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1

Which of the following is TRUE?

  • social cost = private cost + external cost
  • private cost + social cost = external cost
  • external cost = private cost
  • private cost + average cost = social cost

Social cost = private cost + external cost

2

Which of the following illustrates the concept of external cost?

  • A small business owner frequently buys raw materials by using her bank's line of credit
  • Margaret purchases all her food and clothing in the big city outside her residence
  • Raymond cannot open his windows at times because he lives downwind from a mushroom farm
  • Felicia, an economics major, asks the most insightful questions in class.

Raymond cannot open his windows at times because he lives downwind from a mushroom farm.

3

Antibiotics may be ________, since people consider only the ________.

  • underused; private and not the social costs of consumption
  • overused; private and not the social costs of consumption
  • underused; external and not the private costs of consumption
  • overused; external and not the private costs of consumption

overused; private and not the social costs of consumption

4

An external cost:

  • affects producers but not consumers.
  • is a cost paid by people other than the producer or consumer trading in the market.
  • causes markets to allocate resources efficiently.
  • leads to economic efficiency only when private costs are greater than external costs.

is a cost paid by people other than the producer or consumer trading in the market.

5

What is a social cost?

























































































 

the total cost of
production, including both the private cost and any external cost

6

What is a private cost?

a cost borne by the producer of a good or service

7

What is a private good?

a good that is both rival and excludable

8

What is a public good?

a good that is both
nonrivalrous and nonexcludable

9

Describe rivalry.

occurs when consumption of one unit of a good prevents its consumption by someone else

10

What is an externality?

a benefit or cost that affects someone not directly involved in the production or
consumption of a good or service

11

An external cost can be calculated as the difference between?

the social cost of production and the private cost of production

12

If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will

  • emit an acceptable level of sulfur dioxide
  • emit a lower level of sulfur dioxide than is socially efficient.
  • emit a higher level of sulfur dioxide than is socially efficient.
  • not emit any sulfur dioxide in an attempt to avoid paying the entire cost.

emit a higher level of sulfur dioxide than is socially efficient.

13

Ideally, a market should maximize:

  • consumer surplus plus producer surplus.
  • consumer surplus.
  • social surplus.
  • producer surplus.

social surplus.

14

If the government wanted to maximize the number of people receiving a flu vaccination, it should:

  • impose a mandatory vaccination program.
  • give a subsidy to people who are vaccinated.
  • provide research grants to those firms engaging in increasing the supply of vaccine
  • impose a tax on people who are unwilling to be vaccinated.


give a subsidy to people who are vaccinated.
 

15

Government solutions to externality problems include:

  • taxing the consumption of goods that cause externalities.
  • All of the answers are correct.
  • allowing firms to trade the rights to create pollutants.
  • subsidies.

All of the answers are correct.

16

The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

  • consumers may be reluctant to follow.
  • the goal itself may not necessarily be the socially optimal outcome.
  • the situation may be difficult for the government to control.
  • the government may not have enough information to choose the least costly methods.

the government may not have enough information to choose the least costly methods.

17

If a market for tradeable allowances exists, a company that has used up its own allowances can:

  • buy allowances from another firm that will not reach its limit of pollution.


  • buy allowances from another firm that has surpassed its limit of pollution.

     
  • purchase additional allowances from the EPA on a temporary basis.
  • pay a fine to the EPA and purchase additional allowances from other firms.

buy allowances from another firm that will not reach its limit of pollution.

18

Which of the following is an example of an external cost?

  • the cost you pay your plumber to install a new hot water heater
  • increased gas prices for drivers of SUVs
  • secondhand smoke
  • your high electric bill that results from leaving your lights on all night

secondhand smoke

19

The social cost of driving an SUV is equal to

  • only the cost of the pollution emitted by the vehicle
  • both the cost of producing and driving the vehicle
  • both the cost of the vehicle's pollution and its operation (gas, etc).
  • the cost of producing the vehicle.

both the cost of the vehicle's pollution and its operation (gas, etc).

20

A private cost is

  • the cost to everyone trading in all markets.
  • the cost of reaching an agreement.
  • a cost paid by the consumer or the producer trading in the market.
  • a cost paid by people other than the consumer or the producer trading in the market.

a cost paid by the consumer or the producer trading in the market.

21

An external cost is

  • the cost to everyone.
  • a cost paid by the consumer or the producer
  • a cost paid by people other than the consumer or the producer trading in the market.
  • the cost of reaching an agreement.


a cost paid by people other than the consumer or the producer trading in the market.



 

22

The social cost is

  • a cost paid by the consumer or the producer.
  • the cost of reaching an agreement
  • a cost paid by people other than the consumer or the producer trading in the market.
  • the cost to everyone.

the cost to everyone.

23

The price of antibiotics sends the wrong signal because

  • it includes the social cost but not the private cost.


  • it includes the external cost but not the private cost

     
  • it includes the external cost but not the social cost
  • it includes the private cost but not the external cost.

it includes the private cost but not the external cost.

24

When external costs are present in a market,

  • social surplus is maximized.
  • consumer surplus is not maximized.
  • market prices send incorrect signals.
  • market prices are still able to send the correct signals.

market prices send incorrect signals.

25

A Pigouvian tax

  • is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss.
  • is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss.
  • is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss
  • subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.

is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss

26

Which of the following policies does the economics of externalities suggest would encourage an efficient quantity in the corresponding market?

  • subsidizing beautiful flower beds in public spaces.
  • subsidizing polluting factories.
  • taxing healthy food.
  • taxing convenient benches set up in public spaces.


subsidizing beautiful flower beds in public spaces.
 

27

The Coase Theorem suggests that private bargains will ensure the efficiency of markets even when externalities exist

  • but only in the presence of government regulation.
  • if consumers have more information regarding the externality than suppliers.
  • if the cost of the negotiations are less than the price of the good.
  • if transactions costs are low and property rights are well defined.

if transactions costs are low and property rights are well defined.

28

The command and control method is a ______ solution to the externality problem.

  • lottery-based
  • private
  • regulatory
  • democratic

regulatory

29

Tradable allowances for pollution

  • allow firms to reduce pollution levels at lower costs.
  • typically decrease firms' profits.
  • seem good in theory, but have never been successfully enacted in market economies.
  • decrease the availability of resources able to be utilized in other areas of production.

allow firms to reduce pollution levels at lower costs.

30

Absolute advantage is the ability to produce a:

  • good with fewer inputs than others.
  • variety of goods.
  • good when demand is high.
  • good at a lower opportunity cost than others.

good with fewer inputs than others.