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Page 12
Use the diagram below in answering the following question(s).
.
15) Based on the figure above, suppose that production of product X creates external costs. In the
absence of government intervention, this industry would tend to produce
A) 800 units of output, which is less than the allocatively efficient output of 1,000 units.
B) 1,000 units of output, which is more than the allocatively efficient output of 800 units.
C) 800 units, which is the allocatively efficient output.
D) 1,000 units, which is the allocatively efficient output.
16) Based on the figure above, at 1,000 units of output, the marginal benefit from consuming the
last unit of X is equal to
A) $6, but the marginal social cost is equal to about $12, and so, from a social point of view, too
little output is being produced.
B) $12, but the marginal social cost is equal to about $6, and so, from a social point of view, too
little output is being produced.
C) $6, but the marginal social cost is equal to about $12, and so, from a social point of view, too
much output is being produced.
D) $12, but the marginal social cost is equal to about $6, and so, from a social point of view, too
much output is being produced.
1) The term market failure refers to any situation in which
A) a society's income is not distributed fairly.
B) monopolists earn economic profits.
C) society's resources are not used efficiently.
D) the economy fails to grow rapidly.
2) Private costs are also known as
A) spillover costs.
B) external costs.
C) social costs.
D) internal costs.
3) Social costs are
A) the same thing as external costs.
B) the sum of private costs and internal costs.
C) the same thing as private costs.
D) the sum of internal and external costs.
4) Suppose that coal mining creates external costs. Then, in the absence of government
intervention, it is likely that
A) too little coal will be produced from a social point of view and the price of coal will be
artificially low.
B) too much coal will be produced from a social point of view and the price of coal will be
artificially high.
C) too little coal will be produced from a social point of view and the price of coal will be
artificially high.
D) too much coal will be produced from a social point of view and the price of coal will be
artificially low.
5) If the production of a product generates external costs, business tend to
A) produce too much of that product from a social point of view because they consider only
private costs.
B) produce too much of that product from a social point of view because they consider only
social costs.
C) produce too little of that product from a social point of view because they consider only
private costs.
D) produce too little of that product from a social point of view because they consider only social
costs.
Use the following diagram in answering the following question(s).
6) Based on the figure above, in the absence of government intervention, how many hogs would
be produced each year?
A) less than 10 million
B) 10 million
C) between 10 and 15 million
D) 15 million
7) Based on the figure above, from society's point of view, the optimal (or efficient) level of hog
production is
A) less than 10 million.
B) 10 million.
C) between 10 and 15 million.
D) 15 million.
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8) Based on the figure above, if hog producers are forced to internalize their external costs, the
result will be
A) an increase in the number of hogs produced and a lower equilibrium price.
B) a reduction in the number of hogs produced and a higher equilibrium price.
C) an increase in the number of hogs produced and a higher equilibrium price.
D) a reduction in the number of hogs produced and a lower equilibrium price.
9) Which of the following is true?
A) Economists prefer government regulation to pollution taxes because regulations force each
firm to meet the same standard.
B) Economists prefer government regulation to pollution taxes because regulations can achieve a
desired reduction in pollution at a lower cost.
C) Economists prefer pollution taxes to government regulation because pollution taxes force
each firm to reduce pollution by the same amount.
D) Economists prefer pollution taxes to government regulation because pollution taxes allow
pollution to be reduced by the firms that can do it at the lowest cost.
10) Under a system of tradable emission permits
A) firms that find it very costly to reduce their emissions will tend to sell emission permits.
B) firms that can reduce their emissions at a low cost are likely to reduce their pollution below
the permitted amount.
C) all firms are required to reduce their emissions by the same amount.
D) firms that can reduce their emissions at a low cost will tend to buy emission permits.
11) If the consumption of a product yields external benefits, individuals, pursuing their own self
interest
A) will tend to consume the optimal amount of that product from a social point of view.
B) will tend to consume too little of that product from a social point of view.
C) will tend to consume too much of that product from a social point of view.
D) All of the above are equally possible.
12) If the consumption of a product conveys significant external benefits,
A) consumers will recognize this fact and purchase the socially optimal amount of the product.
B) government may choose to tax the consumption of the product to encourage its purchase.
C) it must be produced by government because private firms will not be able to produce it
profitably.
D) government may choose to subsidize its purchase in order to make it more attractive to
consumers.
13) The free-rider problem is associated with
A) pure private goods.
B) public goods.
C) private goods that yield significant external benefits.
D) Both B and C are correct.
14) Which of the following accurately lists the three categories of goods and services produced
by our economy?
A) social goods, private goods, and public goods
B) pure private goods, public goods, and private goods that yield significant external benefits
C) pure private goods, government goods, and free goods
D) pure social goods, pure private goods, and public goods that yield significant external benefits
15) Which of the following is true?
A) Individuals tend to consume too much of products yielding external benefits.
B) Private firms cannot make a profit producing public goods due to the free-rider problem.
C) Businesses tend to produce too little of products creating external costs.
D) The free-rider problem results in the over-production of products yielding significant external
benefits.
16) Elementary education should
A) not be regarded as a true public good because it does not convey external benefits.
B) be regarded as a public good because it is commonly provided by government.
C) not be regarded as a true public good because it can profitably be provided by private firms.
D) be regarded as a public good because it conveys its benefits equally to students and non-
students alike.
17) Which of the following would be best described as a "private good yielding significant
external benefits.?"
A) national defense
B) a lawnmower
C) a flu shot
D) a tornado warning system
18) Which of the following is a true statement?
A) Products that yield external benefits tend to be underproduced because of the free-rider
problem.
B) Pure private goods tend to be underconsumed because purchasers fail to consider their
external benefits.
C) Products that generate external costs tend to be overproduced because firms consider only
their private costs.
D) Public goods tend to be underproduced because consumers fail to properly consider the
external benefits they generate.
19) Public choice economists
A) are confident that government intervention can help to prevent or correct for market failure.
B) view government bureaucrats as selfless servants of the public.
C) regard politicians as self-interested vote maximizers.
D) believe that government needs to do more to correct for market failure.
20) According to public choice economists, politicians may support farm subsidies, even if they
are inefficient and inequitable because
A) they believe the tradition of small family farms needs to be preserved.
B) they recognize that a majority of American voters support these subsidies.
C) opposing subsidies will lose them farm votes without winning the support of other voters.
D) a majority of voters are farmers.
21) According to public-choice economists, many voters choose to remain uninformed because
the costs of becoming informed outweigh the likely benefits. This is described as
A) the lazy voter effect.
B) the rational ignorance effect.
C) government failure.
D) the free-rider problem.
22) Suppose that a proposed government project would cost $300,000 and would convey benefits
worth $1,000 to 400 people and benefits worth $100 to the remaining 600 people in the
community. Economists would argue that this project should be
A) rejected because it costs most people more than the benefits they receive.
B) approved because the benefits of the project outweigh the costs.
C) rejected because the costs of the project outweigh the benefits.
D) rejected because it is an inefficient use of resources.
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23) Suppose that a proposed government project would cost $300,000 and would convey benefits
worth $1,000 to 400 people, and benefits worth $100 to the remaining 600 people in the
community. If each person in the community would be assessed a $300 tax to pay for this
project, the theory of public choice predicts that this proposed project would be
A) rejected because the project's total costs exceed its total benefits.
B) approved because the project's total benefits exceed its total costs.
C) rejected because voters are unable to reflect the strength of their preferences.
D) approved because voters recognize that it is an efficient use of society's limited resources.
24) Which of the following is an example of a pure private good?
A) eyeglasses
B) education
C) a fence between neighbors
D) a flood control dam
1) Firms possessing market power tend to produce more output than is socially desirable; that is,
they cause too many of society's scarce resources to be allocated to the products they produce.
2) External costs are the sum of private costs plus social costs.
3) In making decisions, firms tend to respond only to their private or internal costs.
4) If firms are forced to internalize the external costs they create, the likely result will be a higher
price for their product.
5) When firms ignore the external costs they create, they tend to produce less output than is
socially desirable.
6) If the production of a product creates external costs, the supply curve reflecting social costs
will lie to the right of the supply curve reflecting only private costs.
7) When external costs exist, negotiation can be used to internalize those costs even if property
rights are poorly defined.
8) Negotiation is only a viable method of internalizing external costs when the number of parties
involved is relatively small.
9) When property rights are poorly defined, negotiation cannot be used to internalize external
costs because no party is in a position to charge for the use of the abused resource.
10) Emissions standards permit firms to discharge as much waste into the environment as they
choose, provided they are willing to pay a specified amount for each unit discharged.
11) Pollution taxes can achieve a given level of environmental quality at a lower cost than
emissions standards.
12) Economists generally favor the total elimination of pollution.
13) When external benefits exist, social benefits will exceed private benefits.
14) Without government intervention, too few resources tend to be devoted to the production of
products yielding external benefits.
15) When the consumption of products yields external benefits, economists argue that they be
taxed in order to discourage their use.
16) The demand curve reflecting private plus external benefits would lie to the left of the demand
curve reflecting only private benefits.
17) Milton Friedman supports the use of vouchers as an alternative to subsidized public schools.
18) Pure private goods are products that convey their benefits only to the purchaser.
19) Any product yielding significant external benefits is an example of a public good.
20) Public goods generally must be provided by the government because the free-rider problem
makes it difficult for private firms to earn a profit from such products.
21) Of roads, flood control dams, and national defense, roads are probably the poorest example
of a public good because they might be provided profitably by private firms.
22) When a product conveys its benefits equally to paying and nonpaying members of society, it
is an example of a public good.
23) In 2008 the households in the top (richest) fifth of the income distribution received roughly
70 percent of aggregate income.
24) In the last 20 years, the share of aggregate income going to the households in the top fifth of
the income distribution has declined significantly.
25) In the last 20 years, the share of aggregate income going to the richest fifth of the income
distribution has increased while the share going to the remaining four-fifths has declined.
26) "Government failure" describes the inability of the two political parties to reach consensus
on important policy issues.
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27) Public choice economists argue that politicians should be viewed as individuals acting in the
public interest.
28) Majority voting may result in the rejection of projects whose benefits exceed their costs.
29) Special-interest groups exert a disproportionate influence on political outcomes, in part,
because they take an intense interest in the outcome of a particular vote while the average citizen
does not.
30) Public choice economists expect politicians to reject the pleas of special-interest groups and
support only those proposals that would benefit a majority of voters.
1) Gerald Goodperson owns and operates a business manufacturing catfish pellets food fed to
catfish. Last year he earned a very nice profit from his business. Gerald enjoys making money,
but he is troubled by the industry-wide practice of dumping certain waste by-products into local
rivers in order to reduce disposal costs. (Assume this practice is presently legal.) He has decided
that this year he will truck his wastes to an approved landfill in order to dispose of them without
harming the rivers. According to Mr. Goodperson, "This method of disposal will increase my
average costs by about 5 percent, but I think it's the right thing to do. Besides, I will still be able
to earn a profit."
Assume that the catfish pellet industry is purely competitive. Discuss both the short-run and
long-run impact of the new waste disposal method on Mr. Goodperson's firm. Include graphs
showing Goodperson's initial profit situation, his short-run situation after the adoption of the new
disposal technique, and his eventual long-run situation. Might the outcome have been different if
you had selected a different model; the model of monopolistic competition, for example?
2) Why do individuals and businesses tend to abuse common property resources such as rivers
and lakes? How can assigning the rights to use these resources to particular individuals or
businesses lead to more efficient use?
3) Economists generally argue that the total elimination of pollution would not be in society's
best interest. If pollution is clearly undesirable, why do economists argue against its total
elimination?
4) Suppose firms A and B are each emitting 5 tons of waste into the atmosphere yearly. Firm A
can reduce emissions at a cost of $100 a ton, but it costs firm B $500 a ton.
(a) How much would it cost society to reduce pollution by 4 tons a year if we imposed
emissions standards that required each firm to cut its emissions by 2 tons?
(b) Illustrate that a pollution tax could accomplish this objective at a lower cost to society.
(You select the tax and explain why this approach will be less costly.
5) Public choice economists caution us to remember that politicians and government bureaucrats
are just like the rest of us motivated by self-interest. What are the implications of this warning as
it applies to government's ability to correct for market failures?
