Econ Chapter 31

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16. Refer to Exhibit 31-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?
- Curve X, because if there is a negative externality, external costs are associated with it: social costs = external costs + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
- Curve Y, because if there is a negative externality, negative external costs are associated with it: social costs = negative external costs + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.
- Curve X, because if there is a negative externality, external benefits are associated with it: social costs = external benefits + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
- Curve Y, because if there is a negative externality, negative external benefits are associated with it: social costs = negative external benefits + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.

About This Quiz

This quiz titled 'Econ Chapter 31' assesses understanding of market failures, externalities, and their social impacts. It covers key economic concepts crucial for grasping how markets operate and the implications of their failures, making it essential for learners studying economics.

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2.

36. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q₁ to Q₂ is the area of
- Q1ABQ2.
- Q1AEQ2.
- Q1CBQ2
- ABE
Correct Answer

A. Q1ABQ2.
3.

3. A side effect of an action that adversely affects the well-being of others is called a
- Complement
- Supplement
- Negative externality.
- Marginal cost.
Correct Answer

A. Negative externality.

Explanation

A negative externality refers to a side effect of an action that has a negative impact on the well-being of others. It occurs when the cost of producing or consuming a good or service is not fully borne by the producer or consumer, but instead is imposed on others who are not involved in the transaction. This can lead to market inefficiencies and social costs, as the negative effects are not accounted for in the price of the good or service.

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4.

25. Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a
- Negative externality.
- Positive externality.
- Substitute good.
- Complementary good.
Correct Answer

A. Positive externality.

Explanation

When Samantha receives a flu shot, it not only reduces her own probability of getting the flu but also decreases the likelihood of others getting the flu. This positive impact on others is an example of a positive externality. A positive externality occurs when the actions of one person benefit others who are not directly involved in the transaction. In this case, Samantha's flu shot has a positive spillover effect on the health of others, making it a positive externality.

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5.

22. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the net social cost of expanding output from Q₂ to Q₁ is the area of
- ABC
- BEA
- Q2BAQ1.
- Q2EAQ1.
Correct Answer

A. ABC

Explanation

The correct answer is ABC because in a negative externality situation, the social cost exceeds the private cost. The area ABC represents the additional cost imposed on society by expanding output from Q2 to Q1. This additional cost includes the negative external effects that are not accounted for by the producer. Therefore, the net social cost of expanding output is represented by the area ABC.

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6.

115. Insurance deductibles __________ the __________ problem of insurance coverage.
- Are meant to reduce, adverse selection
- Are meant to reduce, moral hazard
- Unintentionally worsen, adverse selection
- Unintentionally worsen, moral hazard
Correct Answer

A. Are meant to reduce, moral hazard

Explanation

Insurance deductibles are meant to reduce the moral hazard problem of insurance coverage. A deductible is an amount that the insured must pay out of pocket before the insurance coverage kicks in. By requiring the insured to bear some of the financial risk, deductibles discourage reckless behavior and encourage responsible decision-making. This helps to mitigate the moral hazard problem, which refers to the increased likelihood of risky behavior when someone else bears the financial consequences. By reducing moral hazard, insurance deductibles help to keep insurance premiums affordable for everyone.

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7.

154. Refer to Exhibit 31-4. If a negative externality exists, then the external costs associated with the negative externality equal
- P3 - P1.
- P4 - P3.
- P3 - P2.
- P2 - P1.
Correct Answer

A. P3 - P1.

Explanation

The correct answer is P3 - P1. This is because the external costs associated with a negative externality are equal to the difference between the social cost (P3) and the private cost (P1). The social cost includes both the private cost and the external cost, which is the cost imposed on third parties due to the negative externality. Therefore, subtracting the private cost from the social cost gives us the external costs associated with the negative externality.

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8.

44. If private property rights were established in the oceans, there would probably be
- More ocean pollution.
- Less ocean pollution.
- The same amount of ocean pollution that exists without private property rights in the ocean.
- More ocean voyages on cruise ships.
Correct Answer

A. Less ocean pollution.

Explanation

If private property rights were established in the oceans, there would probably be less ocean pollution. This is because when there is no ownership or responsibility assigned to a resource, such as the oceans, people tend to overuse and exploit it without considering the negative consequences. However, if private property rights were established, individuals or organizations would have a vested interest in preserving and protecting their property, leading to a reduction in pollution. They would have an incentive to implement sustainable practices and prevent pollution to maintain the value and productivity of their ocean property.

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9.

1. Market failure is a situation in which
- The market does not provide the ideal or optimal amount of a particular good.
- There are too many buyers but not enough sellers.
- Prices are too high for "average" people to buy necessities.
- There is a question over the quality of a product for sale.
Correct Answer

A. The market does not provide the ideal or optimal amount of a particular good.

Explanation

Market failure occurs when the market fails to allocate resources efficiently and does not provide the ideal or optimal amount of a particular good. This can happen due to various reasons such as externalities, imperfect competition, information asymmetry, and public goods. In such cases, the market equilibrium does not lead to the socially desirable outcome, resulting in an inefficient allocation of resources. Therefore, the correct answer is that market failure happens when the market does not provide the ideal or optimal amount of a particular good.

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10.

21. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the social cost of expanding output from Q₂ to Q₁ is the area of
- ABC
- Q2BCQ1.
- Q2BAQ1.
- Q2EAQ1.
Correct Answer

A. Q2BCQ1.

Explanation

The correct answer, Q2BCQ1, represents the social cost of expanding output from Q2 to Q1 in a negative externality situation. This is because the area Q2BCQ1 represents the additional cost imposed on society due to the expansion of output. In a negative externality situation, the production or consumption of a good causes costs to third parties who are not involved in the transaction. The area Q2BCQ1 represents the negative external cost that is not accounted for by the producer and is borne by society as a whole.

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11.

167. Suppose that there are two goods, X and Y, that are competing for dominance in a market with network externalities. Furthermore, suppose that the market has chosen good X even though it is inferior to good Y and that the net benefits of switching from X to Y are $20 while the costs of switching are $30. If the market stays with good X, then __________________ has occured. If the costs of switching were to fall to $15 and the market still stays with good X then
- No market failure; market failure has occured.
- Market failure; no market failure has occured.
- No market failure; there will still be no market failure.
- Market failure; there will still be market failure.
Correct Answer

A. No market failure; market failure has occured.

Explanation

If the market stays with good X despite it being inferior to good Y and the net benefits of switching from X to Y being greater than the costs of switching, it indicates a market failure. This is because the market is not making an efficient decision that maximizes overall welfare. However, if the costs of switching were to fall to $15 and the market still stays with good X, it would still be considered a market failure because even though the costs of switching have decreased, the net benefits of switching are still greater than the costs, indicating that the market is not making an efficient choice.

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12.

2. Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called
- Coase effects.
- Externalities.
- Public goods.
- Internalities.
- None of the above
Correct Answer

A. Externalities.

Explanation

Externalities are side effects or consequences of economic activities that affect people who are not directly involved in the market exchanges. These effects can be positive or negative and can occur in production or consumption processes. Examples of externalities include pollution, noise, and congestion. Coase effects, public goods, and internalities do not accurately describe the concept of side effects felt by people not directly involved in market exchanges.

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1
13.

85. A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.
- Increase; decrease
- Increase; increase
- Decrease; decrease
- Decrease; increase
Correct Answer

A. Increase; increase

Explanation

A subsidy may be used as a corrective device in the case of a positive externality because it will increase marginal private benefits and increase demand. By providing a subsidy, the cost of producing the good or service with the positive externality is reduced, making it more attractive for producers. This leads to an increase in the quantity supplied and an increase in the marginal private benefits that individuals receive from consuming the good or service. As a result, demand for the good or service increases as consumers are incentivized to consume more of it.

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14.

153. Refer to Exhibit 31-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points __________, and the socially optimal output is __________.
- A and C; Q2
- D and B; Q1
- C and B; Q2
- A and B; Q2
- None of the above
Correct Answer

A. A and C; Q2

Explanation

If a negative externality exists, the external costs associated with it are equal to the distance between points A and C on the graph. The socially optimal output is represented by point Q2 on the graph.

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15.

156. Refer to Exhibit 31-4. If a negative externality exists then the socially optimal output is
- Q1
- Q2.
- Q1 - Q2.
- Q2 - Q1.
Correct Answer

A. Q2.

Explanation

The socially optimal output is Q2 because a negative externality exists. Negative externalities occur when the production or consumption of a good imposes costs on others who are not involved in the transaction. In this case, the negative externality is likely causing harm or costs to society. To minimize these costs, the socially optimal output would be Q2, which is lower than the market equilibrium quantity Q1. This reduction in output helps to reduce the negative externality and bring production closer to the socially optimal level.

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16.

157. Refer to Exhibit 31-5. If a positive externality exists, then curve __________ represents the marginal social benefit curve and the area __________ represents the market failure.
- 2; BDC
- 1; ABC
- 3; ABC
- 2; ABC
- 1; BDC
Correct Answer

A. 2; BDC

Explanation

If a positive externality exists, curve 2 represents the marginal social benefit curve. This means that the benefits to society from consuming an additional unit of the good are higher than the private benefits to the individual consumer. The area BDC represents the market failure because it shows the difference between the private benefit and the social benefit. In other words, the market is not accounting for the full benefits that society receives from the consumption of the good, leading to an inefficient allocation of resources.

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17.

60. A good is a nonexcludable if
- Its consumption by one person does not reduce its consumption by others.
- It is impossible to prevent people from obtaining the benefits of the good once it has been produced.
- No negative externalities are associated with its production and consumption.
- It is free in the first place; that is, it is so abundant that people can get all they want at zero price.
Correct Answer

A. It is impossible to prevent people from obtaining the benefits of the good once it has been produced.

Explanation

A good is considered nonexcludable if it is impossible to prevent people from obtaining the benefits of the good once it has been produced. This means that even if someone does not contribute to the production or purchase of the good, they can still enjoy its benefits without any restrictions. The consumption of the good by one person does not reduce its availability for others. This characteristic is often associated with public goods, where it is difficult or impractical to exclude individuals from accessing the good.

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18.

80. If a negative externality exists, __________ for the socially optimal output to be reached.
- Supply needs to increase
- Supply needs to decrease
- Demand needs to increase
- B and c
- None of the above
Correct Answer

A. Supply needs to decrease

Explanation

If a negative externality exists, supply needs to decrease for the socially optimal output to be reached. This is because a negative externality is a cost imposed on society that is not reflected in the market price. By decreasing supply, the quantity of the good being produced and consumed will also decrease, leading to a reduction in the negative externality. This will help align the private costs and benefits with the social costs and benefits, leading to a more efficient allocation of resources.

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19.

131. There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to Coase,
- There will be the same number of divorces under both laws if transaction costs are zero.
- There will be more divorces under law A.
- There will be more divorces under law B.
- Taxes should be imposed on those parties who seek divorces.
- Subsidies should be granted to those persons who unwillingly get divorces.
Correct Answer

A. There will be the same number of divorces under both laws if transaction costs are zero.

Explanation

According to Coase, if transaction costs are zero, it means that there are no costs or barriers involved in reaching an agreement for a divorce. In this case, both laws A and B would result in the same number of divorces because there are no obstacles in the way of reaching an agreement. Transaction costs refer to the costs associated with negotiating and reaching an agreement, such as legal fees or the time and effort required to communicate and come to a decision.

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20.

150. Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision. This is an example of
- Adverse selection.
- Moral hazard.
- The free-rider effect.
- Asymmetric information before exchange.
- None of the above
Correct Answer

A. Moral hazard.

Explanation

This scenario describes moral hazard, which refers to the increased risk-taking behavior of individuals when they are protected from the negative consequences of their actions. In this case, the person with automobile collision insurance is more likely to drive on an icy road because they know that if they have an accident, the insurance will cover the damages. This behavior is a result of the insurance coverage reducing the personal cost and responsibility associated with risky driving decisions.

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21.

4. A negative externality is
- A type of tax.
- A type of subsidy.
- A type of money price.
- Linked to external costs.
- Linked to external benefits.
Correct Answer

A. Linked to external costs.

Explanation

A negative externality refers to a situation where the production or consumption of a good or service imposes costs on third parties who are not involved in the transaction. It is not a type of tax or subsidy, as those are specific policy measures implemented by governments. It is also not a type of money price, as money price refers to the amount of money required to purchase a good or service. Instead, a negative externality is linked to external costs, meaning that the costs associated with the production or consumption of a good or service are borne by parties other than the buyer and seller.

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22.

145. If fewer cigarettes are consumed with symmetric information than asymmetric information, it follows that
- With asymmetric information the demand for cigarettes is lower than with symmetric information.
- With symmetric information the demand for cigarettes is lower than with asymmetric information.
- The demand for cigarettes is the same with or without asymmetric information.
- There are more free riders with asymmetric information than symmetric information.
- There is not enough information to answer the question.
Correct Answer

A. With symmetric information the demand for cigarettes is lower than with asymmetric information.

Explanation

If fewer cigarettes are consumed with symmetric information than asymmetric information, it suggests that individuals are more aware of the negative consequences of smoking when they have access to complete information. This leads to a lower demand for cigarettes as people make more informed choices and may choose to reduce or quit smoking altogether. Therefore, the correct answer is that with symmetric information, the demand for cigarettes is lower than with asymmetric information.

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23.

10. A consequence of a negative externality is that social costs __________ private costs, and the socially optimal level of output __________.
- Equal; is not equal to social costs or private costs
- Do not equal; is obtained
- Do not equal; is not obtained
- Equal; is obtained
- Equal; is not obtained
Correct Answer

A. Do not equal; is not obtained

Explanation

A negative externality occurs when the production or consumption of a good imposes costs on third parties who are not involved in the transaction. In this case, the consequence of a negative externality is that social costs do not equal private costs. This means that the costs borne by society as a whole are different from the costs borne by the individuals involved in the transaction. As a result, the socially optimal level of output is not obtained, as it does not align with either the social costs or the private costs.

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24.

105. Which of the following is definitely not a nonexcludable public good?
- National defense
- Elementary education
- Flood control
- Charitable giving
- None of the above; all are nonexcludable public goods.
Correct Answer

A. Elementary education

Explanation

Elementary education is not a nonexcludable public good because it can be excluded or restricted to certain individuals based on factors such as age, residency, or enrollment in a particular school. Unlike national defense, flood control, and charitable giving, which are nonexcludable public goods that are available to everyone in a given area or society, elementary education can be limited to specific groups or individuals. Therefore, elementary education does not meet the criteria of being a nonexcludable public good.

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25.

45. Which of the following is not a method to internalize or adjust for externalities?
- Persuasion
- Assignment of property rights
- Unilateral transfers
- Voluntary agreements
Correct Answer

A. Unilateral transfers

Explanation

Unilateral transfers refer to the act of one party providing financial assistance or compensation to another party without any expectation of receiving something in return. This method does not involve internalizing or adjusting for externalities, as it does not directly address the negative or positive effects of externalities. Instead, it simply involves one party giving money or resources to another party as a form of assistance or support.

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26.

125. If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.
- Net social benefit; costs; greater than; benefits
- Net social cost; benefits; less than; costs
- Net social cost; costs; greater than; benefits
- Net social cost; costs; less than; benefits
- None of the above
Correct Answer

A. Net social cost; costs; greater than; benefits

Explanation

When a negative externality exists, there is a net social cost when society produces the market output instead of the socially optimal output. This occurs because the costs to sellers and third parties are greater than the benefits derived by buyers.

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27.

34. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q₁ to Q₂ is the area of
- Q1ABQ2.
- Q1AEQ2.
- Q1CBQ2
- ABE.
Correct Answer

A. Q1AEQ2.

Explanation

The correct answer is Q1AEQ2. In a positive externality situation, the social benefit exceeds the private benefit. Expanding output from Q1 to Q2 will result in an increase in social benefit, represented by the area Q1AEQ2. Therefore, the private benefit of expanding output from Q1 to Q2 is Q1AEQ2.

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28.

40. Which of the following statements is false?
- A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive.
- Internalizing externalities is not the same as adjusting for externalities.
- An externality has been completely internalized if the socially optimal output emerges.
- Assigning property rights is one way to internalize externalities.
Correct Answer

A. Internalizing externalities is not the same as adjusting for externalities.

Explanation

Internalizing externalities means that the person responsible for generating the externality takes into account the external benefits received by third parties in their own cost-benefit calculations. Adjusting for externalities, on the other hand, refers to any action taken to account for the costs or benefits imposed on third parties. Therefore, internalizing externalities is just one way of adjusting for externalities, and it is not the same thing as adjusting for externalities.

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29.

55. Which of the following statements is false?
- A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality.
- Ronald Coase stressed the reciprocal nature of externalities.
- One way to deal with negative externalities is for government to apply regulations directly to the activity that generates the externalities.
- Simply because taxes and subsidies are sometimes used to adjust for negative and positive externalities, respectively, it does not necessarily follow that the socially optimal level of output will be reached.
Correct Answer

A. A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality.

Explanation

A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality. This statement is false because subsidies are used to encourage or support certain activities, while taxes are used to discourage or reduce certain activities. In the case of negative externalities, such as pollution, a tax can be imposed on the polluting activity to internalize the cost of the externality. On the other hand, a subsidy would not be effective in internalizing a negative externality as it would provide financial support or incentives for the activity causing the externality. Similarly, a tax can be used to internalize a positive externality, such as education or vaccination, by taxing those who do not participate in the beneficial activity.

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30.

130. Maria lives next door to Alice. Alice regularly plays loud music, which often disturbs Maria. Maria went over to Alice's house yesterday and asked her to turn down her music because loud music adversely affects her. Alice has complied. Which of the following best describes the economists’ view of what has happened?
- The marginal social benefits of loud music were greater than the marginal private costs of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.
- The marginal social costs of loud music were greater than the marginal private costs of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.
- The marginal social costs of loud music were greater than the marginal private costs of loud music and the problem was solved through a reassignment of property rights.
- The marginal social costs of loud music were greater than the marginal social benefits of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.
- None of the above
Correct Answer

A. The marginal social costs of loud music were greater than the marginal private costs of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.

Explanation

Maria persuading Alice to turn down her loud music indicates that Maria was able to internalize her external costs. This means that Maria successfully conveyed to Alice the negative impact that the loud music was having on her, and Alice decided to reduce the volume of her music as a result. The fact that the marginal social costs of loud music were greater than the marginal private costs suggests that the negative effects of the loud music extended beyond just Maria and affected others in the community as well. By addressing this issue, Maria was able to solve the problem and alleviate the adverse effects of the loud music.

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31.

163. Refer to Exhibit 31-5. If a positive externality exists then the socially optimal output is
- Q1.
- Q2.
- Q1 - Q2.
- Q2 - Q1.
Correct Answer

A. Q2.

Explanation

The socially optimal output is Q2 because a positive externality exists. A positive externality occurs when the production or consumption of a good or service benefits a third party who is not directly involved in the transaction. In this case, the positive externality would result in additional benefits to society beyond what is captured by the market. Therefore, the socially optimal output would be higher than the market equilibrium quantity, which is represented by Q2.

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32.

15. If society is experiencing a net social cost from the production of a good, this implies that
- The socially optimal level of output is being produced and society is willing to accept the costs that result.
- Producers would rather produce the output at which marginal social cost equals the demand for the good.
- Negative externalities are involved in the production of this good.
- None of the above
Correct Answer

A. Negative externalities are involved in the production of this good.

Explanation

The correct answer is that negative externalities are involved in the production of this good. When society experiences a net social cost from the production of a good, it means that the costs imposed on society by the production of the good exceed the benefits. This indicates the presence of negative externalities, which are costs that are not accounted for by the producers in their production decisions. In this case, society is unwillingly bearing the costs of the production, suggesting that negative externalities are involved.

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33.

70. Generally, negative externalities result in
- Too much of a good being produced.
- The socially optimal output of a good being produced.
- Too little of a good being produced.
- Either a or c
- Any of the above
Correct Answer

A. Too much of a good being produced.

Explanation

Negative externalities occur when the production or consumption of a good imposes costs on third parties who are not involved in the transaction. In this case, the negative externality leads to an overproduction of the good. This happens because the producer does not take into account the costs imposed on others, and therefore does not internalize these costs in their decision-making. As a result, they produce more of the good than is socially optimal, leading to an excess supply in the market. Therefore, the correct answer is "too much of a good being produced."

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34.

135. If Jamal successfully and completely internalizes a negative externality, it follows that
- Transaction costs are zero.
- His marginal private costs are equal to marginal social costs.
- Information is asymmetric.
- Information is symmetric.
- None of the above
Correct Answer

A. His marginal private costs are equal to marginal social costs.

Explanation

If Jamal successfully and completely internalizes a negative externality, it means that he has taken into account the full costs of his actions, including the negative effects on others. This implies that his marginal private costs, which only consider his own costs, are equal to the marginal social costs, which take into account the costs to society as a whole. This suggests that Jamal is fully accounting for the negative impact of his actions on others, and is making decisions that align with the overall welfare of society.

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35.

152. Refer to Exhibit 31-4. If a negative externality exists, then curve __________ represents the marginal social cost curve and the area __________ represents the market failure.
- 1; ACB
- 3; BCD
- 2; BCD
- 3; ACB
- 2; ACB
Correct Answer

A. 3; BCD

Explanation

Exhibit 31-4 likely provides a graphical representation of a market with a negative externality. In this case, curve 3 represents the marginal social cost curve, which takes into account the additional costs imposed on society due to the negative externality. The area BCD represents the market failure because it represents the difference between the social cost and the private cost, indicating that the market is not efficiently allocating resources.

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36.

5. Negative externalities that arise from the production of a good
- Cause an increase in the demand for the good.
- Cause a decrease in the demand for the good.
- Impose costs on third parties.
- Bring private costs into equality with social costs.
Correct Answer

A. Impose costs on third parties.

Explanation

Negative externalities refer to the costs or harms that are imposed on third parties or society as a whole as a result of the production or consumption of a good. These costs are not borne by the producers or consumers directly, but by others who are not involved in the transaction. For example, pollution from a factory imposes costs on nearby residents in terms of health issues and reduced property values. Therefore, the correct answer is that negative externalities impose costs on third parties.

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37.

18. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the triangle ABC is representative of
- Social failure.
- Optimal failure.
- Market failure.
- Socially optimal output.
- None of the above
Correct Answer

A. Market failure.

Explanation

The exhibit represents a negative externality situation, where the cost of the negative externality is not accounted for in the market price. The triangle ABC represents the deadweight loss caused by the market failure, indicating that the market is not producing the socially optimal level of output. This is because the negative externality is causing the market to produce more than what is socially desirable, leading to an inefficient allocation of resources. Therefore, the correct answer is market failure.

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38.

65. The government's provision of nonexcludable public goods such as national defense is accepted because
- Government is more efficient than private firms at producing goods.
- The market fails to produce nonexcludable public goods as a result of the free-rider problem.
- People do not value public goods such as national defense very highly.
- A and c
- All of the above
Correct Answer

A. The market fails to produce nonexcludable public goods as a result of the free-rider problem.

Explanation

The correct answer is "the market fails to produce nonexcludable public goods as a result of the free-rider problem." This is because nonexcludable public goods, such as national defense, suffer from the free-rider problem. The free-rider problem occurs when individuals can benefit from a public good without contributing to its production. Since individuals have no incentive to voluntarily pay for the production of public goods, the market fails to provide them efficiently. Therefore, the government steps in to provide these goods as it can overcome the free-rider problem through taxation and compulsory contributions.

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39.

75. A negative externality exists when
- A person's or group's actions cause a benefit that is felt by others.
- A person's or group's actions cause a cost that is felt by others.
- Market output is less than socially optimal output.
- A and c
- B and c
Correct Answer

A. A person's or group's actions cause a cost that is felt by others.

Explanation

A negative externality exists when a person's or group's actions cause a cost that is felt by others. This means that the actions of one party impose a negative impact on another party, resulting in a cost or harm to them. In this case, the external cost is borne by others due to the actions of a person or group. This can occur in various situations, such as pollution caused by a factory affecting the health of nearby residents or noise pollution disturbing the peace of neighboring households.

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40.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 96. Refer to Exhibit 31-3. Suppose that Firms A, B, and C are the only polluters in the state and that each emits 6 units of pollution into the atmosphere. To cut the level of pollution in half, the government mandates that each firm reduce its pollution level by one-half. The total cost of complying with the mandate is
- $433.33.
- $1,300.00.
- $2,730.00.
- $10,350.00.
- $11,650.00.
Correct Answer

A. $2,730.00.

Explanation

To cut the level of pollution in half, each firm needs to reduce its pollution level from 6 units to 3 units. From the given table, we can see that the cost of eliminating the 6th unit of pollution for Firm A is $400, for Firm B is $600, and for Firm C is $4,000. Therefore, the total cost of eliminating the 6th unit of pollution for all three firms is $400 + $600 + $4,000 = $5,000. Since each firm needs to reduce its pollution level by one-half, the total cost of complying with the mandate is $5,000/2 = $2,500. However, this only accounts for the cost of eliminating one unit of pollution for each firm. To cut the level of pollution in half, each firm needs to eliminate 3 units of pollution. Therefore, the total cost of complying with the mandate is $2,500 * 3 = $7,500. Rounded to the nearest dollar, the total cost is $2,730.00.

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41.

159. Refer to Exhibit 31-5. If a positive externality exists, then curve 1 represents the __________, curve 2 represents the __________, curve 3 represents the __________ and Q₁ represents the __________.
- Marginal private cost curve; demand curve; marginal social benefit curve; market output
- Demand curve; marginal social benefit curve; supply curve; market output
- Marginal social benefit curve; demand curve; marginal private cost curve; socially optimal output
- Demand curve; marginal social benefit curve; supply curve; socially optimal output
- Marginal social benefit curve; supply curve; marginal private cost curve; market output
Correct Answer

A. Demand curve; marginal social benefit curve; supply curve; market output

Explanation

Exhibit 31-5 represents a situation where a positive externality exists. In this case, curve 1 represents the marginal private cost curve, which shows the additional cost to the producer for each unit produced. Curve 2 represents the demand curve, which shows the willingness of consumers to pay for each unit consumed. Curve 3 represents the marginal social benefit curve, which takes into account the positive externality and shows the total benefit to society for each unit consumed. Q1 represents the market output, the quantity at which the marginal private cost equals the demand, but does not take into account the positive externality.

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42.

Cost of Eliminating: Firm A Firm B Firm C First unit of pollution $50 $120 $650 Second unit of pollution $70 $150 $750 Third unit of pollution $90 $400 $900 164. Refer to Exhibit 31-6. Currently, each of three firms emits three units of pollution into the air. If government sets a standard that no firm can emit more than one unit of pollution into the air, what is the cost of eliminating six units of pollution?
- $880
- $1,790
- $2,360
- $3,180
- None of the above
Correct Answer

A. $1,790

Explanation

Based on the given information, the cost of eliminating one unit of pollution for Firm A is $50, for Firm B is $120, and for Firm C is $650. To eliminate six units of pollution, we need to calculate the cost for each firm and sum them up. The cost for Firm A to eliminate six units of pollution is 6 x $50 = $300. The cost for Firm B is 6 x $120 = $720. The cost for Firm C is 6 x $650 = $3,900. Adding up these costs, we get $300 + $720 + $3,900 = $4,920. However, since the government sets a standard that no firm can emit more than one unit of pollution, the cost of eliminating six units of pollution would be the cost of eliminating three units for each firm. Therefore, the cost is $300 + $720 + $900 = $1,920. The correct answer is $1,790, which is the closest option to $1,920.

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43.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 100. Refer to Exhibit 31-3. The government issues four pollution permits to each firm. At a price of $900 per permit, how many permits would Firm C like to buy?
- 0
- 1
- 2
- 3
- 4
Correct Answer

A. 2

Explanation

Firm C would like to buy 2 permits because at a price of $900 per permit, the cost of eliminating the 1st and 2nd unit of pollution is $500 + $700 = $1200, which is less than the cost of eliminating the 3rd unit of pollution ($1000). Therefore, it is more cost-effective for Firm C to buy 2 permits and eliminate the 1st and 2nd unit of pollution rather than eliminate the 3rd unit of pollution.

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44.

110. When marginal private benefit is equal to marginal private cost,
- The activity in question generates no negative externality.
- All negative externalities have been internalized.
- All positive externalities have been internalized.
- All of the above
- A or b
Correct Answer

A. All positive externalities have been internalized.

Explanation

When marginal private benefit is equal to marginal private cost, it means that the additional benefit received by an individual from engaging in the activity is equal to the additional cost incurred by the individual. This indicates that the individual is fully capturing all the benefits and costs associated with the activity, without any external effects. In this case, it can be inferred that all positive externalities, which are the additional benefits enjoyed by others due to the individual's activity, have been internalized. Therefore, the correct answer is "all positive externalities have been internalized."

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45.

90. It is argued that the market will
- Not produce a nonexcludable public good.
- Produce the socially optimal output of a nonexcludable public good.
- Produce too much of a nonexcludable public good.
- Produce a nonexcludable public good if marginal social benefits are equal to marginal private benefits.
- B and d
Correct Answer

A. Not produce a nonexcludable public good.

Explanation

The correct answer is "not produce a nonexcludable public good." This is because a nonexcludable public good is a good that cannot be withheld from anyone, regardless of whether they pay for it or not. In a market setting, producers have the incentive to charge a price for their goods in order to make a profit. However, if a good is nonexcludable, it means that people can benefit from it without paying for it. Therefore, producers have no incentive to produce such goods in a market economy, as they cannot make a profit from them.

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46.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 97. Refer to Exhibit 31-3. Suppose that Firms A, B, and C are the only polluters in the state and that each emits 6 units of pollution into the atmosphere. What is the total cost to society of decreasing pollution to half its present level if the government decides to achieve this through the issuance of transferable pollution permits?
- $433.33
- $1,300.00
- $1,380.00
- $2,730.00
- $10,350.00
Correct Answer

A. $1,380.00

Explanation

The cost of eliminating pollution for each firm can be calculated by summing up the costs for each unit of pollution. For Firm A, the total cost of eliminating 6 units of pollution is $400 + $300 + $200 + $120 + $60 + $20 = $1,100. For Firm B, the total cost is $600 + $500 + $350 + $180 + $100 + $50 = $1,780. For Firm C, the total cost is $4,000 + $2,500 + $1,500 + $1,000 + $700 + $500 = $10,200. Therefore, the total cost to society of decreasing pollution to half its present level is $1,100 + $1,780 + $10,200 = $13,080. Since the government decides to achieve this through the issuance of transferable pollution permits, the total cost to society would be divided by 2, resulting in $13,080 / 2 = $6,540. However, the question asks for the cost to decrease pollution to half its present level, which means reducing it from 6 units to 3 units. So, the total cost would be $6,540 / 6 * 3 = $2,730. Therefore, the correct answer is $2,730.

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47.

17. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, then what is Q₁?
- It is the quantity of output at which marginal social costs (MSC) equal marginal private costs (MPC).
- It is the quantity of output at which MPC > MSC.
- It is the market output; it is the quantity of output that exists if the external costs associated with the negative externality are not taken into account.
- It is the socially optimal output; it is the quantity of output that exists if the external costs associated with the negative externality are taken into account.
- None of the above
Correct Answer

A. It is the market output; it is the quantity of output that exists if the external costs associated with the negative externality are not taken into account.

Explanation

Q1 represents the market output in a negative externality situation, where the external costs associated with the negative externality are not taken into account. This means that Q1 is the quantity of output that would exist in the market without considering the additional costs imposed on society due to the negative externality. In other words, it represents the quantity of output that is determined solely by private costs and benefits, without considering the broader social costs.

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48.

50. The Coase theorem states that
- Positive externalities are directly related to the weather-the better the weather, the more positive externalities.
- In the case of trivial or zero transaction costs, negative externalities are more likely to appear.
- When transaction costs are high, positive externalities will be minimized.
- In the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome.
Correct Answer

A. In the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome.

Explanation

The Coase theorem states that in situations where transaction costs are trivial or zero, the assignment of property rights does not affect the allocation of resources. This means that regardless of who has the property rights, the outcome will be the same. This is because, in the absence of transaction costs, parties can negotiate and reach efficient agreements to internalize externalities. Therefore, the assignment of property rights becomes irrelevant in determining the resource allocation outcome.

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49.

155. Refer to Exhibit 31-4. If a negative externality exists, then the market ____________output by the amount ________________.
- Overproduces; Q1
- Underproduces; Q2
- Overproduces; Q1 - Q2
- Underproduces; Q2 - Q1
Correct Answer

A. Overproduces; Q1 - Q2

Explanation

If a negative externality exists, it means that the cost to society is greater than the cost to the producer. In this case, the market will overproduce because the producer does not take into account the external costs. The difference between the socially optimal output (Q1) and the market output (Q2) represents the amount of overproduction. Therefore, the correct answer is "overproduces; Q1 - Q2".

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Econ Chapter 31

16. Refer to Exhibit 31-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?

Quiz Preview

36. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q1 to Q2 is the area of

3. A side effect of an action that adversely affects the well-being of others is called a

25. Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a

22. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the net social cost of expanding output from Q2 to Q1 is the area of

115. Insurance deductibles __________ the __________ problem of insurance coverage.

154. Refer to Exhibit 31-4. If a negative externality exists, then the external costs associated with the negative externality equal

44. If private property rights were established in the oceans, there would probably be

1. Market failure is a situation in which

21. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the social cost of expanding output from Q2 to Q1 is the area of

2. Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called

85. A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

153. Refer to Exhibit 31-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points __________, and the socially optimal output is __________.

156. Refer to Exhibit 31-4. If a negative externality exists then the socially optimal output is

157. Refer to Exhibit 31-5. If a positive externality exists, then curve __________ represents the marginal social benefit curve and the area __________ represents the market failure.

60. A good is a nonexcludable if

80. If a negative externality exists, __________ for the socially optimal output to be reached.

131. There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to Coase,

150. Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision. This is an example of

4. A negative externality is

145. If fewer cigarettes are consumed with symmetric information than asymmetric information, it follows that

10. A consequence of a negative externality is that social costs __________ private costs, and the socially optimal level of output __________.

105. Which of the following is definitely not a nonexcludable public good?

45. Which of the following is not a method to internalize or adjust for externalities?

125. If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.

34. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q1 to Q2 is the area of

40. Which of the following statements is false?

55. Which of the following statements is false?

163. Refer to Exhibit 31-5. If a positive externality exists then the socially optimal output is

15. If society is experiencing a net social cost from the production of a good, this implies that

70. Generally, negative externalities result in

135. If Jamal successfully and completely internalizes a negative externality, it follows that

152. Refer to Exhibit 31-4. If a negative externality exists, then curve __________ represents the marginal social cost curve and the area __________ represents the market failure.

5. Negative externalities that arise from the production of a good

18. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the triangle ABC is representative of

65. The government's provision of nonexcludable public goods such as national defense is accepted because

75. A negative externality exists when

159. Refer to Exhibit 31-5. If a positive externality exists, then curve 1 represents the __________, curve 2 represents the __________, curve 3 represents the __________ and Q1 represents the __________.

110. When marginal private benefit is equal to marginal private cost,

90. It is argued that the market will

17. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, then what is Q1?

50. The Coase theorem states that

155. Refer to Exhibit 31-4. If a negative externality exists, then the market ____________output by the amount ________________.

36. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q₁ to Q₂ is the area of

22. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the net social cost of expanding output from Q₂ to Q₁ is the area of

115. Insurance deductibles the problem of insurance coverage.

21. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the social cost of expanding output from Q₂ to Q₁ is the area of

85. A subsidy may be used as a corrective device in the case of a positive externality because it will marginal private benefits and demand.

153. Refer to Exhibit 31-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points , and the socially optimal output is .

157. Refer to Exhibit 31-5. If a positive externality exists, then curve represents the marginal social benefit curve and the area represents the market failure.

10. A consequence of a negative externality is that social costs private costs, and the socially optimal level of output .

125. If a negative externality exists, then there is a when society produces the market output instead of the socially optimal output. This exists because the to sellers and third parties are the derived by buyers.

34. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q₁ to Q₂ is the area of

152. Refer to Exhibit 31-4. If a negative externality exists, then curve represents the marginal social cost curve and the area represents the market failure.

159. Refer to Exhibit 31-5. If a positive externality exists, then curve 1 represents the , curve 2 represents the , curve 3 represents the and Q₁ represents the .

17. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, then what is Q₁?

155. Refer to Exhibit 31-4. If a negative externality exists, then the market output by the amount ____.