1) An externality isA) a benefit realized by the purchaser of a good or serviceB) a cost paid for by the producer of a good or serviceC) a benefit or cost experienced by someone who is not a producer or consumer of a good orserviceD) anything that is external or not relevant to the production of a good or serviceFigure 1 2) Refer to Figure 1 The efficient output level isA) QmB) QnC) QoD) Qo – Qm3) Refer to Figure 1 The private profit-maximizing output level isA) QmB) QnC) QoD) Qo – Qm4) Refer to Figure 1 The size of marginal external benefits can be determined byA) the demand curve D2B) D2 + D1 at each output levelC) D2 – D1 at each output levelD) the demand curve D11 5) Refer to Figure 1 In the absence of any government intervention, the private marketA) underproduces by Qo – Qm unitsB) overproduces by Qo – Qm unitsC) overproduces by Qn – Qm unitsD) underproduces by Qn – Qm units6) Refer to Figure 1 The deadweight loss due to the externality is represented by the areaA) msoB) msnC) nsoD) mtn7) The Coase theorem states thatA) government intervention is always needed if externalities are presentB) assigning property rights is the only thing the government should do in a market economyC) if transactions costs are low, private bargaining will result in an efficient solution to the problemof externalitiesD) a free-market equilibrium is the best solution to address externalitiesFigure 2 Companies producing toilet paper bleach the paper to make it white The bleach is discharged intorivers and lakes and causes substantial environmental damage Figure 2 illustrates the situation inthe toilet paper market8) Refer to Figure 2 The efficient output isA) Q1B) Q2C) Q3D) Q42 9) Refer to Figure 2 The private profit-maximizing output level isA) Q1B) Q2C) Q3D) Q410) Refer to Figure 2 An efficient way to get the firm to produce the socially optimal output levelisA) for government to set a quota on the quantity of toilet paper that the toilet paper industry canproduceB) to impose a tax to make the industry bear the external costs it createsC) to grant a subsidy to enable the industry to internalize the external costs of productionD) to assign property rights to the firms in the industry11) Refer to Figure 2 Suppose the government wants to use a Pigovian tax to bring about theefficient level of production What should the value of the tax be?A) (P2- P1) per unit of outputB) (P2- P0) per unit of outputC) (P1- P0) per unit of outputD) P1 per unit of output12) Refer to Figure 2 Let’s suppose the government imposes a tax of $50 per unit of toilet paperto bring about the efficient level of production What happens to the market price of toilet paper?A) It rises by $50 per unitB) It rises by more than $50 per unitC) It rises by less than $50 per unitD) It remains the same because the tax is imposed on producers who create the externalityFigure 3 Consider a chemical plant that discharges toxic fumes over a nearby community To reduce theemissions of toxic fumes the firm can install pollution abatement devices Figure 3 shows themarginal benefit and the marginal cost from reducing the toxic fumes emissions3 13) Refer to Figure 3 What is the economically efficient level of pollution reduction?A) 125 million tonsB) 9 million tonsC) 8 million tonsD) 0 tons14) Refer to Figure 3 Suppose the emissions reduction target is currently established at 8 milliontons What is the area that represents the cost of eliminating an additional 1 million tons?A) AB) B + CC) A + BD) A + B + C15) Refer to Figure 3 Suppose the emissions reduction target is currently established at 8 milliontons Should society undertake to reduce an additional 1 million tons so that the total reduction is 9million tons?A) No, because there is a net cost represented by the area B + CB) Yes, because the marginal benefit exceeds the marginal cost at 8 million tonsC) Yes, because toxic fumes are dangerous and must be eliminated at any costD) No, because the firms will pass the additional cost on to consumers16) A private good isA) rivalrous and nonexcludableB) nonrivalrous and nonexcludableC) rivalrous and excludableD) nonrivalrous and excludable17) A public good isA) rivalrous and excludableB) nonrivalrous and nonexcludableC) nonrivalrous and excludableD) rivalrous and nonexcludable18) "Free riding" is a characteristic of which type of good?A) a private goodB) a common resourceC) a public goodD) a good that is both rival and excludable 4 Figure 4 Amit and Bree are the only two homeowners on an isolated private road Both agree that installingstreet lights along the road would be beneficial and want to do so Figure 4 shows their willingnessto pay for different quantities of street lights, the market demand for street lights, and the marginalcost of installing the street lights19) Refer to Figure 4 What is the optimal quantity of street lights to install?A) 3B) 4C) 6D) 920) Refer to Figure 4 Suppose Amit and Bree know each other’s preferences so that it is notpossible for one to deceive the other Which of the following statements best describes thecircumstances under which the optimal quantity of street lights could be achieved?A) The optimal quantity will be installed only if Amit pays for the entire installation costB) Because there are only two consumers, it is likely that private bargaining will result in theoptimal quantity being installedC) The optimal quantity will be installed only if the two parties split the cost of installation equallyD) The optimal quantity will be installed only if Bree pays for the entire installation cost 5
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