to the producers of the externality.
30. A liability rule:
A. involves the use of taxes or fees to remedy negative externalities.
31. The economist that originated the idea that government can correct externalities through
taxes and subsidization is:
D. Theodore Groves.
32. Your neighbor likes to blast 1970’s rock music and the louder the better. The loud music
imposes a cost on you because it disrupts your study of economics. Let
D
stand for the volume of
his music in decibels,
B
for his benefits and
C
for your costs, where
B
and
C
are measured in
dollars. For any given volume,
D
, your neighbor’s benefit is
B
= 0.63
D
– 0.002
D
2 and your cost is C
= 0.06
D
+ 0.001
D
2. What is the efficient volume,
D
?
D. 345