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69

much more a player than a neutral umpire. WARM-UP QUESTIONS FOR SECTION IX

A. Which of the following is incorrect? (a) with public goods consumption by one person does not diminish the potential consumption by others

(b) public goods have problems with private market financing because people will be tempted to let others do the paying (c) if provided by the market, public goods tend to be underprovided (d) there is a free-rider problem with public goods because the impossibility of excluding people from consumpdon (e) a public good is any good provided by the government.

B. Manganese nodules are very rich sources of minerals lying on ocean floors. Outside territorial waters, the overly rapid depletion of these resources may result from: (a) the fact that manganese nodides are public goods (b) the absence of property rights over manganese nodules (c) the constant tendency of humans to over-exploit natural resources (d) the fact that manganese nodules are a common property resource (e) both (b) and (d).

C. In which of the following cases is the marginal benefit to society clearly different from that of the individual consumer of a commodity? (a) when Joe receives a rabies shot (b) when Rob eats an apple

(c) when Mike reads a book (d) when Paul drinks a glass of vnne (e) when Art watches a play at the theatre.

D. Which of the following indicates the presence of negative externalities in producdon? (a) marginal social benefit exceeds marginal private benefit (b) marginal social benefit is less than marginal private benefit (c) marginal social cost equals marginal private cost (d) marginal social cost is greater than marginal private cost (e) marginal private cost equals marginal private benefit.

E. One way of making firms take all re]e\ant social costs into account when making decisions is to: (a) impose an excise tax on the commodity equal to marginal social cost (b) impose an excise tax on the commodity equal to marginal private cost (c) impose an excise tax on the commodity equal to marginal external cost (d) offer a subsidy to firms producing pollution control equipment (e) none of the above.

F. The essential characteristic of a public good is that: (a) the good is over-supplied by the private market (b) if one person consumes the good, so do other people (c) the marginal social cost of consumption is high (d) the marginal social cost of consumption is low (e) such goods are only produced by the governmenL

G. If we subtract the marginal private cost from the marginal social cost, we will get back the dollar value of the: (a) marginal external cost (b) marginal private benefit (c) marginal external benefit (d) marginal social benefit (e) none of the above.

H. Which of the following conditions are necessary for the Coase theorem to apply? (a) no transactions costs (b) ownership of property rights clearly defined (c) tradeable property rights (d) all of the above (e) none of the above.

I. If all of the above conditions are met, then according to the Coase theorem: (a) resource allocation will automatically be optimal (b) one person cannot be made better off without making anyone else worse off (c) an efficient allocation of resources will ensure (d) the government need not intervene to control externalities (e) all of the above.

J. The equilibrium of a compeutive industry which emits a great deal of uncontrolled pollution will be characterized by: (a) a marginal social cost of production higher than the marginal private cost (b) negative externalities (c) excessive production of the final product (d) less welfare than under properly controlled conditions (e) all of the above.

K. The term, internalizing the externalities, means: (a) a laissez-faire approach to pollution (b) reducing pollution (c) changing incentives so that private decisions reflect the full costs and benefits to society (d) minimizing the social cost of production (e) stopping pollution once and for all.

L. If we subtract the marginal private cost from the marginal social cost, we will get back the marginal : (a) social benefit (b) private cost (c) private benefit (d) external cost (e) all of the above.



QUESTIONS FOR SECTION IX

1. Economic efficienc) requires a level of output such that: (a) marginal social benefit equals marginal private benefit (b) marginal social cost equals marginal private cost (c) marginal social cost equals marginal social benefit (d) marginal social cost equals marginal private benefit (e) marginal private cost equals marginal social benefit.

2- Which of the following represents a case in which marginal social cost exceeds marginal private cost? (a) a person with a communicable disease handles food in a restaurant (b) I landscape my property and this delights the neighbors (c) 1 drop beer cans on the floor in prirate (d) we engage in a business transaction that nobody else cares about (e) I pay the neighboring property owners for the permission to use my land for the disposal of toxic waste.

3. Each time a barrel of oil is refined at Smellyoil Inc., 2i worth of damage is done to neighboring crops and worth of damage to auto paint jobs. If these are the only external costs, economists would recommend:

(a) that the refinery be shut down (b) that the refinery continue to operate if the oil is really needed (c) that a tax of 3 per barrel be imposed, but only if the company does not go bankrupt (d) that a subsidy of be imposed (e) that a tax of per barrel be imposed regardless of whether the firm goes bankrupt.

4. Someone used to plant strawberries for community use in front of Leopolds Record Store in Isla \ta. Despite a sign asking that the berries be allowed to ripen, they were always picked prematurely. This happened because: (a) the t)erries are a public good

(b) there were externalities in the provision of berries

(c) social costs exceeded social benefits (d) the berries were a common property resource (e) social costs exceeded private costs.

5. Which of the following is inconsistent with economic efficiency? (a) the cat eats caviar while poor people starve (b) the neighbors offer to pay some of the costs of having the house painted (c) production where marginal social benefits equal marginal social costs (d) a subsidy to a competitive industry with negligible externalities (e) restrictions on the catching of fish.

6. In which of the following situations might a monopoly produce a more socially desirable level of

output than a perfectly competitive industry? (a) when marginal social benefits exceed marginal private benefits (b) when marginal social costs are less than marginal private costs (c) when marginal social costs are greater than marginal private costs (d) all of the above (e) none of them.

7. If several firms are drilling the same pool of oil competitively, we would expect: (a) a socially optimal depletion of oil reserves (b) excessive depletion of reserves because the oil is a common property resource (c) an excesshe depletion of reserves because marginal social benefits exceed marginal private benefits (d) an excessive depletion of reserves because oil is a public good (e) none of the above.

8. Negative externalities are most likely to exist when: (a) property rights are vvell defined (b) class action lawsuits encourage free-riding by people who benefit from the litigation but who dont pay any of the costs (c) private costs exceed social costs (d) social costs exceed private costs (e) marginal social benefits exceed private ones.

9. Assume that smelting steel is a filthy but compedtive industry. At present 1,000,000 tons are smelted per day at a constant external cost per ton of $2. If the optimal output is 800,000 tons, the net welfare loss from excessive output is then about: (a) $400,000 (b) $1,500,000 (c) $2,000,000 (d) $200,000 (e) none of die above.

10. Industrial research and development often generates accidental discoveries which are commercially valuable to other firms (spinoffs). In this case we would expect: (a) market provision of research and development to be optimal (b) market provision of research and development to be less than optimal (c) market prorision of research and development to be greater than optimal (d) government vvould do all research (e) both (b) and (d).

11. The patent system may serve to produce a socially optimal amount of technical innovation because othervrise: (a) the marginal social benefit from inventions would be less than the marginal private benefit (b) the supply of inventions would be inelastic (c) the benefits of invention capturable by the inventor would be insufficient to justify sirfficient investment (d) the supply of inventors would be inelzistic (e) all inventiveness would stop.



12. The neighbors were particularly happy that I had recendy painted my house. This indicates that:

(a) the marginal social cost of painting my house is less than the marginal private cost (b) the marginal social cost of paindng my house is greater than the marginal private cost (c) the marginal social benefit of my newly painted house is less than the marginal benefit to myself (d) the marginal social benefit of my newly painted house exceeds the marginal private benefit (e) the marginal social udlity equals marginal private udlity.

13. An economy of 50 million people has a government defense budget of $10 billion ($200 per capita). Alternauvely, each person could be given $200 for defense against hosdle powers. This woidd be economically inefficient due to: (a) the non-exclud-ability or free-rider problem of the public good

(b) economies of scale in the provision of defense

(c) a lack of real interest in defense (d) opposition by the defense establishment (e) both (a) and (b).

14. In which of the following situations would we be uncertain whether output is too large or small? (a) a monopolist produces a good with no external costs or benefits (b) a competitive industry produces a good with neither external costs nor benefits (c) a monopolist produces a good with both external costs and benefits (d) a competidve industry receives a subsidy to produce a good with external costs (e) a subsidized competitive industry produces a good with no external costs or benefits.

15. Elxternal costs are: (a) another name for social costs (b) those costs borne by persons not directly engaged in economic transactions (c) part of a firms cost of production (d) found in all firms of an industry (e) borne solely by the producer of an item.

16. In which of the following situations are social costs and private costs equal? (a) the effluent from my factory destroys a nearby wildlife preserve (b) lead fishing weights poison the swans on the Thames river (c) I drop cigarette stubs on the floor in the privac) of my own bedroom (d) construction of a new building interferes with traffic flows in the vicinity (e) none ofthese.

17. The basic reason why zero pollution is considered to be sub-optimal is: (a) no human being deserves clean air purely as a birth right (b) if pollution were zero, the MC of pollution abatement would

not be the same for all firms (c) it is only fair that both environmentalists and businessmen compromise (d) the dollar value society places on having the very last particle of pollution removed is less than the cost of removing it (e) all of these.

18. Which of the following is correct? (a) if pollution is an inevitable by-product of refineries, a monopolized oil industry may be more efficient than a competitive one (b) competitive industries automatically provide the optimal amount of pollution (c) public goods are all those produced by the government (d) government intervention in the case of market failure can be relied upon to improve the situation (e) externalities would not exist in a centrally planned economy.

19. A planned high rise buildhig threatens to destroy the view from an existing one on the adjacent lot. The building owners offer to make a substantial payment to the developers Lf they will build elsewhere, but it is refused as too small. This suggests that: (a) social benefits of the new building exceed private benefits (b) social costs of the new building exceed social benefits (c) the building should be built (d) private costs are greater than private benefits (e) no externalities exisL

20. According to the Wall Street Jour nal. Ford purchases its competitors cars and disassembles them looking for ideas to incorporate into its own designs. This fact suggests that at equilibrium: (a) social costs of automobile research by GM exceeds social benefits (b) marginal social benefit in automobile innoradon exceeds marginal private and social cost (c) Fords competitors undertake design research up to the point at which marginal social costs equal marginal social benefits (d) automotive design research is over-produced (e) marginal social cost and marginal social benefits are equal in design research.

21. Externalities in production are present when: (a) "A" consumes "Bs" production (b) "As" production is sold to "B" (c) "A" pays "B" for die right to recycle (d) "B" gains what "A" loses (e) none of the above.

22. Production in a polluting but competitive industry has been restricted to the optimal amount by a pollution tax. The price ofthe final product is $6. If the MC to the firm of producing the last unit is $5 exclusive of the tax, then: (a) the environmental



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