Question 1

For society as a whole, the optimal amount of pollution control exists when:

Accepted Answer

A)  ​the marginal cost of pollution reduction is equal to the marginal benefit of the pollution reduction.
B)  ​firms are allowed to produce as much pollution as necessary to make the goods people want.
C)  ​the marginal costs of pollution clean up exceed the benefits.
D)  ​no pollution is permitted at all.E) A) and B)
F) B) and D)

Question 2

If quality-detection costs are very low,

Accepted Answer

A)  ​lower quality products will tend to be outcompeted in the market, and the average quality will rise.
B)  ​lower quality products will tend to be outcompeted in the market, but the average quality will fall.
C)  ​higher quality products will tend to be outcompeted in the market, and the average quality will rise.
D)  ​higher quality products will tend to be outcompeted in the market, and the average quality will fall.E) A) and B)
F) B) and C)

Question 3

The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Accepted Answer

A) True 
 B)False

Question 4

The efficient level of pollution is greater

Accepted Answer

A)  ​The higher the marginal social benefit of abatement function and the higher the marginal social benefit of abatement function.
B)  ​The higher the marginal social benefit of abatement function and the lower the marginal social benefit of abatement function.
C)  ​The lower the marginal social benefit of abatement function and the higher the marginal social benefit of abatement function.
D)  ​The lower the marginal social benefit of abatement function and the lower the marginal social benefit of abatement function.E) All of the above
F) B) and D)

Question 5

An individual insured against a particular cost,

Accepted Answer

A)  ​has reduced incentives to take precautions against those costs.
B)  ​may take on additional risk because he/she is insured.
C)  ​faces incentives that can result in higher insurance rates.
D)  ​All of the above are true.E) A) and D)
F) None of the above

Question 6

The optimal level of pollution is achieved when:

Accepted Answer

A)  ​the marginal social benefit from decreased pollution is equal to the marginal social cost of reducing pollution.
B)  ​the level of pollution reaches zero.
C)  ​pollution abatement exceeds the pollution level.
D)  ​benefits from further pollution abatement are zero.E) A) and B)
F) A) and C)

Question 7

Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Accepted Answer

A)  ​too high; too high.
B)  ​too high; too low.
C)  ​too low; too high.
D)  ​too low, too low.E) C) and D)
F) All of the above

Question 8

If the production of a good creates large spillover benefits on others, the government might correct for the:

Accepted Answer

A)  ​overallocation of resources to its production by subsidizing it.
B)  ​overallocation of resources to its production by imposing a tax on it.
C)  ​underallocation of resources to its production by subsidizing it.
D)  ​underallocation of resources to its production by imposing a tax on it.E) C) and D)
F) A) and C)

Question 9

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Accepted Answer

A) True 
 B)False

Question 10

The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of:

Accepted Answer

A)  ​the moral hazard problem.
B)  ​the free rider problem.
C)  ​the adverse selection problem.
D)  ​the "lemon" problem.E) B) and C)
F) A) and D)

Question 11

Which of the following may involve external benefits?

Accepted Answer

A)  ​drunken driving.
B)  ​smoking.
C)  ​public education.
D)  ​highway congestion.E) All of the above
F) C) and D)

Question 12

Assume that production of a good generates external benefits for others. The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Accepted Answer

A)  ​too high; too high.
B)  ​too high; too low.
C)  ​too low; too high.
D)  ​too low, too low.E) A) and C)
F) All of the above

Question 13

If education produces positive externalities and the government does not intervene in the market, we would expect

Accepted Answer

A)  ​the market equilibrium price to be higher than the efficient equilibrium price.
B)  ​the market equilibrium quantity to be lower than the efficient equilibrium output level.
C)  ​the market equilibrium quantity to be higher than the efficient equilibrium output level.
D)  ​none of the aboveE) B) and C)
F) A) and D)

Question 14

When your neighbor's dog barks all night long, this is an example of a negative externality.

Accepted Answer

A) True 
 B)False

Question 15

The total social costs of production are:

Accepted Answer

A)  ​private costs plus private benefits.
B)  ​private benefits minus private costs.
C)  ​private costs plus external costs.
D)  ​private costs minus external costs.E) A) and B)
F) All of the above

Question 16

Technology spillovers:

Accepted Answer

A)  ​Are caused by patents.
B)  ​Can lead to clustering of technology firms near one another.
C)  ​Are examples of negative externalities.
D)  ​All of the above are true.E) C) and D)
F) All of the above

Question 17

A tradable emissions permit program is efficient because the cap protects the environment while:

Accepted Answer

A)  ​generating substantial revenues for the government.
B)  ​keeping compliance and administration costs relatively low.
C)  ​while requiring the same response by each polluter.
D)  ​none of aboveE) None of the above
F) A) and D)

Question 18

Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes the decision are called ____ costs.

Accepted Answer

A)  ​negative; positive
B)  ​social; private
C)  ​private; social
D)  ​positive; negativeE) All of the above
F) A) and B)

Question 19

Factory A can reduce emissions at a cost of $400 per ton. Factory B can reduce emissions at a cost of $100 per ton. In a system in which the government issues transferable pollution right at a price of $200 per ton:

Accepted Answer

A)  ​Factory A can profit from selling its pollution rights to Factory B.
B)  ​Neither firm can profit from selling its pollution rights to the other.
C)  ​Factory B can profit from selling its pollution rights to Factory A.
D)  ​Both firms have an incentive to sell pollution rights.E) A) and D)
F) A) and C)

Question 20

Which of the following is a valid reason for the government rather than the market to finance the provision of certain economic goods and services?

Accepted Answer

A)  ​When the government provides economic goods, they are free; costs are incurred when such goods are provided by private firms.
B)  ​Voters tend to be better informed than market consumers are.
C)  ​Decision makers in the market sector are motivated by self-interest, whereas political decision makers are primarily motivated by altruism (the desire to help others) .
D)  ​Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers; the government can use taxes to overcome this problem of nonpayment.E) A) and B)
F) All of the above

Exam 8: Market Failure

If the production of a good creates large spillover benefits on others, the government might correct for the:

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A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

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The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Correct AnswerverifiedShow Answer

If education produces positive externalities and the government does not intervene in the market, we would expect

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The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of:

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An individual insured against a particular cost,

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Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

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Technology spillovers:

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For society as a whole, the optimal amount of pollution control exists when:

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Which of the following may involve external benefits?

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Which of the following is a valid reason for the government rather than the market to finance the provision of certain economic goods and services?

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Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes the decision are called ____ costs.

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The total social costs of production are:

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The efficient level of pollution is greater

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When your neighbor's dog barks all night long, this is an example of a negative externality.

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A tradable emissions permit program is efficient because the cap protects the environment while:

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The optimal level of pollution is achieved when:

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Assume that production of a good generates external benefits for others. The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

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Factory A can reduce emissions at a cost of $400 per ton. Factory B can reduce emissions at a cost of $100 per ton. In a system in which the government issues transferable pollution right at a price of $200 per ton:

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If quality-detection costs are very low,

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Assume that production of a good imposes external costs on others. The equilibrium price will be and the equilibrium quantity for efficient resource allocation.

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Costs that accrue to the total population are called costs. Costs incurred by the producer or consumer who makes the decision are called costs.

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Assume that production of a good generates external benefits for others. The equilibrium price of the good will be and the equilibrium quantity for efficient resource allocation.

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