Exploring Economics 7th Edition Sexton Test Bank Download

Exploring Economics 7th Edition by Sexton
ISBN 128585943X 9781285859439

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1. A public good is nonrivalrous and excludable.

a. True
b. False
ANSWER: False
2. Since it is difficult to establish and enforce ownership rights over air, people have less incentive to preserve air quality
than if its ownership was clearly defined.
a. True
b. False
ANSWER: True
3. Positive externalities include benefits received the seller but not benefits received by the buyer.
a. True
b. False
ANSWER: False
4. A cost that spills over onto individuals not directly involved in an activity is called a positive externality.
a. True
b. False
ANSWER: False
5. When one more car enters a crowded highway it increases the travel times of all other drivers on the highway creating a
negative externality.
a. True
b. False
ANSWER: True
6. When your neighbor’s dog barks all night long, this is an example of a negative externality.
a. True
Copyright Cengage Learning. Powered by Cognero. Page 1
b. False
ANSWER: True
7. Pollution taxes always cause deadweight losses, reducing economic efficiency.

a. True
b. False
ANSWER: False
8. When negative externalities are present, it leads to an underallocation of resources in that area relative to that which is
socially desirable.
a. True
b. False
ANSWER: False
9. When positive externalities are present, it leads to an underallocation of resources in that area relative to that which is
socially desirable.
a. True
b. False
ANSWER: True
10. If a negative externality results from the production of chemicals, an external cost is imposed on parties not directly
involved in the market for the chemicals.
a. True
b. False
ANSWER: True
11. When a price fails to reflect all the costs of a product, too much of it is produced and/or consumed.
a. True
b. False
ANSWER: True
12. When a price fails to reflect all the benefits of a product, too much of it is produced and/or consumed.
a. True
b. False
ANSWER: False
13. If mining companies are able to shift some of their production costs onto outside parties, the actual output of mines is
likely to fall short of society's ideal.
a. True
b. False
ANSWER: False
14. Someone who does not contribute toward covering the cost of a good he desires, yet cannot be excluded from
receiving the good, is called a free rider.
a. True
b. False
ANSWER: True
15. Inoculation against communicable diseases is an example of an activity that generates positive externalities.
a. True
b. False
ANSWER: True
16. The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing
goods that have positive externalities.
a. True
b. False
ANSWER: True
17. Technology spillovers are examples of negative externalities.

a. True
b. False
ANSWER: False
18. A technology spillover occurs when one firm’s research and production increase another firm’s access to
technological advances.
a. True
b. False
ANSWER: True
19. A public good or service can be consumed by paying and nonpaying customers alike.
a. True
b. False
ANSWER: True
20. An example of a public good is a flood control project that protects all the homes and properties near a river.
a. True
b. False
ANSWER: True
21. Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded.
a. True
b. False
ANSWER: True
22. 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.
a. True
b. False
ANSWER: True
23. Information supplied to consumers by the government rarely ever helps in making better decisions.
a. True
b. False
ANSWER: False

24. Adverse selection occurs when a fully insured person fails to take as many precautions against risk as she would if
uninsured.
a. True
b. False
ANSWER: False
25. One way to overcome an adverse selection problem when buying a used car is to hire an independent mechanic to
inspect the car before making a purchase.
a. True
b. False
ANSWER: True
26. The over hunting of U.S. buffalo that nearly caused their extinction would be an example of the tragedy of the
commons.
a. True
b. False
ANSWER: True
27. The failure of private incentives to provide adequate maintenance of public resources leads to the tragedy of the
commons.
a. True
b. False
ANSWER: True
28. Moral hazard occurs when an informed party benefits in an exchange by taking advantage of knowing more than the
other party.
a. True
b. False
ANSWER: False
29. Positive externalities exist any time the social costs of producing a good or service exceed the private costs.
a. True
b. False
ANSWER: False
30. It is possible to increase our consumption of a clean environment without giving up anything.
a. True
b. False
ANSWER: False
31. Economists generally prefer greater effort made to force internalization of externalities through taxes rather than using
alternative approaches, such as establishing pollution standards.
a. True
b. False
ANSWER: True
32. Transferable pollution rights would allow firms to move into an area that is already as polluted as allowed by EPA
standards.
a. True
b. False
ANSWER: True
33. The least costly way to clean up the environment is for all firms to reduce pollution by an equal percentage.
a. True
b. False
ANSWER: False
34. Corrective taxes are generally more efficient than regulatory mandates keeping the environment clean.
a. True
b. False
ANSWER: True
35. A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.
a. True
b. False
ANSWER: True
36. Economists believe that the optimal level of pollution is zero.

a. True
b. False
ANSWER: False
37. The Coase theorem holds well in situations where information and transaction costs are substantial.
a. True
b. False
ANSWER: False
38. The main duty of the Environmental Protection Agency is to monitor a government-enforced system of property
rights.
a. True
b. False
ANSWER: False
39. Transaction costs are the cost of negotiating and executing an exchange.
a. True
b. False
ANSWER: True
40. Under the pollution rights approach, polluters have little or no incentive to develop improved pollution abatement
technologies.
a. True
b. False
ANSWER: False
41. The least-cost abatement pattern will require all polluters to clean up on an equal basis.
a. True
b. False
ANSWER: False
42. The Coase theorem implies that an efficient solution is possible only if property rights are well-defined and
transactions costs are low.
a. True
b. False
ANSWER: True
43. Increase in the number of transactors makes it difficult to negotiate private agreements for environmental goods.
a. True
b. False
ANSWER: True
44. Private costs are those borne by:

a. the government.
b. the producer of an item.
c. both an item's producer and outside parties affected by a negative externality.
d. outside parties affected by a negative externality.
ANSWER: b
45. The total social costs of production are:

a. private costs plus private benefits.
b. private benefits minus private costs.
c. private costs plus external costs.
d. private costs minus external costs.
ANSWER: c
46. An example of a positive externality is:

a. freeway congestion.
b. pollution in a resort lake.
c. airport noise.
d. beautiful trees on property along a parkway.
ANSWER: d
47. An externality occurs when:

a. people other than those making the demand and supply decisions share the benefits or the costs of an activity.
b. only the people making the demand and supply decisions share the benefits or the costs of an activity.
c. private costs of production equal the full social costs associated with production of a good.
d. private costs of production are ignored.
ANSWER: a
48. Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes
the decision are called ____ costs.
a. negative; positive
b. social; private
c. private; social
d. positive; negative

ANSWER: b
49. Negative externalities are costs incurred by:

i. buyers
ii. sellers
iii. someone other than buyers or sellers
a. (i) only
b. (ii) only
c. (iii) only
d. both (i) and (ii)
ANSWER: c
50. Which of the following will most likely generate positive externalities?
a. a hot dog vendor
b. public education
c. an automobile
d. a steel mill
ANSWER: b
51. Golf course developers who buy the land around the golf course they build are attempting to:
a. impose external costs on non-consenting third parties.
b. internalize external benefits.
c. turn a private good into a public good.
d. internalize external costs.
ANSWER: b
52. Which of the following is an example of an externality?

a. cigarette smoke that permeates an entire restaurant
b. a flu shot that prevents a student from transmitting the virus
c. a beautiful flower garden outside the county courthouse
d. All of the above are examples of externalities.
ANSWER: d
53. The presence of negative externalities leads to a misallocation of societal resources because:
a. whenever external costs are imposed on outside parties, the good should not be produced at all.
b. less of the good than is ideal for society is produced.
c. there are some costs associated with production that the producer fails to take into consideration.
d. the government always intervenes in markets when negative externalities are present, and the government is
inherently inefficient.
ANSWER: c
54. Which of the following activities, if any, represents an external cost?

a. The reduction in the incidence of chicken pox when children are inoculated against the disease.
b. The damage to a person's health from secondhand smoke.
c. The increase in local property values when the city creates a neighborhood park.
d. The price you pay for the prime rib that you consume at a local restaurant.
ANSWER: b

55. Which of the following activities, if any, represents an external cost?
a. The benefits that accrue to society when an individual receives a college education.
b. The increase in property values of vacant lots in an area near where a new amusement park is constructed.
c. The pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard.
d. None of the above
ANSWER: d
56. Which of the following activities, if any, represents an external benefit?

a. The benefit to a consumer from consuming a Caesar salad.
b. The damage to a person's health from secondhand smoke.
c. The reduction in tourist revenues at a beach resort caused by an oil spill.
d. None of the above
ANSWER: d
57. Which of the following activities, if any, represents an external benefit?

a. The benefit to a consumer from watching a film on DVD.
b. The reduction in air quality resulting from industrial development in an urban area.
c. The increase in the value of property belonging to your neighbors when you hire a landscaper to beautify your
front yard.
d. The reduction in property values when a new airport is built in a neighborhood.
ANSWER: c
58. An negative externality is present whenever:

a. the private marginal cost of an activity exceeds the private marginal benefit.
b. the private marginal benefit of an activity exceeds the private marginal cost.
c. the social marginal cost of an activity exceeds the private marginal cost.
d. none of the above
ANSWER: c
59. A positive externality is present whenever:

a. the social marginal benefit of an activity exceeds the private marginal benefit.
d. none of the above.
ANSWER: a
60. If there are both external benefits and external costs:

a. the social marginal benefit of an activity exceeds the private marginal benefit.
d. Both a. and c. are true.
ANSWER: d
61. If there are both external benefits and external costs associated with the production and consumption of a good, and
the external benefits are greater than the external costs,
a. More than the efficient amount is being produced
b. Less than the efficient amount is being produced
c. the efficient amount is being produced
d. We do not know whether the efficient amount, or more or less, is being produced.
ANSWER: b
the external benefits are less than the external costs,
ANSWER: a
the external benefits are equal in magnitude to the external costs,
ANSWER: c
the external benefits are less than the external costs,
a. Taxing it could bring us closer to the efficient solution
b. Subsidizing it could bring us closer to the efficient solution
c. Neither a tax or a subsidy could bring us closer to the efficient solution
d. None of the above is true.
ANSWER: a
the external benefits are greater than the external costs,
a. Taxing it could bring us closer to the efficient solution
b. Subsidizing it could bring us closer to the efficient solution
c. Neither a tax or a subsidy could bring us closer to the efficient solution
d. None of the above is true.
ANSWER: b
66. An example of a negative externality is:

a. the benefit you receive when your neighbor installs a smoke detector.
b. the reduction in profits for your company that occurs when there is a decrease in consumer demand for the
product you manufacture.
c. the sleep you lose when your neighbor throws a loud party next door that keeps you awake.
d. the change in the property values of your neighbors' homes when you paint your house and landscape your
front yard
ANSWER: c
67. If a positive externality results from the consumption of higher education, then the marginal benefit students receive
from education:
a. equals the marginal social benefit.
b. is less than the marginal social benefit.
c. includes the marginal external benefit.
d. exceeds the marginal social benefit.
ANSWER: b
68. A positive externality will cause a market to produce:

a. more than the efficient equilibrium output level.
b. iless than the efficient equilibrium output level.
c. the efficient equilibrium output level.
d. None of the above.
ANSWER: b
69. Suppose that flu shots create a positive externality equal to $20 per shot. What is the relationship between the market
equilibrium output level and the efficient equilibrium output produced?
a. They are equal.
b. The market equilibrium output level is greater than the efficient equilibrium output level.
c. The market equilibrium output level is less than the efficient equilibrium output level.
ANSWER: c
70. The greater the magnitude of the external costs of production,

a. The larger is the deadweight loss from overproduction.
b. The greater would be the optimal pollution tax.
c. The further the private market solution ignoring those costs would deviate from the socially efficient level of
output.
d. All of the above are true.
ANSWER: d
71. The greater the magnitude of the external benefits of production,

a. The larger is the deadweight loss from underproduction.
b. The greater would be the optimal subsidy.
c. The further the private market solution ignoring those benefits would deviate from the socially efficient level
of output.
d. All of the above are true
ANSWER: d
72. The greater the magnitude of the external costs of production,

b. The greater would be the optimal pollution tax.
c. The further the private market solution ignoring those costs would deviate from the socially efficient level of
output.
ANSWER: c
73. The greater the magnitude of the external benefits of production,

b. The greater would be the optimal tax.

c. The less the private market solution would deviate from the socially efficient level of output.
ANSWER: a
74. Which of these statements is not true of both external cost and external benefit situations?
a. They both can lead to market failure.
b. They both cause welfare costs.
c. They both make it possible for government intervention to lead to more efficient results.
ANSWER: d
75. Which of the following is (are) true when one firm's research and production can increase another firm's access to
technological advances?
a. It is called a technology spillover.
b. Other firms will imitate and improve on the new knowledge.
c. If there is no subsidy, the market equilibrium output level is less than the efficient equilibrium output level.
d. All of the above.
ANSWER: d
76. Technology spillovers:

a. Can be reduced by way of patents.
b. Can lead to clustering of technology firms near one another.
c. Are examples of positive externalities.
ANSWER: d
77. Technology spillovers:

a. Are caused by patents.
b. Can lead to clustering of technology firms near one another.
c. Are examples of negative externalities.
ANSWER: b
78. As a result of technology spillovers:

Taxes may move us closer to the efficient output level in such industries.
a. Other members of society bear external costs.
b. Too much production takes place in the high technology areas.
c. Taxes may move us closer to the efficient output level in such industries.
d. None of the above are true.
ANSWER: d
79. If education produces positive externalities and the government does not intervene in the market, we would expect
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.
ANSWER: b
80. If a negative externality results from the refining of oil, the cost of production as seen by the oil refinery:
a. does not include the external cost.
b. includes the external cost.
c. does not include the external benefit.
d. includes the external benefit.
ANSWER: a
81. If positive externalities are present in the production of a good, then society will:
a. produce too much of the good since the marginal private benefit to consumers is less than the marginal social
benefit.
b. produce too little of the good since the marginal private benefit to consumers is greater than the marginal
social benefit.
c. produce too much of the good since the marginal private benefit to consumers is greater than the marginal
social benefit.
d. produce too little of the good since the marginal private benefit to consumers is less than the marginal social
benefit.
ANSWER: d
82. If negative externalities are created in the production of a good, then society will:
a. produce too much of the good since the marginal private cost to firms is less than the marginal social cost.
b. produce too little of the good since the marginal private cost to firms is less than the marginal social cost.
c. produce too much of the good since the marginal private cost to firms is greater than the marginal social cost.
d. produce too little of the good since the marginal private cost to firms is greater than the marginal social cost.
ANSWER: a
83. In a market where firms are able to reduce their private costs by shifting costs onto others, which of the following will
not happen?
a. Inefficiencies will occur.
b. Negative externalities will be observed.
c. The market prices of products produced by firms will be too low relative to the social optimum.
d. Output of the good being produced will be too low.
ANSWER: d
84. Suppose that a mayor of a large city believes strongly that education provides great benefits to the community and
urges the state government to provide the district with more money. An economist would say that this reflects the Mayor's
belief that:
a. since teachers are overpaid, the district needs more money to hire enough teachers for its classrooms.
b. there are positive external benefits associated with education.
c. there are nontrivial external costs associated with education.
d. public schools provide a higher quality education than private schools.
ANSWER: b
85. Consider two goods-one that generates external benefits and another that generates external costs. A competitive
market economy would tend to produce:
a. too much of both goods, relative to the social optimum.
b. too little of both goods, relative to the social optimum.

c. too much of the good that generates external benefits relative to the social optimum, and too little of the good
that generates external costs.
d. too little of the good that generates external benefits relative to the social optimum, and too much of the good
that generates external costs.
ANSWER: d
86. Which of the following provides an example of an externality?

a. The air pollution generated when you drive your car.
b. The view that passersby and neighbors enjoy when observing your rose garden.
c. The free concerts neighbors hear when an accomplished musician practices at home.
d. All of the above.
ANSWER: d
87. Which of the following statements is true?

a. Externalities can never refer to costs borne by the seller.
b. Both external costs and external benefits can never exist for the same good.
c. Externalities can never lead to under-production of a specific good.
d. External benefits can never exceed external costs.
ANSWER: a
88. Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?
a. A flu shot is less expensive than the cost of treatment when you get the flu.
b. The income of doctors increases when you get a flu shot.
c. A flu shot reduces the likelihood that others will catch the flu from you.
d. A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn
more income.
ANSWER: c
89. Suppose that firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. If this is
the case in a competitive market, how will the price and output of the chemical products compare with their values under
conditions of ideal economic efficiency?
a. Price is too low; output is too large.
b. Price is too high; output is too large.
c. Price is too low; output is too small.
d. Price is too high; output is too small.
ANSWER: a
90. If there are significant external benefits associated with the consumption of a product, it can be said that the private
benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the
efficient situation.
a. overstates; increase
b. understates; increase
c. overstates; decrease
d. understates; decrease
ANSWER: b

91. If there are significant external costs associated with the production of a product, it can be said that the private cost of
production to the firm ____ the cost to society associated with this product and output should ____ to move toward the
efficient situation.
a. overstates; increase
b. understates; increase
c. overstates; decrease
d. understates; decrease
ANSWER: d
92. Which of the following would be an example of a nongovernmental solution to a problem associated with
externalities?
a. society's preference to drive large cars and SUVs
b. new stricter anti-litter laws
c. a general moral commitment against using sprinklers during a drought
d. tax credits for the purchase of hybrid autos
ANSWER: c
93. A tax equal to the external cost on firms that emit pollutants would:
a. provide firms with the incentive to increase the level of activity creating the pollution.
b. provide firms with the incentive to decrease the level of activity creating the pollution.
c. provide firms with little incentive to search for less environmentally damaging production methods.
d. not reduce pollution levels at all.
ANSWER: b
94. Currently Q0 of electrical power is being produced. The demand curve is represented by D, and the current market
supply is represented by S0. It is discovered that the Rocky Mountain Electrical Co-op and Power Company is discharging
waste into the area water supply. As a result, S1 represents ____ and a price of ____ would represent the true internalized
cost of production at that level of output.
a. the supply curve with external costs included; P2

b. the supply curve with external costs included; P1
c. the supply curve with external costs included; P0
d. There is insufficient information available to provide an accurate answer.
ANSWER: a
95. If the magnitude of the external costs in an industry increased

a. The supply curve including external costs would increase
b. The efficient price would increase

c. The market price would increase
d. Both a and b are true
ANSWER: b
96. Because of the problem of second-hand smoke, if unregulated, the market for cigarettes would produce a quantity that
is too ____ at a price that is too ____ when compared to the socially optimal results.
a. low; low
b. high; low
c. low; high
d. high; high
ANSWER: b
Exhibit 8-1
97. Refer to Exhibit 8-1. Suppose that education provides spillover benefits to the community as illustrated in the
diagram. Based on this information, we can say that:
a. the market would exceed short of the desirable level of education, Q0.
b. education is overproduced by Q1 minus Q0 units.
c. the socially optimal quantity of education is Q1 units.
d. the socially optimal quantity of education is Q0 units.
ANSWER: c
98. Refer to Exhibit 8-1. The area bounded by what letters represents the associated efficiency loss resulting when there
are external benefits associated with education?
a. Q0, c, b, Q1
b. O, P1, b, Q1
c. O, P0, a, Q0
d. a, b, c
ANSWER: d
99. Refer to Exhibit 8-1. If the magnitude of the external benefits increased
a. The demand curve including external benefits would shift up
b. The efficient price would increase
c. The market price would increase
d. Both a and b are true
ANSWER: d
100. To internalize a negative externality:

a. a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a
good.
b. a producer's costs could be increased by an amount equal to the external cost resulting from the production of
a good.
c. a producer could receive a subsidy equal to the external cost resulting from the production of a good.
d. None of the above are correct.
ANSWER: b
101. To internalize a positive externality:

a. the consumers of a good could receive a subsidy equal to the external benefit resulting from the production or
consumption of the good.
b. a producer's costs could be increased by an amount equal to the external benefit resulting from the production
of the good.
c. consumers of the good could pay a tax equal to the external benefit resulting from the production or
consumption of the good.
d. None of the above are correct.
ANSWER: a
102. A corrective tax equal to the external cost imposed on third parties levied on polluters will:
a. eliminate all pollution.
b. increase the level of pollution.
c. force polluters to internalize the external cost resulting from their actions.
d. usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government.
ANSWER: c
103. If the production of a particular good involves significant external benefits, to force the externality to be internalized
the government might:
a. impose a tax on production of the good in order to increase production.
b. impose a tax on production of the good in order to decrease production.
c. offer a subsidy for production of the good in order to increase production.
d. offer a subsidy for production of the good in order to decrease production.
ANSWER: c
104. If the production of a particular good involves significant external costs, to force the externality to be internalized the
government might:
a. impose a tax on production of the good in order to increase production.
b. impose a tax on production of the good in order to decrease production.
c. offer a subsidy for production of the good in order to increase production.
d. offer a subsidy for production of the good in order to decrease production.
ANSWER: b
105. If firms were required to pay the full social costs of the production of goods, including both private and external
costs, other things being equal, there would probably be:
a. an increase in production.
b. a decrease in production.
c. a greater misallocation of resources.
d. a decrease in the market price of the product.
ANSWER: b
106. If consumers were able to receive the full social benefits associated with the consumption of goods involving positive
externalities, other things being equal, there would probably be:
a. an increase in consumption.
b. a decrease in consumption.
c. a greater misallocation of resources.
d. a decrease in the market price of the product.
ANSWER: a
107. 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?
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.
ANSWER: d
108. Which of the following is an example of a public good?

a. telephone service
b. national defense
c. a city-owned bus
d. electricity generated by a city-owned public utility
ANSWER: b
109. As an additional consumer obtains the benefits of a public good such as national defense, the benefits to existing
consumers:
a. decline.
b. increase.
c. increase in the short run, but decrease in the long run.
d. do not change.
ANSWER: d
110. Nonrivalry in consumption and the inability to exclude nonpaying consumers from using the goods are
characteristics of what kinds of goods?
a. durable
b. nondurable
c. public
d. private
ANSWER: c
111. The reason why national defense is commonly provided by the government, while food is not, is that food:
a. is too essential to survival to be provided by a bureaucratic organization.
b. manufacturers have successfully lobbied the government to stay out of the food industry.
c. can easily be withheld from those who refuse to pay for it.
d. provision is subject to a free-rider problem.
ANSWER: c
112. A public good is:

a. a good or service for which it is relatively easy to exclude nonpaying customers from consumption.
b. a good or service that is consumed by both the paying and nonpaying customers.
c. any good or service that is produced by the government.
d. a good or service that is consumed by private individuals and financed by private contributions.
ANSWER: b
113. Which of the following is the best example of a public good?

a. a national system of healthcare
b. an amusement park
c. city street lights
d. telephone service
ANSWER: c
114. Over the air television signals are ____________ ; television signals available through cable are
a. Public goods, public goods
b. Public goods, private goods
c. Private goods, private goods
d. Private goods, public goods
ANSWER: b
115. Over the air television signals are ____________ ; television signals available through cable are
a. Public goods, public goods
b. Public goods, common property resources
c. Private goods, private goods
d. Common property resource, private goods
ANSWER: c
116. Private goods ____ rival ____ excludable.

a. Are, and are
b. Are, but are not
c. Are not, but are
d. Are not, and are not
ANSWER: a
117. Public goods ____ rival ____ excludable.

a. Are, and are
b. Are, but are not
c. Are not, but are
ANSWER: d
118. Common property resources ____ rival ____ excludable.

a. are, and are
b. Are, but are not
c. Are not, but are
ANSWER: b
119. The free rider problem

a. Exists in the case of public goods
b. Exists in the case of common property resources
c. Is worse the larger the number of people involved for either public goods or common property resources
d. All of the above are true
ANSWER: d
120. Which of the following is true?

a. Consumption of a public good by one individual reduces the availability of the good for others.
b. It is extremely difficult to limit the benefits of a public good to the people who pay for it.
c. Public goods are free whenever the government produces them.
d. From an efficiency standpoint, a market economy will generally supply too much of a public good.
ANSWER: b
121. Where a free-rider problem exists, goods tend to be:

a. underproduced.
b. overproduced.
c. high-priced and available only to the rich.
d. low priced and available only to the poor.
ANSWER: a
122. A free-rider problem arises whenever:

a. goods cannot be provided exclusively to those who pay for them.
b. the price of a good is very low.
c. the government provides goods or services.
d. goods cease to be scarce.
ANSWER: a
123. In the absence of government action, the private market would probably not provide as much police protection as is
socially desirable because:
a. individuals are too poorly informed about the value of police protection.
b. the private benefits are greater than the private costs of providing police protection.
c. it is difficult to prevent free riders from benefiting from some police protection services.
d. the use of police services by one person will significantly reduce the police protection available to others.
ANSWER: c
124. Which of the following best illustrates the free-rider problem?

a. A tollbooth is constructed at the entrance of a privately funded highway.
b. Individuals contribute toward a national defense program by paying taxes to the government.
c. Some homeowners in a mountain resort area refuse to contribute toward paving the area's only access road.
d. You erect a locked gate around your swimming pool to keep out unsupervised children.
ANSWER: c
125. Public goods are those that are consumed:
a. only by those who have paid for them.
b. only by the government that provides them.
c. by the private group that funds them.
d. by the paying and nonpaying public alike.
ANSWER: d
126. Medical research helps to develop better treatments for neuromuscular disease. Medical researchers are constantly in
search of funds. Many in the public, however, are unwilling to contribute money toward neuromuscular disease research
until a member of their own family suffers from a neuromuscular ailment. If left strictly to the private market, it is likely
that there will be:
a. an overallocation of resources to neuromuscular disease research, relative to the efficient level.
b. an underallocation of resources to neuromuscular disease research, relative to the efficient level.
c. an efficient quantity of resources devoted to neuromuscular disease research.
d. an efficient quantity of resources devoted to neuromuscular disease research.
ANSWER: b
127. Public goods are characterized by:

a. rivalry in consumption.
b. nonrivalry in consumption.
c. excludability of nonpayers.
ANSWER: b
128. An example of a public good is:

a. a pizza.
b. milk.
c. a delivery truck.
d. national defense.
ANSWER: d
129. An example of a public good is:

a. a tornado siren.
b. a cake.
c. a personal computer.
d. a DVD player.
ANSWER: a
130. The free-rider problem arises when:

a. goods cease to be scarce.
b. goods are produced by the government.
c. goods can't be provided exclusively to paying customers.
d. the marginal benefit to a private individual outweighs the marginal cost of producing a good.
ANSWER: c
131. When a good is nonrivalrous in consumption, then:

a. consumption by an additional individual will significantly reduce the benefits derived by others from a public
good.
b. individuals who refuse to pay for a public good cannot be excluded from benefiting from it.
c. consumption by an additional individual does not prevent others from benefiting from a public good.
d. individuals who refuse to pay for a public good can be excluded from benefiting from it.
ANSWER: c
132. When city beautification programs are funded privately:

a. only contributing citizens are likely to benefit from a more beautiful city.
b. only free riders are likely to benefit from a more beautiful city.
c. an underallocation of resources toward the beautification project is likely to occur relative to what is socially
efficient.
ANSWER: c
133. An economist might argue that U.S. national defense should be funded through tax revenues because:
a. U.S. citizens are not very patriotic.
b. the government is always a more efficient provider of goods than the private market.
c. the government always seeks to act benevolently on behalf of its citizens.
d. individuals who refuse to contribute to a national defense fund cannot be excluded from benefiting from
national defense.
ANSWER: d
134. Which of the following goods is least likely to be provided by the private sector?
a. a good characterized by nonrivalry in consumption from which nonpaying customers can be excluded
b. a good characterized by nonrivalry in consumption from which paying customers cannot be excluded
c. a good characterized by rivalry in consumption from which nonpaying customers can be excluded
d. a good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good
ANSWER: b
135. The practice of potential buyers offering lower prices for a product of uncertain quality than they would for a product
of certain quality is known as:
a. the lemon problem.
b. moral hazard.
c. external costs.
ANSWER: a
136. Consumers are generally willing to spend more time researching cars before making a purchase than they do
researching paper towels because:
a. the cost of gathering information about paper towels is very small.
b. the cost of gathering information about cars is less than the cost of gathering information about paper towels.
c. the cost of gathering information about cars is less than the cost of gathering information about paper towels.
d. the net benefit from gathering additional information about paper towels is likely much greater than the net
benefit derived from gathering additional information about cars.
ANSWER: c
137. Consumers will willingly make less-informed decisions:

a. if information costs are less than the perceived benefits of gathering information.
b. if information costs are greater than the perceived benefits of gathering information.
c. since ignorance always leads to bliss.
d. whenever acquiring more information requires sacrifice.
ANSWER: b
138. Socially inefficient outcomes may occur in markets where there are:
a. negative externalities present.
b. asymmetric information problems present.
c. positive externalities present.
d. any of the above.
ANSWER: d
139. Sellers may choose not to sell in certain markets because:

a. it is possible to practice price discrimination against customers.
b. buyers are unable to perceive the high quality of their goods and are, therefore, less willing to pay for them.
c. they are able to impose negative externalities on third parties.
d. an above-average profit potential is projected.
ANSWER: b
140. A warranty offered by a seller is one way to overcome:

a. A warranty offered by a seller is one way to overcome:.
b. a negative externality problem.
c. an adverse selection problem.
d. a free-rider problem.
ANSWER: c
141. Health insurance is subject to

a. Both asymmetric information problems and moral hazard problems
b. Neither asymmetric information problems nor moral hazard problems
c. Asymmetric information problems but not moral hazard problems
d. moral hazard problems but not asymmetric information problems
ANSWER: a
142. In the health insurance field, asymmetric information creates problems _____ insurance contracts are signed; moral
hazard causes problems_____ insurance contracts are signed.
a. Before; before
b. Before; after
c. After; after
d. After; before
ANSWER: b
143. The tendency of those who are insured to take more risks as a result is a problem of:
a. free riding.
b. moral hazard.
c. adverse selection.
d. positive externalities.
ANSWER: b
144. After trading in her Volkswagen Beetle for a much safer Mercedes sedan, Rene began driving less carefully. This is
an example of:
a. adverse selection.
b. free-riding.
c. moral hazard.
d. Positive externalities.
ANSWER: c
145. Which of the following is an example of moral hazard?

a. There are likely more cars of low quality than of high quality offered for sale without warranties in the used
car market.
b. An individual who eats well and exercises regularly chooses not to purchase health insurance.
c. An individual drives less cautiously after obtaining automobile insurance.
d. A car salesman offers a full warranty on a used car for 90 days.
ANSWER: c
146. Which of the following are true?

a. Negative externalities are real costs, but, unlike the other resources a firm uses in production, no one owns the
air, so a firm does not have to pay for its use.
b. In the case of external costs, firms tend to produce too much from society's standpoint, causing an efficiency
loss due to an overallocation of scarce resources to the production of the good.
c. If government could impose a pollution tax equal to the exact size of the external costs imposed by a firm,
then the firm would produce at the socially desired level of output.
ANSWER: d
147. If the government overcorrected in a situation of external costs

a. More than the efficient amount of the good would end up being produced.
b. Less than the efficient amount of the good would end up being produced.
c. It would result in a welfare cost in that market.
d. Both b and c are would result.
ANSWER: d
148. If the government overcorrected in a situation of external costs

a. More than the efficient amount of the good would end up being produced.
b. Less than the efficient amount of the good would end up being produced.
c. It would result in a welfare cost in that market that was bigger than the initial welfare cost.
d. Both a and c are would result.
ANSWER: a

a. The private market provides too much of goods that generate external benefits.
b. In the case of external benefits, if we could add the benefits that are derived by non-paying consumers, the
supply curve would shift to the right, increasing output.
c. In the case of external benefits, a tax equal to external benefits would result in an efficient level of output.

d. In the case of public goods, when people act as free-riders, some goods having benefits greater than costs will
not be produced.
ANSWER: d
150. If Don paints the outside of his house a horrendous color:

a. he probably has lowered the value of his home, but not that of his neighbors' homes.
b. he probably has lowered the value of his home and the value of his neighbors' homes.
c. he probably has lowered the value of his neighbors' homes but not the value of his own home.
ANSWER: b
151. Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the
equilibrium quantity ____ for efficient resource allocation.
a. too high; too high.
b. too high; too low.
c. too low; too high.
d. too low, too low.
ANSWER: c
152. 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.
a. too high; too high.
b. too high; too low.
c. too low; too high.
d. too low, too low.
ANSWER: d
153. If the production of a good creates large spillover benefits on others, the government might correct for the:
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.
ANSWER: c
154. If there are important spillover benefits from consumption of a good,

a. government should prohibit its production.
b. taxes should be imposed on producers of the product.
c. the market demand curve for the good understates the value of the product to society and resources are
therefore underallocated to its production.
d. the market demand curve for the good overstates the value of the product to society and resources are therefore
overallocated to its production.
ANSWER: c
155. In a competitive market,

a. demand will always reflect all spillover costs.
b. demand will always reflect all spillover benefits.
c. supply will always reflect all spillover costs.

d. none of the above are true.
ANSWER: d
156. Suppose a product produces substantial spillover costs. If the government adopts a policy that forces producers to
bear those costs:
a. the equilibrium quantity of the product exchanged will fall.
b. the initial misallocation of resources will be corrected.
c. the equilibrium price of the product will rise.
d. all of the above will be true.
ANSWER: d
157. When the production or consumption of a good involves an externality:

a. resources are necessarily overallocated to the good.
b. resources are necessarily underallocated to the good.
c. someone not involved in buying or selling the good is affected.
d. the market will efficiently allocate resources to its production.
ANSWER: c
158. An individual firm has little incentive to voluntarily internalize any external costs it was creating because:
a. it would shift its cost curves downward.
b. it would put it at a competitive disadvantage compared to its rivals.
c. it would have to increase output to make up for the added costs.
d. they do not care at all about other people.
ANSWER: b
159. Signaling is important because:

a. it increases social benefits associated with public goods.
b. it decreases external costs associated with externalities.
c. it reduces information costs associated with asymmetric information.
d. all of the above
ANSWER: c
160. Education ____ create external benefits; it ______ provide a valuable signally function.
a. Does; does
b. Does, does not
c. Does not; does
d. Does not; does not
ANSWER: a
161. Which of the following may involve external benefits?

a. drunken driving.
b. smoking.
c. public education.
d. highway congestion.
ANSWER: c
162. In a competitive economy with no government sector:

a. goods with spillover benefits will not be produced at all.
b. there will be too few public goods produced.
c. goods with spillover costs will be underproduced.
d. too few resources be allocated to each industry.
ANSWER: b
163. If the production of a good created both external costs and external benefits, but the external costs were greater,
without government intervention, a market economy will:
a. not produce the product at all.
b. overproduce the product.
c. underproduce the product.
d. produce the optimal amount of the product.
ANSWER: b
164. If the government required car makers to install more costly and effective emission control devices on cars, it will
lead to:
a. a higher price of cars and a larger quantity of cars sold.
b. a higher price of cars and a smaller quantity of cars sold.
c. a lower price of cars and a larger quantity of cars sold.
d. a lower price of cars and a smaller quantity of cars sold.
ANSWER: b
165. The consumption of public goods is

a. excludable and rivalrous
b. excludable and non-rivalrous
c. non-excludable and rivalrous
d. non-excludable and non-rivalrous
ANSWER: d
166.
Without government intervention, society is likely to get too little production of:
i. private goods that generate external costs
ii. private goods that generate external benefits
iii. public goods
a. (i) only
b. (ii) only
c. (iii) only
d. both (ii) and (iii)
ANSWER: d
167. Without government intervention, society is likely to get too much production of:
i. private goods that generate external costs
ii. private goods that generate external benefits
iii. public goods
a. (i) only
b. (ii) only
c. (iii) only
d. both (ii) and (iii)
ANSWER: a
168. Which of the following is false?

a. The nature of public goods is such that the government cannot accurately assess the benefits of those affected.
b. National defense and flood control are illustrations of public goods.
c. Just as in the case of external costs, public goods tend to be underprovided by the private sector.
ANSWER: c

a. The nature of public goods is such that the government cannot accurately assess the benefits of those affected.
b. National defense and flood control are illustrations of public goods.
c. Just as in the case of external costs, public goods tend to be underprovided by the private sector.
ANSWER: d
170. The free rider problem suggests that a producer will tend to:
i. produce more than the optimal quantity of a public good.
ii. produce less than the optimal quantity of a public good.
iii. produce the optimal quantity of a public good if it is funded out of tax revenue.
a. (i) only
b. (ii) only
c. (i) and (iii) only
d. (ii) and (iii) only
ANSWER: d
171. Forms of free riding behavior

a. Always leads to underproduction
b. Occur in both external cost and public goods cases
c. Does not occur with common property resources, unlike public goods cases
d. Occurs with private goods, public goods and common property resources
ANSWER: b
172. The market system fails to provide the efficient output of public goods because:
a. people place no value on public goods.
b. private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them.
c. public enterprises can produce those goods at lower cost than private firms.
d. public goods create widespread spillover costs.
ANSWER: b
173. Public goods are:

a. any goods or services several members of the public would like produced
b. those goods for which natural monopolies exist.
c. goods which cannot be successfully produced by private firms.
d. goods which cannot be easily financed through the market system.
ANSWER: d
174. Public goods:

a. Can be both produced and financed by the private sector.
b. Can be both produced but not easily financed by the private sector
c. Cannot be produced but can be financed by the private sector.
d. Cannot be produced or easily financed by the private sector.
ANSWER: b
175. Public goods, like national defense, are usually funded through government because:
a. no one cares about them, because they are public.
b. it is prohibitively difficult to withhold national defense from someone unwilling to pay for it.
c. they cost too much for private firms to produce them.
d. they provide benefits only to individuals, and not firms.
ANSWER: b
176. The determination of which goods are public goods depends on:
a. public laws.
b. normative considerations.
c. whether it is produced directly by the government or produced by a private sector firm.
d. whether it is possible to exclude additional users from consuming the good if they do not pay for it.
ANSWER: d
177. The free rider problem suggests that a producer will tend to:
a. produce more than the optimal quantity of a public good.
b. produce less than the optimal quantity of a public good.
c. produce the optimal quantity of a public good if it is funded out of tax revenue.
d. do none of the above.
ANSWER: b
178. If quality-detection costs are very low,

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.
ANSWER: a
179. An individual insured against a particular cost,

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.
ANSWER: d

a. Economic reasoning implies that individuals will acquire all possible information about a choice before
making it.
b. It is not rational for people to make decisions that could turn out to be mistaken.
c. Reducing information costs to consumers and suppliers could permit more intelligent market decisions and
lead to greater satisfaction.
d. Occupational licensing laws generally act to protect misinformed consumers from getting shoddy services and
enhances competition, leading to lower prices.
ANSWER: c
181. Which of the following is false?

a. Product liability laws can make it unprofitable to sell shoddy merchandise, providing a substantial incentive to
provide safe products independent of government regulations.
b. Asymmetric information exists when the available information is initially distributed in favor of one party to a
transaction relative to another.
c. In adverse selection situations, it is rational for a seller with more information about a product to provide a
truthful and complete disclosure and make that fact known to a potential buyer.
d. Moral hazard arises in part from the fact that it is costly for an insurer to monitor the behaviors of the insured
party.
ANSWER: c
182. Which of the following is true of adverse selection?

a. It can result when one of the parties to a transaction has little information about the quality of the goods
involved.
b. It can cause the quality of goods traded to fall, if quality detection costs are high.
c. It can be a difficult problem to overcome, because it is not individually rational for the transactor with the
superior information to provide a truthful and complete disclosure.
ANSWER: d
183. Which of the following is most likely to be characterized by substantial asymmetric information?
a. a soft drink purchased in a vending machine
b. a car wash to benefit the local high school band
c. a collectible baseball card purchased on eBay
d. wireless service that includes unlimited minutes and texting
ANSWER: c
184. In the market for insurance, the moral hazard problem leads:
a. those most likely to collect on insurance to buy it.
b. those who buy insurance to take fewer precautions to avoid the insured risk.
c. those with less insurance to take on more risk.
d. to none of the above.
ANSWER: b
185. In the market for insurance, the adverse selection problem leads
a. those most likely to collect on insurance to buy it.
b. those who buy insurance to take fewer precautions to avoid the insured risk.
c. those with less insurance to take on more risk.
d. to none of the above.
ANSWER: a

186. 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:
a. the moral hazard problem.
b. the free rider problem.
c. the adverse selection problem.
d. the "lemon" problem.
ANSWER: a
187. If, after she buys a car with air bags, Maria Andretti starts to drive recklessly, that would be an illustration of:
a. the moral hazard problem.
b. the free rider problem.
c. the adverse selection problem.
d. the "lemon" problem.
ANSWER: a
Exhibit 8-2
188. Refer to Exhibit 8-2. The market equilibrium and efficient equilibrium are denoted by points ____ respectively.
a. a and b
b. c and a
c. a and c
d. c and b
ANSWER: c
189. Refer to Exhibit 8-2. If the suppliers of steel are not aware of or not responsible for the external costs, they will tend
to:
a. apply new technology to reduce external costs.
b. produce too much.
c. produce too little.
d. reduce production to Q2.
ANSWER: b
190. Refer to Exhibit 8-2. The supply curve S social includes the following costs.
a. Private costs only
b. Private costs and external costs

c. External costs and public costs
d. all of the above
ANSWER: b
191. Refer to Exhibit 8-2. The supply curve S private includes the following costs.
a. Costs that production imposes on others
b. Private costs and external costs
c. External costs and spillover costs
d. Costs of capital, entrepreneurship, land, and labor
ANSWER: d
192. Refer to Exhibit 8-2. Which of the following observations is correct?

a. The equilibrium at P2 and Q2 is inefficient.
b. From society's standpoint, Q1 is the efficient level of output.
c. The social opportunity cost is above the demand curve at Q1.
d. The equilibrium at P1 and Q1 is efficient.
ANSWER: c
193. Which of the following is a rival good that is nonexcludable?

a. public good
b. private good
c. common resource
ANSWER: c
194. Global warming, which causes unfavorable climatic changes due to the burning of fossil fuels, would be an example
of a(n):
a. positive externality.
b. negative externality.
c. internalized externality.
d. Coase externality.
ANSWER: b
195. The key explanation for the prevalence of waterway pollution is:
a. the inclusion in decisions of all production costs associated with the use of waterways.
b. that there are private costs but no costs to society associated with the use of waterways that are not costs to
society.
c. that waterways are not private property and can be used free of charge.
d. that waterways are not of great value to society.
ANSWER: c
196. If the government tried to implement a total ban on pollution:

a. output prices would decrease.
b. output prices would increase.
c. production would increase.
d. production would be unchanged.
ANSWER: b
197. If the production of a product creates external costs, there is an ____ to production of that good which the
government can correct for by ____.
a. overallocation of resources; granting a subsidy
b. overallocation of resources; imposing a per-unit tax
c. underallocation of resources; granting a subsidy
d. underallocation of resources; imposing a per-unit tax
ANSWER: b
198. A chemical manufacturer dumps waste into a river, which harms owners of resorts downstream from the chemical
factory. Which of the following best describes the situation?
a. The socially efficient level of output exceeds the chemical firm's privately optimal output level.
b. River pollution should be reduced until it is technologically impossible to reduce it further.
c. The firm's privately optimal output level exceeds the socially efficient level of output.
d. If the firm were forced to bear the external costs of dumping chemicals into the river, it would increase its
production of output.
ANSWER: c
199. The optimal quantity of pollution is:

a. zero.
b. the level where the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement
by the greatest amount.
c. the level where the marginal benefit of pollution abatement exceeds the marginal cost of pollution abatement
by the greatest amount.
d. none of the above.
ANSWER: d
200. Which of the following allows the greatest value to be generated with a given amount of pollution?
a. Pollution tax
b. Regulatory guidelines
c. Compliance standards
d. Pollution rights
ANSWER: d
201. Pollution reduction policies are likely to lead to:

a. higher product prices.
b. lower product prices.
c. unchanged product prices.
d. indeterminate changes in product prices.
ANSWER: a
202. Identify the approach used by the Environmental Protection Agency (EPA) to enforce environmental standards.
a. pollution taxes
b. least-cost method
c. compliance standards
d. pollution rights
ANSWER: c

203. The main duty of the Environmental Protection Agency (EPA) is to:
a. assure safe work places.
b. prevent crime.
c. enforce environmental standards.
d. regulate air transport.
e. regulate rates charged by generators of nuclear energy.
ANSWER: c
204. The optimal level of pollution is achieved when:

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.
ANSWER: a
205. The efficient level of pollution is greater

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.
ANSWER: c
206. The efficient level of pollution abatement is greater

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.
ANSWER: b
207. If both the marginal social benefit of abatement function and the marginal social benefit of abatement function
shifted up.
a. The greater would be the efficient level of pollution abatement.
b. The smaller would be the efficient level of pollution abatement.
c. There would be no change in the efficient level of pollution abatement.
d. We do not know whether the efficient level of pollution abatement would rise or fall.
ANSWER: d
208. The concept of the "best" level of pollution suggests that:

a. increased concerns about pollution control shifted the marginal social cost curve to the left.
b. the opportunity cost of reducing pollution may sometimes exceed the benefit.
c. unregulated markets generally reduce pollution to efficient levels with marginal social cost equal to marginal
social benefit.
ANSWER: b
209. Cleaning an environment may lead to:

a. less production.
b. higher prices.
c. lower incomes.
d. all of the above.
ANSWER: d
210. If the government imposes a pollution tax on gasoline refineries:

a. the supply of gasoline will shift to the right.
b. the demand for gasoline will shift to the right.
c. the supply of gasoline will shift to the left.
d. the demand for gasoline will shift to the left.
ANSWER: c
211. The imposition of a per-unit tax on polluting firms will result in the socially efficient level of production only if the
tax equals:
a. the marginal social cost plus the marginal private cost.
b. the marginal social cost plus the marginal external cost.
c. the marginal social cost minus the marginal private cost.
d. the average total cost minus the average variable cost.
ANSWER: c
212. A pollution tax:

a. increases the price of the good taxed.
b. decreases the price of the good taxed.
c. increases the production of the good taxed.
d. increases the quantity of the taxed good demanded.
ANSWER: a
213. A tax on pollution would:

a. increase the quantity of pollution generated by giving firms the right to pollute.
b. result in firms polluting the same amount as before the imposition of a tax.
c. decrease the quantity of pollution generated.
d. have an indeterminate impact on pollution levels.
ANSWER: c
214. The optimal quantity of pollution control occurs where:

a. pollution equals zero.
b. the total benefit of pollution control equals the total cost.
c. the marginal social benefit of pollution control just equals the marginal social cost.
d. the marginal external cost of pollution equals zero.
ANSWER: c
215. Evidence suggests that the marginal social cost of pollution reduction:
a. increases as pollution reduction increases.
b. remains constant as pollution reduction increases.
c. decreases as pollution reduction increases.
d. equals zero since it is beneficial to reduce pollution.
ANSWER: a
216. For society as a whole, the optimal amount of pollution control exists when:
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.
ANSWER: a
217. When a firm creates negative externalities by polluting, in order to achieve the socially efficient outcome:
a. the firm's production should be prohibited.
b. the firm's production should be increased and the price of its output should be decreased.
c. the firm's production should be increased and the price of its output should be increased.
d. the firm's production should be reduced and the price of its output should be increased.
ANSWER: d
218. Transferable pollution rights allow a given level of pollution reduction to be achieved:
a. at zero cost.
b. at higher cost than compliance standards.
c. at lower cost than compliance standards.
d. at higher cost than a system of pollution taxes.
ANSWER: c
219. 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:
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.
ANSWER: c
b. Both firms have an incentive to buy pollution rights.
ANSWER: b

b. Both firms have an incentive to buy pollution rights.
ANSWER: d
222. Which of the following observations concerning pollution rights is incorrect?

a. It would not allow firms to move into an area that is already as polluted as allowed by EPA standards.
b. It allows the greatest value to be generated with a given amount of pollution.
c. The rights are private property and can be sold.
d. Each polluter is motivated to discover and use the cheapest way to reduce pollution.
ANSWER: a
223. Firms buy and sell the right to pollute:

a. under a system of compliance standards.
b. under a free market system where there is no government intervention and property rights are not well-
defined.
c. under a system of transferable pollution permits.
d. under a pollution tax system.
ANSWER: c
224. A system of transferable pollution rights:

a. increases the quantity of pollution generated.
b. provides firms with an incentive to develop new pollution-abatement technologies.
c. is not as cost-effective in reducing pollution as a system based on compliance standards.
d. is characterized by none of the above.
ANSWER: b
225. Under a system of transferable pollution rights, which of the following firms is most likely to purchase a $500 permit
to emit a ton of pollutants in to the atmosphere?
a. a non-polluting firm
b. a polluting firm that can reduce emissions at a cost of $500 per ton
c. a polluting firm that can reduce emissions at a cost of $200 per ton
d. a polluting firm that can reduce emissions at a cost of $600 per ton
ANSWER: d
Exhibit 8-3
Cost of Reducing
Emissions from Firm A Firm B Firm C
5 to 4 tons $500 $100 $200
4 to 3 tons $600 $200 $250
3 to 2 tons $700 $300 $350
2 to 1 ton $800 $400 $500
1 ton to zero $900 $500 $700
226. Refer to Exhibit 8-3. What would be the total cost if each firm was initially emitting 5 tons of pollution, then the
government established a standard of 3 tons maximum pollution per firm in order to decrease pollution by a total of 6
tons?
a. $800
b. $1,050
c. $1,850
d. $2,100
ANSWER: c
227. Refer to Exhibit 8-3. What would be the total cost if each firm was initially emitting 5 tons of pollution, then the
government issued transferable pollution rights allowing a total of 9 tons of pollution in the industry in order to decrease
pollution by a total of 6 tons?
a. $1,400
b. $1,700
c. $1,840
d. $3,600
ANSWER: a
228. Which objective of an ideal pollution control policy would involve the principle of continuing to reduce pollution by
one more unit only as long as the value of the improved environmental quality is greater than the value of ordinary goods
that are sacrificed?
a. achieving pollution reduction at least cost
b. motivating advances in abatement technology
c. achieving the efficient level of pollution
d. achieving a zero level of pollution
ANSWER: c
229. An ideal pollution control policy:

a. would reduce pollution to zero.
b. would reduce pollution to the socially efficient level.
c. discourage firms from wasting time developing abatement technologies.
d. reduce pollution as quickly as possible, regardless of the cost.
ANSWER: b
230. If pollution is reduced below the socially efficient level:

a. the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.
b. the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement.
c. the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.
d. nothing can be said about the relationship between the marginal cost and marginal benefit of pollution
abatement.
ANSWER: a
231. If pollution levels exceed the socially efficient level:

a. the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.
b. the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement.
c. the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.
d. nothing can be said about the relationship between the marginal cost and marginal benefit of pollution
abatement.
ANSWER: b
232. Which of the following is not true with regard to pollution control through transferable pollution rights?
a. It does not require the government to know in advance the pollution abatement techniques to be utilized.
b. It creates an incentive to develop improved pollution abatement technologies.
c. It ultimately requires all firms to reduce pollution in equal amounts.
d. It established private property rights that can be sold.
ANSWER: c
233. Which of the following statements is correct?

a. The ideal solution to a pollution problem is to reduce pollution until it is technologically impossible to reduce
it any further.
b. The ideal and fair solution to a pollution problem is to impose identical compliance standards on all polluting
firms.
c. Charging firms for transferable emissions permits is a more efficient way of dealing with pollution than are
compliance standards.
d. A per-unit pollution tax is a more efficient way of dealing with pollution than is a system of transferable
emissions permits.
ANSWER: c
234. Pollution abatement is likely to be most costly under:

a. a compliance standard.
b. a per-unit pollution tax system.
c. a system of transferable pollution rights.
d. Costs are the same under all three pollution control policies.
ANSWER: a
235. The presence of a negative externality is likely to give rise to significant market failures when:
a. property rights are not well-defined.
b. property rights are well-defined.
c. there are few victims of pollution and few polluters.
d. transaction costs are relatively low.
ANSWER: a
236. According to the Coase Theorem, private solutions to externalities can lead to the socially efficient outcome when:
i. transaction costs are negligible
ii. property rights are clearly defined
iii. the number of parties involved is small
a. (i), (ii), and (iii)
b. (i) and (ii) only
c. (iii) only
d. (ii) and (iii) only
ANSWER: a
237. Nick owns a dog whose barking annoys his neighbor Jane. Suppose that the benefit of owning the dog is worth $500
to Nick, and that Jane bears a cost of $700 from the barking. Assume that the city has no ordinance against barking dogs.
A possible private solution that would benefit both parties is for:
a. Jane to pay Nick $450 to get rid of the dog.
b. Nick to pay Jane $650 for her inconvenience.
c. Jane to pay Nick $650 to get rid of the dog.
d. There is no private solution that would improve this situation for both parties.
ANSWER: c
238. Nick owns a dog whose barking annoys his neighbor Jane. Suppose that the benefit of owning the dog is worth $700
to Nick, and that Jane bears a cost of $500 from the barking. Assume that the city has no ordinance against barking dogs.
A possible private solution that would benefit both parties is for:
a. There is no private solution that would improve this situation for both parties.
b. Jane to pay Nick $650 to get rid of the dog.
c. Jane to pay Nick $800 to get rid of the dog.
d. Nick to pay Jane $600 for her inconvenience.
ANSWER: a
239. Private solutions often are not possible due to the costs of negotiating and enforcing these solutions. Such costs are
called:
a. transaction costs.
b. external costs.
c. deadweight losses.
d. social costs.
ANSWER: a
240. Nancy loves to landscape her yard, but her neighbor Tom places a low value on his landscaping. When Tom's grass
is neglected and gets long, Nancy will mow for Tom. This is an example of:
a. the fallacy of composition.
b. a pollution tax.
c. a private solution to a negative externality problem.
d. how lazy Tom is.
ANSWER: c
241. If transaction costs of negotiating are ____, the ____ suggests that the private market ____ allocate resources.
a. high; Externality Theorem; will efficiently
b. high; Coase Theorem; will not efficiently
c. low; Coase Theorem; will efficiently
d. both b. and c
ANSWER: d
242. Suppose that your roommate is very untidy. Suppose she/he gets a $100 benefit from being messy but imposes a
$200 cost on you. (Assume that there are no regulations against untidiness in your living quarters.) The Coase Theorem
would suggest that an efficient solution can be reached where:
a. you pay your roommate at least $100 but no more than $200 to clean up after her/himself
b. you pay your roommate at least $201 to clean up after her/himself.
c. you continue to live with your untidy roommate until you are able to make other living arrangements
elsewhere.
d. your roommate pays you at least $100 to have you clean up after her/him.
ANSWER: a
243. Assume your roommate is very untidy. According to campus policy, you have a right to live in an uncluttered
apartment. Suppose she/he gets a $200 benefit from being untidy but imposes a $100 cost on you. The Coase Theorem
would suggest an efficient solution can be reached where:

a. you continue to live with your messy roommate until you are able to make other living arrangements
elsewhere.
b. your roommate stops her/his messy habits or you force her/him to move out.
c. you pay your roommate at least $100 but no more than $200 to clean up after (her)himself.
d. your roommate pays you at least $100 but no more than $200 for the right to be untidy (or to have you clean
up after her/him).
ANSWER: d
244. The Coase Theorem suggests that under its assumption, the efficient solution to an externality problem:
a. depends on who owns property rights to the resources.
b. is enhanced by government involvement in the negotiations.
c. can be enhanced through the use of taxes.
d. does not depend on the distribution of property rights.
ANSWER: d
245. The noise from the low altitude combat training the Air Force conducts over the Yippy I-O Ranch causes the ranch's
cattle to lose weight. Which of the following actions is not consistent with recognition that the Yippy I-O has a property
right to its skies?
a. The Air Force equips its planes with mufflers.
b. The Air Force compensates the Yippy I-O for the value of the lost weight.
c. The ranch compensates the Air Force for the cost of moving the exercises to another location.
d. The Air Force pays for cow earplugs for the ranch herd.
ANSWER: c
246. Thousands of Japanese fishermen have used gill nets to catch tuna with great efficiency. Many environmentalists
have objected to this practice since many other marine animals (such as dolphins and sharks) are killed by the nets and
discarded by the fishermen. Which of the following statements is most accurate?
a. A private solution can be reached through negotiation between the fishermen and the environmentalists.
b. A private solution is not practical due to the large number of individuals affected.
c. The market price of tuna is higher than the socially optimum price of tuna.
d. A private solution to this problem would not affect the price of tuna.
ANSWER: b
247. The theory that private negotiations have the potential to make some people better off without making anyone worse
off when negative externalities are present is known as:
a. the Negative Externality Theorem.
b. the Sexton Theorem.
c. the Coase Theorem.
d. the Abatement Theorem.
ANSWER: c
248. A tradable emissions permit program is efficient because the cap protects the environment while:
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 above
ANSWER: b

249. If the rivers, lakes and air in the United States could all be privately owned, then:
a. there would be less pollution.
b. costs of production for many firms would rise.
c. externalities would be internalized.
d. all of the above are correct.
ANSWER: d
250. The ____ is the government agency with the task of developing and enforcing policies that are aimed at protecting
the environment.
a. FDA
b. DOI
c. FEMA
d. EPA
ANSWER: d
251. If a subsidy was imposed on an industry whose production imposed external benefits on others, then the goods'
consumers of the good would be ____ and the result would be a(n) ____ in efficiency.
a. better off; increase.
b. better off; decrease.
c. worse off; increase.
d. worse off; decrease.
ANSWER: a
252. Beginning from a situation where there were no clear property rights to clean air and water:
a. subsidies could not improve efficiency in cases of external benefits.
b. subsidies could not improve efficiency in cases of external costs.
c. taxes could not improve efficiency in cases of external costs.
d. neither external benefits nor external costs could improve efficiency in either the case of external benefits or
the case of external costs.
ANSWER: b
253. Various new cars are sold with sensors that automatically turn on the headlights at night or in low light conditions.
Would these sensors create a positive externality or a negative externality? How?
ANSWER: Cars with these new sensors would likely create positive externalities. Other drivers would be safer because
those driving with these sensors would always have their headlights on when driving at night, in the rain, etc.
254. What is the difference between private and social costs?

ANSWER: Social costs are those that accrue to the total population; private costs refer to those costs incurred only by
the producer or consumer of the good or service.
255. Why do decision makers tend to ignore external costs? How can internalizing external costs move us closer to
efficient levels of output?
ANSWER: The decision makers ignore it because it is not a resource that they have to "purchase" for the production
process. If an industry or a firm were somehow forced to compensate persons who incur the costs of
pollution, we would say that the industry had internalized the externality. There would be greater social
efficiency if all of the costs of production were internalized. The firms would produce less and charge a
higher price, but it would then include all the costs.
256. What are the external costs and external benefits associated with cell phone usage in automobiles?
ANSWER: The external costs associated with cellular phone usage may include a higher incidence of traffic accidents.
Not only are the individuals involved in the accident bearing additional costs, but so also are other insured
drivers who now have to pay higher insurance rates. External benefits could include the ability to report an
accident so that help can reach victims more quickly, and so that traffic reporters can advise motorists to
avoid a particular area.
257. What distinguishes public goods from private goods?
ANSWER: Public goods are both nonrival in consumption (one person's consumption does not diminish another's) and
nonexclusive (you cannot prevent nonpaying individuals from benefiting from the good). Private goods are
both rivalrous and exclusive. One's consumption of such a good does diminish another's, and you can keep
nonpaying individuals from consuming the good or service.
258. Explain why broadcasting television over the air is considered a public good. Why is cable TV not a public good?
ANSWER: Broadcast television is a good that is nonrivalrous (I can watch at the same time as others) and nonexclusive
(benefits cannot be restricted to those who pay) in nature. However, cable TV can exclude nonpayers, so that
it is not a public good.
259. Differentiate between a public good and a common resource good.
ANSWER: A public good is neither rival nor excludable. It is not rival because everyone can consume the good
simultaneously. It is not excludable because once the good is produced, it is prohibitively costly to exclude
anyone from consuming the good. On the other hand, a common resource is a rival good that is
nonexcludable; that is, nonpayers cannot be easily excluded from consuming the good, and when one unit is
consumed by one person, it means that it cannot be consumed by another.
260. If a developer plans to build a skyscraper in a major city overshadowing an historic church, could an efficient
solution be reached if the church had the legal right to prevent the developer from building in that location? Why or why
not?
ANSWER: Yes, an efficient solution could be reached if the property rights were well established. In this case, if the
builder's value of developing the site was greater than the church's value of no development, the builder
could potentially compensate the church for an amount that would make both parties better off.
261. Why do most economists favor emissions taxes and transferable pollution rights over compliance standards as
pollution deterrents?
ANSWER: Compliance standards do not consider which firms can reduce pollutants at the lowest cost. Pollution taxes,
on the other hand, encourage firms to develop and utilize abatement technologies in order to avoid paying
taxes. Firms able to reduce pollution levels at relatively low opportunity costs can sell transferable pollution
rights to firms unable to reduce pollution levels except at relatively high opportunity costs.
262. How could transferable pollution rights lead to pollution being reduced at the lowest possible opportunity cost?
ANSWER: A policy allowing tradable pollution rights encourages polluters to find cheaper ways to reduce pollution. A
firm that is able to reduce its pollution levels can sell its remaining pollution credits to others. The
supervising government agency does not need to be informed about the cheapest methods by which a firm
can reduce its pollution output. Firms most capable of reducing emissions will do so. Firms with the highest
opportunity costs of pollution abatement are likely to purchase rights to pollute from others. This promotes
economic efficiency in the attainment of targeted pollution levels.
263. What is the Coase Theorem? What are transaction costs?

ANSWER: The Coase Theorem asserts that if the benefits are greater than the costs for some course of action, there must
be potential transactions that can make some people better off without making anyone worse off. For this to

result property rights must be well-defined and transaction costs must be low. Transaction costs are the costs
of negotiating and executing an exchange, excluding the cost of the good or service bought.

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Exploring Economics 7th Edition by Sexton

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1. A public good is nonrivalrous and excludable.

7. Pollution taxes always cause deadweight losses, reducing economic efficiency.

17. Technology spillovers are examples of negative externalities.

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36. Economists believe that the optimal level of pollution is zero.

44. Private costs are those borne by:

45. The total social costs of production are:

46. An example of a positive externality is:

47. An externality occurs when:

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49. Negative externalities are costs incurred by:

52. Which of the following is an example of an externality?

54. Which of the following activities, if any, represents an external cost?

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56. Which of the following activities, if any, represents an external benefit?

57. Which of the following activities, if any, represents an external benefit?

58. An negative externality is present whenever:

59. A positive externality is present whenever:

60. If there are both external benefits and external costs:

66. An example of a negative externality is:

68. A positive externality will cause a market to produce:

70. The greater the magnitude of the external costs of production,

71. The greater the magnitude of the external benefits of production,

72. The greater the magnitude of the external costs of production,

73. The greater the magnitude of the external benefits of production,

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76. Technology spillovers:

77. Technology spillovers:

78. As a result of technology spillovers:

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86. Which of the following provides an example of an externality?

87. Which of the following statements is true?

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a. the supply curve with external costs included; P2

95. If the magnitude of the external costs in an industry increased

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100. To internalize a negative externality:

101. To internalize a positive externality:

108. Which of the following is an example of a public good?

112. A public good is:

113. Which of the following is the best example of a public good?

116. Private goods ____ rival ____ excludable.

117. Public goods ____ rival ____ excludable.

118. Common property resources ____ rival ____ excludable.

119. The free rider problem

120. Which of the following is true?

121. Where a free-rider problem exists, goods tend to be:

122. A free-rider problem arises whenever:

124. Which of the following best illustrates the free-rider problem?

127. Public goods are characterized by:

128. An example of a public good is:

129. An example of a public good is:

130. The free-rider problem arises when:

131. When a good is nonrivalrous in consumption, then:

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132. When city beautification programs are funded privately:

137. Consumers will willingly make less-informed decisions:

139. Sellers may choose not to sell in certain markets because:

140. A warranty offered by a seller is one way to overcome:

141. Health insurance is subject to

145. Which of the following is an example of moral hazard?

116. Private goods rival excludable.

117. Public goods rival excludable.

118. Common property resources rival excludable.