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Choose the one alternative that best completes the statement or answers the question. 1) Externalities A) cannot be expressed in dollar amounts. B) always make society better off. C) are always part of private costs or private benefits. D) always create extra social costs. E) can be either benefits or costs. Answer: E Topic: Externalities Skill: Level 2: Using definitions 1) 2) An example of a good with an external cost includes A) Jess smoking near her non-smoking roommate.

B) electricity generation that produces carbon dioxide emissions that contribute toward global warming. C) All of these are examples of mixed goods with external costs. D) noise pollution from aircraft. E) logging that destroys wildlife habitat. Answer: C Topic: Externalities Skill: Level 2: Using definitions 2) 3) If the marginal private benefit of attending college for Shelly is $40,000 and the marginal external benefit is $15,000, she will attend college if the cost of attendance is no more than A) $45,000. B) $40,000. C) $55,000. D) $15,000. E) $25,000. Answer: B Topic: Private benefit Skill: Level 3: Using models ) 4) A cost or a benefit that arises from the production or consumption that falls on someone other than the producer or consumer is called A) a public good. B) an externality. C) a private good. D) a mixed good. E) a public choice impact. Answer: B Topic: Externalities Skill: Level 1: Definition 4) 1 5) The deadweight loss associated with producing a product that has an external cost occurs because A) not enough resources are allocated to producing the good. B) the marginal social cost does not equal zero. C) too little output is produced. D) the price firms charge for the good is too high.

E) too much output is produced. Answer: E Topic: Inefficient equilibrium Skill: Level 3: Using models 5) 6) A noisy party that keeps neighbors awake is an example of a A) negative consumption externality. B) positive consumption externality. C) positive production externality. D) negative production externality. E) Both answers B and C are correct. Answer: A Topic: Integrative Skill: Level 2: Using definitions 6) 7) Evidence of external costs in the production of a product is present if A) the production cost increases because of an increase in the minimum wage.

B) producers pay all of the costs of producing the good or service. C) non-buyers and/or non-producers of the product experience a loss for which they are not compensated. D) buyers refuse to purchase the product. E) the price of the product is higher than it should be. Answer: C Topic: Externalities Skill: Level 4: Applying models 7) 8) Research leading to the discovery of new knowledge has external benefits because A) the new knowledge decreases costs. B) others can use the new knowledge. C) the new knowledge increases profits. D) Both answers A and B are correct. E) Both answers A and C are correct.

Answer: B Topic: External benefit Skill: Level 2: Using definitions 8) 9) An example of someone bearing the burden of a negative production externality would be A) Taylor living downwind from a smelly feedlot where pigs are raised. B) Jess's roommate smokes and she doesn't. C) None of these are examples someone bearing the burden of a negative production externality. D) Lynna's neighbors play loud music late at night. E) All of these are examples someone bearing the burden of a negative production externality. Answer: A Topic: Externalities Skill: Level 2: Using definitions 9) 2 0) Which of the following is NOT an example of a good with an external cost? A) electricity generation that produces carbon dioxide emissions that contribute toward global warming. B) noise pollution from aircraft. C) Jess smoking near her non-smoking roommate. D) Ahmed works at a bank and he gets a flu shot each fall. E) logging that destroys wildlife habitat. Answer: D Topic: Externalities Skill: Level 2: Using definitions 10) 11) If the marginal private cost of running a car is $0. 30 a mile and the marginal external cost is $0. 10, what is the marginal social cost? A) $0. 3 B) None of the above answers is correct. C) $0. 40 D) $3. 00 E) $0. 20 Answer: C Topic: Marginal external cost Skill: Level 3: Using models 11) 12) If all education in the United States were provided by private, tuition charging schools, A) too little education would be consumed. B) too much education would be consumed. C) the efficient level of education would be provided. D) education would no longer have an external benefit. E) the government would provide both students and schools with vouchers. Answer: A Topic: Inefficient equilibrium Skill: Level 4: Applying models 12) 3) Which of the following government actions is appropriate in a market with an external benefit? A) marketable permits B) price ceiling C) setting a tax equal to the transactions costs D) vouchers E) taxes Answer: D Topic: Vouchers Skill: Level 2: Using definitions 13) 14) Pollution is an example of a ________ externality. A) negative production B) Coasian C) positive production D) negative consumption E) positive consumption Answer: A Topic: Externalities Skill: Level 1: Definition 14) 3 15) If the marginal social cost of generating a kilowatt of electricity is $0. 10 and the marginal private cost is $0. 8, what is the marginal external cost? A) $0. 02 B) $0. 10 C) $0. 18 D) $0. 80 E) $0. 08 Answer: A Topic: Marginal external cost Skill: Level 3: Using models 15) 16) Education leads to external benefits because A) better educated people are less lazy. B) the people who become better educated get better jobs. C) little pollution is created when educating people. D) better educated people commit fewer crimes. E) better educated people are more productive. Answer: D Topic: Education Skill: Level 2: Using definitions 16) 17) Which of the following is an example of a publicly provided product with n external benefit? A) purses B) milk C) mink coats D) gasoline E) None of the above answers is correct. Answer: E Topic: External benefit Skill: Level 2: Using definitions 17) 18) If producing a good or a service creates pollution, then A) at the unregulated, competitive market equilibrium quantity, marginal social benefit is less than the equilibrium price. B) the industry's supply curve includes the extra cost of pollution. C) at the unregulated, competitive market equilibrium quantity, marginal social benefit and marginal social cost are equal.

D) at the unregulated, competitive market equilibrium quantity, marginal social cost is greater than the equilibrium price. E) an unregulated competitive market produces an efficient output. Answer: D Topic: Inefficient equilibrium Skill: Level 2: Using definitions 18) 19) When production of a good results in an external cost, the unregulated competitive market equilibrium quantity is A) greater than the efficient level of output. B) zero. C) the efficient level of output. D) unattainable. E) not zero but is less than the efficient level of output. Answer: A Topic: Inefficient equilibrium Skill: Level 3: Using models 9) 4 20) The cost of producing an additional unit of a good or service that falls on people other than the producer is the marginal A) private cost. B) social cost. C) external cost. D) social benefit. E) None of the above answers is correct. Answer: C Topic: External cost Skill: Level 1: Definition 20) 21) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered. If 5 concerts are put on, then the A) marginal external cost will be greater than the marginal private cost. B) marginal social cost will equal the marginal external cost.

C) marginal external cost will equal the marginal private cost. D) marginal external cost will be greater than the marginal social cost. E) marginal external cost will equal zero. Answer: A Topic: External cost Skill: Level 3: Using models 21) 5 22) If a government action is designed to achieve efficiency, then the action must have the market produce the amount of output so that the A) marginal external cost equals the marginal external benefit. B) marginal private cost equals the marginal private benefit. C) marginal social benefit exceeds the marginal social cost by as much as possible.

D) marginal social cost equals the marginal social benefit. E) marginal private cost equals the tax. Answer: D Topic: Government actions in the face of external benefits Skill: Level 3: Using models 22) 23) One reason why property rights help achieve an efficient level of pollution is because property rights A) force the marginal external cost to a lower level than marginal private cost. B) eliminate marginal private costs. C) force the marginal social cost to zero. D) change the marginal external cost so that they are equal to the marginal social benefit. E) force the marginal private cost to equal the marginal social cost.

Answer: E Topic: Property rights Skill: Level 2: Using definitions 23) 24) Which of the following is the best example of a transactions cost? A) the price of labor and materials used to produce a house B) the value of the time spent negotiating a contract C) the cost associated with producing a golf club D) the price of food E) the price of a new set of tires Answer: B Topic: Coase theorem Skill: Level 2: Using definitions 24) 25) The production of a good or service by an authority that receives the most of its revenue from the government is referred to as A) private subsidies.

B) vouchers. C) Coasian production. D) public provision. E) patents and copyrights. Answer: D Topic: Public provision Skill: Level 1: Definition 25) 6 26) Vouchers given to consumers A) decrease the demand for a good. B) increase the supply of a good. C) increase both the demand for the good and the supply of the good. D) decrease the supply of a good. E) increase the demand for a good. Answer: E Topic: Vouchers Skill: Level 3: Using models 26) 27) MSB equals A) MB + MC. B) MB + the marginal external cost. C) MC + the marginal external cost. D) MC + the marginal external benefit.

E) MB + the marginal external benefit. Answer: E Topic: Marginal social benefit Skill: Level 1: Definition 27) 28) The benefit the consumer of a good or service receives is the A) private benefit. B) external benefit. C) consumption benefit. D) public benefit. E) social benefit. Answer: A Topic: Private benefit Skill: Level 1: Definition 28) 29) Joanne rents a TV production studio to produce an extra hour of a TV show. The rent is A) a private cost and not an external cost. B) a private benefit because viewers will benefit from watching the extra hour of the show.

C) both a private cost and an external cost. D) neither a private cost nor an external cost. E) an external cost and not a private cost. Answer: A Topic: Private cost Skill: Level 2: Using definitions 29) 7 30) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the Coase theorem can be used in this market, output equals ________ kilowatt hours per day. A) 150 billion B) 100 billion C) 0 D) more than 200 billion E) 200 billion Answer: A Topic: Coase theorem Skill: Level 3: Using models 30) 1) The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the government imposes a pollution tax to achieve the efficient level of production, the tax equals ________ per kilowatt hour. A) 2. 5? B) 10? C) 7. 5? D) 0? E) 15? Answer: C Topic: Taxes Skill: Level 3: Using models 31) 8 32) Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tons of leather are produced?

A) more than 300 tons B) 300 tons C) 200 tons D) 0 tons E) more than 0 tons and less than 200 tons Answer: B Topic: Pollution limits Skill: Level 3: Using models 32) 33) To eliminate the inefficiency resulting from pollution that creates an external cost, the government can impose a pollution tax on producers that is equal to the A) MC. B) price. C) MSC. D) MSB. E) marginal external cost. Answer: E Topic: Taxes Skill: Level 1: Definition 33) 9 34) When government provides a good with an external benefit, to attain efficiency the price paid by consumers is set equal to the A) marginal private cost at the efficient level of output.

B) amount paid by taxpayers. C) market-determined price. D) marginal private benefit at the efficient level of output. E) marginal external benefit at the efficient level of output. Answer: D Topic: Public provision Skill: Level 4: Applying models 34) 35) A tax on a polluting industry A) shifts the marginal social benefit curve rightward. B) leads to less output in this industry. C) is not desirable because it reduces efficiency. D) causes more resources to be used in the polluting industry. E) shifts the marginal social benefit curve leftward. Answer: B Topic: Taxes Skill: Level 3: Using models 35) 6) A competitive, unregulated market would A) produce too much pollution because pollution is an external cost. B) produce too little education because education has an external benefit. C) fail to achieve equilibrium if there are externalities present. D) Both answers A and B are correct. E) Both answers B and C are correct. Answer: D Topic: Integrative Skill: Level 3: Using models 36) 37) What is the biggest problem of using government actions such as taxes and pollution charges to control external costs? A) The Coase theorem points out that taxes and pollution charges work only in the short run and not in the long run.

B) insufficient legal power to enforce the controls C) obtaining enough data to determine how much the tax or pollution charge will be D) political lobbying and voter disagreement E) in some situations, there is no known way to control the external costs Answer: C Topic: Pollution charges Skill: Level 2: Using definitions 37) 10 38) The additional benefit that Marvin gets from being vaccinated against the flu is known as the A) marginal private benefit. B) marginal social benefit. C) private cost. D) social cost. E) external benefit. Answer: A Topic: Marginal benefit Skill: Level 1: Definition 38) 9) Firm A and Firm B emit 300 tons of pollution each and each have marketable permits that allow each to emit 100 tons of pollution. If it costs $5,000 for Firm A to eliminate 100 tons of pollution and it costs Firm B $6,000 to eliminate 100 tons of pollution, then A) Firm B sells its permits to Firm A for a price below $6,000. B) Firm A sells its permits to Firm B for a price below $6,000. C) Firm B sells its permits to Firm A for a price above $6,000. D) Firm A sells its permits to Firm B for a price above $6,000. E) neither Firm A nor Firm B sell permits because neither have extra permits.

Answer: B Topic: Marketable permits Skill: Level 4: Applying models 39) 40) Suppose scientific research generates external benefits. Without government intervention, the market for scientific research would A) produce more than the efficient amount. B) produce the efficient amount. C) produce some research, but less than the efficient amount. D) either produce more than or less than the efficient amount depending on whether the external benefit is on the production or consumption of the research. E) produce zero research. Answer: C Topic: Inefficient equilibrium Skill: Level 3: Using models 40) 1) When people decide whether or not to get a flu vaccination, they ignore the ________ and as a result ________. A) marginal external cost; vouchers must be provided B) external benefit; too few vaccinations are given C) marginal private benefit; too few vaccinations are given D) social cost; too many vaccinations are given E) private cost; too many vaccinations are given Answer: B Topic: Integrative Skill: Level 3: Using models 41) 11 The figure above shows the demand for college education (D), the marginal social benefit of college education (MSB), and the marginal cost of the private schools (MC). 2) In the figure above, suppose the government provides vouchers worth $15,000 per student per year. Then the market equilibrium occurs at a tuition of ________ a year and ________ million students. A) $20,000; 20 B) $10,000; 15 C) $15,000; 15 D) $15,000; 7. 5 E) $25,000; 15 Answer: B Topic: Vouchers Skill: Level 3: Using models 42) 43) A marketable permit A) allows firms to pollute all they want without any cost. B) eliminates pollution by setting the price of pollution permits above the marginal cost of polluting. C) allows firms to buy and sell the right to pollute at government controlled prices.

D) is the Coase theorem solution to pollution. E) allows firms to buy and sell the right to pollute. Answer: E Topic: Marketable permits Skill: Level 1: Definition 43) 12 44) Which of the following is an example of a voucher? A) a patent on a pharmaceutical drug B) the postal service C) police services D) social security E) food stamps Answer: E Topic: Vouchers Skill: Level 2: Using definitions 44) 45) If an external benefit is present, then the A) marginal social benefit is equal to the marginal social cost. B) marginal social cost curve lies above the marginal private benefit curve.

C) marginal social benefit curve lies above the marginal private benefit curve. D) marginal social benefit curve is the same as the marginal private benefit curve. E) marginal private benefit curve lies above the marginal private cost curve. Answer: C Topic: Marginal social benefit Skill: Level 3: Using models 45) 46) The use of vouchers for education A) decreases the demand for education and decreases the equilibrium quantity. B) increases the demand for education and increases the equilibrium quantity. C) decreases the quantity provided to the efficient level. D) decreases the demand for education and increases the equilibrium quantity.

E) increases the deadweight loss for those who can't afford schooling. Answer: B Topic: Vouchers Skill: Level 2: Using definitions 46) 47) If a polluting producer is forced to pay a pollution charge, what is the effect on the supply and demand curves for the product? A) The firm's demand curve shifts leftward. B) The firm's supply curve shifts rightward. C) The firm's supply curve shifts leftward. D) The quantity supplied along the firm's supply curve increases. E) Both the supply curve and the demand curve shift leftward. Answer: C Topic: Government actions in the face of external costs Skill: Level 3: Using models 7) 48) In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution, the pollution tax must be set equal to the A) marginal private cost. B) marginal external cost. C) marginal social cost. D) price of the good. E) marginal benefit of polluting. Answer: B Topic: Taxes Skill: Level 1: Definition 48) 13 49) The figure above illustrates the gasoline market. There is no external benefit from gasoline. If this market is left unregulated and no pollution tax is imposed, the equilibrium quantity of gasoline is A) 15 million gallons. B) 0 gallons. C) 10 million gallons.

D) 20 million gallons. E) 5 million gallons. Answer: D Topic: Inefficient equilibrium Skill: Level 3: Using models 49) 50) Three methods the government can use to cope with the external cost from pollution are A) pollution taxes, regulations, and subsidies. B) marketable permits, pollution subsidies, and pollution taxes. C) pollution charges, marketable permits, and pollution limits. D) vouchers, pollution subsidies, and pollution taxes. E) pollution taxes, subsidies, and outright bans. Answer: C Topic: Government actions in the face of external costs Skill: Level 1: Definition 50) 14

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