Question 1

The difference between a club good and a public good is that a club good is _____ and a public good is _____.

Accepted Answer

A)  nonexcludable and rival; excludable and rival
B)  excludable and nonrival; excludable and rival
C)  nonexcludable and rival; nonexcludable and nonrival
D)  excludable and nonrival; nonexcludable and nonrivalE) All of the above
F) A) and B)

Question 2

A positive externality is an activity:

Accepted Answer

A)  that generates negative externalities.
B)  that benefits domestic firms as a result of the actions of foreign (external)  firms.
C)  that benefits foreign (external)  firms as a result of the actions of domestic firms.
D)  whose side effects benefit bystanders.E) B) and C)
F) A) and C)

Question 3

While we are not used to considering this possibility, pollution has some indirect benefits, since:

Accepted Answer

A)  we obtain goods and services that make our life more convenient, even though we pollute in the process.
B)  firms pollute the environment and thus charge us less than they would otherwise have to.
C)  businesses receive a perverse satisfaction from polluting.
D)  it benefits wildlife, which is displaced from urban areas.E) None of the above
F) B) and C)

Question 4

(Figure: MSB and Demand Curves)  Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the shampoo market. What is the marginal external benefit?

Accepted Answer

A)  $2
B)  $4
C)  $6
D)  $8E) A) and B)
F) A) and C)

Question 5

Adriana stops at a propane station to fill up the tank of her BBQ. The propane in her tank for the BBQ is BEST described as a:

Accepted Answer

A)  private good.
B)  public good.
C)  club good.
D)  common resource.E) A) and B)
F) A) and C)

Question 6

From a community perspective, the marginal cost that matters is the marginal _____ cost.

Accepted Answer

A)  private
B)  external
C)  public
D)  socialE) All of the above
F) A) and B)

Question 7

(Figure: MSB and Demand Curves 2)  Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the hamburger market. What is the marginal external benefit when eight units are bought?

Accepted Answer

A)  $2
B)  $4
C)  $6
D)  $8E) None of the above
F) A) and B)

Question 8

What type of good is nonrival and excludable?

Accepted Answer

A)  private goods
B)  club goods
C)  common resources
D)  public goodsE) B) and C)
F) A) and D)

Question 9

How is the marginal social benefit curve positioned on a graph when there are positive externalities?

Accepted Answer

A)  It is above the demand curve and has a negative slope.
B)  It is below the demand curve and has a negative slope.
C)  It intersects the demand curve and has a positive slope.
D)  It intersects the demand curve and has a negative slope.E) A) and B)
F) All of the above

Question 10

When externalities are present, the socially optimal outcome occurs where the _____ benefit equals the _____ cost.

Accepted Answer

A)  marginal external; marginal external
B)  marginal social; marginal social
C)  total social; total social
D)  total external; total externalE) A) and B)
F) A) and C)

Question 11

The harvesting of corn generates external costs in the form of methane gas emissions. In equilibrium:

Accepted Answer

A)  too little corn will be harvested.
B)  the price of a bushel of corn will be less than the marginal social cost of the last bushel of corn sold.
C)  the price of a bushel of corn will be less than the marginal social benefit of the last bushel of corn sold.
D)  the price of a bushel of corn will be less than the marginal cost of the last bushel of corn sold to the corn farmer who sold it.E) C) and D)
F) A) and B)

Question 12

(Market 6)  Use the graph to answer the question.
The graph shows the marginal social benefit, marginal private benefit, and marginal private curves in the taco market. In this market, the socially optimal output would be _____, whereas the market-determined output would be _____.

Accepted Answer

A)  six; nine
B)  six; four
C)  12; six
D)  four; sixE) A) and B)
F) None of the above

Question 13

The Coase theorem implies that:

Accepted Answer

A)  private individuals will not produce the socially optimal outcome because bargaining costs are generally quite high.
B)  given low bargaining costs, private individuals can achieve a socially optimal solution without the involvement of the government.
C)  given external costs, the government must intervene to achieve the socially optimal output.
D)  all goods that generate an external cost (or benefit)  should be produced up to the point where the marginal social benefit equals the marginal social cost of the good.E) A) and D)
F) C) and D)

Question 14

(Figure: MSC and Supply Curves)  Use the graph answer the question.
The graph shows the marginal social cost and supply curves in a market. When eight units are produced, the relevant marginal cost facing the community is:

Accepted Answer

A)  $2.
B)  $4.
C)  $12.
D)  $8.E) A) and C)
F) A) and B)

Question 15

Suppose that the city of Cleveland has set an emissions tax to reduce the amount of pollution going into the Cuyahoga River. Assume that the optimal tax would be $700 but that government officials have set the tax at $1,200. At the equilibrium with the $1,200 tax:

Accepted Answer

A)  there will be too much pollution.
B)  the marginal social cost of pollution will be less than $1,200.
C)  the marginal social benefit of pollution will be $1,200.
D)  the marginal social benefit of pollution will be more than $1,200.E) A) and D)
F) None of the above

Question 16

In a cap and trade system, licenses that can be bought and sold by polluters and that enable the holder to pollute up to a specified amount during a given period are called:

Accepted Answer

A)  emissions taxes.
B)  corrective taxes.
C)  tradable emissions permits.
D)  environmental standards.E) All of the above
F) A) and D)

Question 17

A(n)  _____ is a benefit that an individual or firm confers on bystanders without receiving compensation.

Accepted Answer

A)  external cost
B)  external benefit
C)  positive equivalent action
D)  negative externalityE) B) and C)
F) A) and B)

Question 18

Which of the following statements supports the idea that price changes are not externalities?

Accepted Answer

A)  A price change redistributes costs and benefits but does not generate new costs or benefits.
B)  Prices are a side effect of decisions making.
C)  A drop in price is a clear signal that the market was negatively impacting buyers.
D)  A change in price adversely affects all suppliers in the market.E) A) and B)
F) B) and C)

Question 19

Why is a price change NOT an externality?

Accepted Answer

A)  A price change does not change total costs or benefits.
B)  A price change affects bystanders, not market participants.
C)  A change in price changes benefits rather than redistributes them.
D)  A price change redistributes costs but not benefits.E) All of the above
F) A) and B)

Question 20

(Figure: Market 5)  Use the graph to answer the question.
The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market are in the graph. Market forces would yield a quantity of _____ and a price of _____.

Accepted Answer

A)  four; $8
B)  six; $2
C)  six; $6
D)  four; $4E) None of the above
F) B) and C)

Exam 10: Externalities and Public Goods

The harvesting of corn generates external costs in the form of methane gas emissions. In equilibrium:

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(Figure: MSB and Demand Curves) Use the graph to answer the question. The graph shows the marginal social benefit and demand curves in the shampoo market. What is the marginal external benefit?

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Adriana stops at a propane station to fill up the tank of her BBQ. The propane in her tank for the BBQ is BEST described as a:

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(Market 6) Use the graph to answer the question. The graph shows the marginal social benefit, marginal private benefit, and marginal private curves in the taco market. In this market, the socially optimal output would be _____, whereas the market-determined output would be _____.

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Why is a price change NOT an externality?

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What type of good is nonrival and excludable?

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The Coase theorem implies that:

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The difference between a club good and a public good is that a club good is _____ and a public good is _____.

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A(n) _____ is a benefit that an individual or firm confers on bystanders without receiving compensation.

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Which of the following statements supports the idea that price changes are not externalities?

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In a cap and trade system, licenses that can be bought and sold by polluters and that enable the holder to pollute up to a specified amount during a given period are called:

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From a community perspective, the marginal cost that matters is the marginal _____ cost.

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While we are not used to considering this possibility, pollution has some indirect benefits, since:

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(Figure: Market 5) Use the graph to answer the question. The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market are in the graph. Market forces would yield a quantity of _____ and a price of _____.

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(Figure: MSB and Demand Curves 2) Use the graph to answer the question. The graph shows the marginal social benefit and demand curves in the hamburger market. What is the marginal external benefit when eight units are bought?

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How is the marginal social benefit curve positioned on a graph when there are positive externalities?

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When externalities are present, the socially optimal outcome occurs where the _____ benefit equals the _____ cost.

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A positive externality is an activity:

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(Figure: MSC and Supply Curves) Use the graph answer the question. The graph shows the marginal social cost and supply curves in a market. When eight units are produced, the relevant marginal cost facing the community is:

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Suppose that the city of Cleveland has set an emissions tax to reduce the amount of pollution going into the Cuyahoga River. Assume that the optimal tax would be $700 but that government officials have set the tax at $1,200. At the equilibrium with the $1,200 tax:

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(Market 6) Use the graph to answer the question. The graph shows the marginal social benefit, marginal private benefit, and marginal private curves in the taco market. In this market, the socially optimal output would be _, whereas the market-determined output would be _.

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The difference between a club good and a public good is that a club good is _ and a public good is _.

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(Figure: Market 5) Use the graph to answer the question. The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market are in the graph. Market forces would yield a quantity of _ and a price of _.

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When externalities are present, the socially optimal outcome occurs where the _ benefit equals the _ cost.

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