ECON 232 – Which of the following statements is TRUE

Name: __________________________ Date: _____________1. Which of the following statements is TRUE?I. If an activity creates an external cost of $15, the government should subsidize theactivity by $15.II. Social surplus is maximized when the private marginal benefit equals the social cost.III. External costs result in markets producing too much output.IV. Someone pays external costs other than the producer or consumer.A) I and III onlyB) II, III, and IV onlyC) III onlyD) II and IV onlyUse the following to answer question 2:Figure: Market for Bathroom Cleaner2. (Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a marketfor cans of a bathroom cleaner that causes environmental damage, imposing costs onpeople other than the consumers and producers of the cleaner. If consumers were taxedsuch that they only purchased the efficient quantity of the product, how muchdeadweight loss would be removed from this market?A) $90B) $180C) $45D) $255Page 13. Figure: External Cost 2Refer to the figure. What is the deadweight loss in this figure at the market equilibrium?A) $25.00B) $4.00C) $8.33D) $11.254. In the case of an external cost, marginal private cost:A) is equal to marginal social cost for all quantity levels.B) is less than marginal social cost for all quantity levels.C) is greater than marginal social cost for all quantity levels.D) and marginal social cost cannot be compared at any quantity.Page 2Use the following to answer questions 5-6:Figure: Market for Vaccines5. (Figure: Market for Vaccines) Refer to the figure. The figure represents the market forvaccines with external benefits. The external ________ of vaccination is ________.A) cost; $15B) cost; $10C) benefit; $20D) benefit; $56. (Figure: Market for Vaccines) Refer to the figure. The figure represents the market forvaccines with external benefits. The market’s outcome generates a(n):A) deadweight loss of approximately $750.B) shortage of 1,800 vaccines.C) equilibrium price of $20.D) All of the answers are correct.Page 3Use the following to answer question 7:Figure: ABC Company7. (Figure: ABC Company) Refer to the figure. The figure depicts the market for a watercleaner for home aquariums. After use it gets washed down drains and enters intostreams where it improves the mineral content of the water and thus leads to better waterquality and better fish growth. If the users of the cleaner were given a subsidy tocompensate them for the benefit they are creating for the ecological system, how muchdeadweight loss is removed from this market?A) $2,400B) $3,000C) $3,600D) $1,200Use the following to answer question 8:Figure: SoftellaPage 48. (Figure: Softella) Refer to the figure. The figure shows a market for medicated tissues.Assume that the only use for these tissues is to wipe and clean one’s hands thuspreventing germs from spreading to other people. If the government were to subsidizethe users of these tissues, what is the dollar amount of deadweight loss that would beremoved from this market?A) $1,600B) $2,800C) $5,600D) $8009. A plague called The Black Death swept Medieval Europe. At the time, people believedcats spread the plague (cats were associated with the Devil) and started killing them toprevent the spread of disease. In reality, rats spread the plague and the slaughter of theirnatural predators only hastened the disease’s proliferation. With this in mind, a marketfor cats would have had a ______ externality because the cats ______.A) positive; prevented rats from eating their owners’ grainB) positive; killed rats regardless of who those rats would infectC) negative; spread disease to everyone regardless of who owned themD) negative; made everyone sicker through their association with the Devil10. Which would be the MOST likely place to find an internalized externality? (Keeptransaction costs in mind.)A) a factory polluting the air surrounding a large suburbB) a wind farm slightly disturbing the mountain view of a nearby cityC) a paper mill polluting a stream that only flows into a single farmD) roadwork operating on a major highway, but only operating at night11. Your neighbor has a tree that blocks your view of a distant hill. Your neighbor valuesthe tree at $100. You value the tree’s removal at $150. Tree removal costs $60. In thiscase, property rights are clear. Your neighbor owns the airspace extending above hishouse for some distance. Transaction costs in this case:A) would allow for a private solution to the external cost.B) would prohibit a private solution to the external cost.C) would be equal to zero.D) are unknown.Page 512. If you are a government official, under which of the following situations would you optfor a command and control solution to an externality problem?I. Lack of running water in part of the country is exacerbating the spread of cholera inthe population.II. Foreign ships are dumping toxic wastes in the waters off your country’s shores.III. A large number of banks fail due to excessive risk taking.A) I onlyB) I and II onlyC) II and III onlyD) I, II, and III13. Which best creates incentives to reduce the pollution generated by washing machines?A) regulating the capacity of washing machinesB) requiring appropriate filtering mechanisms on washing machinesC) taxing the pollutants directly caused by washing machinesD) allowing the Coase theorem to effectively reach an efficient market equilibrium14. Which of the following statements is TRUE?I. Taxes may reduce consumption by exactly the same amount as governmentregulations.II. Taxes typically cost more than government regulations because taxes raise priceswhereas regulations simply limit quantity.III. Command and control policies effectively reduce consumption, but they may not bethe lowest cost method for doing so.A) I and II onlyB) I and III onlyC) II onlyD) II and III only15. A number of cities and states have banned smoking in bars because of secondhandsmoke. In cities without the ban, the bar owner decides whether smoking is permitted. Ifsmokers have a greater willingness to pay to smoke than nonsmokers have to avoidsmoke, then bar owners will ______ smoking, which is an ______ outcome.A) ban; efficientB) ban; inefficientC) permit; efficientD) permit; inefficientPage 616. Table: Costs of Reducing Sulfur DioxideIndustryIndustry XIndustry YSulfur Dioxide Emissions (tons)2020Cost of Reducing 1 Ton of Sulfur Dioxide$300$400Refer to the table. Which statement is FALSE?A) Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry Xemits zero tons.B) Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301.C) If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1ton, the cost of reducing pollution rises by $100.D) Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid itat least $1,500.17. Assume an EPA official observes the following situation in a small town on the banksof a river. The town depends heavily on fish for its food and is heavily dependent oncoal for its power. A coal factory on the banks of the river empties pollutants into theriver causing health problems among the residents and the fish to develop toxic residuesin their livers and other organs. Which of the following solutions should the EPAchoose to mitigate this negative externality problem (at least in the short run)?I. levy taxes on the coal factory’s production of pollutantsII. levy taxes on the consumers’ consumption of fishIII. create a market for tradable allowancesIV. subsidize firms that produce clean fishA) I and III onlyB) II and IV onlyC) III and IV onlyD) I, III, and IV onlyPage 7Use the following to answer question 18:Figure: Palm Oil18. (Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropicalrainforests to grow the plants that excrete the oil. With this externality, what is thedeadweight loss (if any) of producing palm oil?A) $100,000,000B) $200,000,000C) $400,000,000D) There is no deadweight loss.19. Which statement explains the difference between command and control policies andtradable allowances?A) Command and control policies are a government solution to externalities, whereastradable allowances are a type of private market solution.B) Tradable allowances allow for less flexibility than command and control policies.C) Command and control policies require all firms to reduce pollutants by a specificquantity, whereas tradable allowances allow some firms to pollute more than othersby trading for pollution rights.D) Tradable allowances sometimes result in higher overall levels of pollutants becausefirms can simply purchase the rights to pollute more, whereas the quantity ofpollution is fixed under command and control.Page 820. Private solutions to externalities are MOST likely to occur when there are:A) well-defined property rights and low transaction costs.B) communal property rights and large numbers of sellers.C) private property rights and high transaction costs.D) communal property rights and large numbers of buyers and sellers with equalbargaining power.21. Market solutions to externality problems are more likely to occur when:A) the costs of reaching an agreement are low and property rights are well defined.B) the transaction costs are low and property rights are nonexistent.C) transaction costs are high and property rights are well defined.D) the costs of reaching an agreement are high and property rights are nonexistent.22. Fewer people get flu shots than is efficient because:A) people usually perceive that the private cost of getting flu shots is higher than theirprivate benefit.B) people usually perceive that the private benefit of getting flu shots is higher thantheir private cost.C) the cost of producing flu shots is too high in relation to profits.D) there are always more people getting flu shots than the amount of flu shotsavailable.23. Rank economists’ LEAST favorite to MOST favorite method of reducing electricityconsumption.A) tax on electricity, command and control, tax on the pollutants generated fromelectricity productionB) command and control, tax on electricity, tax on the pollutants generated fromelectricity productionC) tax on electricity, tax on the pollutants generated from electricity production,command and controlD) tax on the pollutants generated from electricity production, command and control,tax on electricity24. In a market with external costs, the market price is:A) higher than the efficient price.B) lower than the efficient price.C) equal to the efficient price.D) regulated by the government.Page 925. Transaction costs:A) are incurred in the production process due to externalities.B) are eliminated when the government intervenes in a market with externalities.C) can keep private parties from solving externality problems.D) increase when taxes are imposed to correct negative externalities.Use the following to answer question 26:Table: Costs of AntibioticsQuantity of Marginal BenefitAntibioticsto Buyers1$252$203$154$105$5Marginal Costto Sellers$5$10$15$20$25ExternalCost$10$10$10$10$10Marginal SocialCost?????26. (Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is________ and the efficient equilibrium quantity is ________.A) 5; 1B) 3; 4C) 3; 2D) 2; 527. To ensure an efficient equilibrium outcome when external costs are present in themarket, the government could:I.implement a tax equal to the level of the external cost.II. create a system of tradable allowances to reduce output to the efficient quantity.III. institute command and control policies to reduce output to the efficient quantity.A) I and II onlyB) II and III onlyC) II onlyD) I, II, and IIIPage 10Use the following to answer question 28:Table: Costs of AntibioticsQuantity of Marginal BenefitAntibioticsto Buyers1$252$203$154$105$5Marginal Costto Sellers$5$10$15$20$25ExternalCost$10$10$10$10$10Marginal SocialCost?????28. (Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market couldbe eliminated if the government:A) outlawed the production of the good.B) added a $10 tax per unit.C) equated marginal benefit with external cost.D) subsidized consumption by $5 per unit.29. Which of the following statements are TRUE?I. Market prices do not correctly signal the true costs and benefits to society whenexternal costs are present.II. Market prices do not correctly signal the true costs and benefits to society whenexternal benefits are present.III. Taxes and subsidies can adjust prices so that they do send the correct signals.A) I and III onlyB) II and III onlyC) I onlyD) I, II, and III30. What is the importance of the Clean Air Act of 1990?A) Under this act, the EPA distributes pollution allowances to electricity producers.B) Under this act, the EPA sets the maximum amount of pollution that each firm mayemit.C) The act lists the pollutants that are deemed harmful to the environment.D) The act delineates which firms are allowed to emit more than 1 ton of sulfurdioxide.Page 1131. Suppose the government limits the amount of pollution from cars by capping theamount of pollution they can emit to 30 pounds of carbon dioxide per car per year. IfAlex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler waswilling to sell a pound of his allowance for $30, would it be efficient for them to makethis trade?A) No, it would raise the cost of pollution abatement.B) Yes, it would lower the cost of pollution abatement.C) It is impossible to say whether this would or would not be an efficient trade.D) There is no incentive for Alex and Tyler to trade.32. Private markets fail to reach a socially optimal equilibrium when external benefits arepresent because the:A) social value exceeds the private value at the private market solution.B) private cost exceeds the social benefit at the private market solution.C) private benefit equals the social benefit at the private market solution.D) None of the answers is correct. Private markets DO achieve a socially optimalequilibrium when external benefits are present.33. The Centers for Disease Control and Prevention (CDC) wants at least 90% of thepopulation vaccinated against preventable diseases, since the chance of a diseaseoutbreak decreases as vaccine coverage increases. We can conclude that:A) the external benefits of vaccination likely decrease as more and more people arevaccinated.B) the private benefits of vaccination increase with vaccine coverage.C) vaccines create a negative externality once the vaccine covers 90% of thepopulation.D) vaccines create a positive externality once the vaccine covers 90% of thepopulation.34. When external benefits are significant:A) market output is too low.B) market output is too high.C) market output is at the efficient level.D) social surplus is maximized.Page 1235. Suppose there will be global catastrophe unless we hold total carbon dioxide emissionsat or below 35 million tons per year. As a result, each person on Earth is allocated 10pounds of untradable emissions permits per year. Why would this be an inefficientsolution?A) Flexibility is not desirable.B) Transaction costs are very high.C) Everybody has the same cost of emissions abatement.D) Different people have different costs of emissions abatement.36. When the number of tradable allowances is set equal to the efficient market quantity:A) it is equivalent to a tax set equal to the level of the external cost.B) the outcome will be more efficient than a tax on pollution.C) it is equivalent to a government regulation set equal to the efficient marketquantity.D) the price of the allowances will equal the social cost of pollution.37. The Coase theorem posits that externality problems can be solved without governmentintervention:A) when transaction costs are low and property rights are clearly defined.B) when trading in tradable allowances occurs.C) if markets can reach the efficient quantity and if transaction costs exceed thedeadweight loss caused in the market.D) only rarely, that in general, markets cannot maximize social surplus.38. Products that create external benefits are:A) overconsumed because the private benefits exceed the private costs.B) underconsumed because consumers only consider the private benefits ofconsumption.C) neither overconsumed nor underconsumed because the marginal benefits equal themarginal costs.D) underconsumed because the social costs exceed the social benefits.Page 13Use the following to answer question 39:Figure: Market for Bathroom Cleaner39. (Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a marketfor cans of a bathroom cleaner that causes environmental damage, imposing costs onpeople other than the consumers and producers of the cleaner. What is the efficientquantity in this market?A) 100B) 85C) 15D) 9Use the following to answer question 40:Figure: Dishwashing DetergentPage 1440. (Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent containsphosphates that harm marine life. In this figure, the market equilibrium quantity is______ units, and the efficient quantity is ______.A) 6; 9B) 12; 6C) 9; 6D) 12; 9