Microeconomics Ch. 10 – Flashcards

The impact of one person's actions on the well-being of a bystander is called a. an economic dilemma. b. deadweight loss. c. a multi-party problem. d. an externality.

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 to her roommate c. a beautiful flower garden outside of the local post office. d. All of the above are correct.

If a sawmill creates too much noise for local residents, a. noise restrictions will force residents to move out of the area. b. a sense of social responsibility will cause owners of the mill to reduce noise levels. c. the government can raise economic well-being through noise-control regulations. d. the government should avoid intervening because the market will allocate resources efficiently.

The difference between social cost and private cost is a measure of the a. loss in profit to the seller as the result of a negative externality. b. cost of an externality. c. cost reduction when the negative externality is eliminated. d. cost incurred by the government when it intervenes in the market.

When a market is characterized by an externality, the government a. can correction the market failure only in the case of positive externalities. b. can correct the market failure only in the case of negative externalities. c. can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality. d. cannot correct for externalities due to the existence of patents.

When negative externalities are present in a market a. private costs will be greater than social costs. b. social costs will be greater than private costs. c. only government regulations will solve the problem. d. the market will not be able to reach any equilibrium.

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because a. social costs equal private costs at the private market solution. b. private costs exceed social costs at the private market solution. c. social costs exceed private costs at the private market solution. d. they internalize externalities.

Which of the following would not be considered a negative externality? a. Smelter, Inc. creates steel and pollution. b. Your friend buys a new puppy that barks every night. c. You have an adverse reaction to a medication your doctor prescribed for you. d. Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.

Suppose that meat producers create a negative externality. What is the relationship between the equilibrium quantity and the socially optimal quantity of meat to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

A fertilizer plant emits a very foul odor during the production process. If the government forces the plant to internalize the negative externality, then the a. supply curve for fertilizer would shift down. b. supply curve for fertilizer would shift up. c. demand curve for fertilizer would shift down. d. demand curve for fertilizer would shift up.

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct? a. At the current output level, the marginal social benefit exceeds the marginal private benefit. b. The current output level is inefficiently low. c. A per-shot subsidy could turn an inefficient situation into an efficient one. d. All of the above are correct.

Which of the following statements is not correct? a. A patent is a way for the government to encourage the production of a good with technology spillovers. b. A tax is a way for the government to reduce the production of a good with a negative externality. c. A tax that accurately reflects social costs produces the socially optimal outcome. d. Government policies cannot improve upon private market outcomes.

One drawback to industrial policy is that a. technology spillovers are too expensive to control. b. measuring the size of spillovers from different markets is difficult. c. spillovers often occur in industries that produces undesirable products for society. d. positive side effects are often outweighed by negative side effects.

Patents do no a. provide firms an incentive to research. b. assign property rights to inventors. c. protect the rights of inventors for their lifetimes. d. internalize externalities.

Externalities tend to cause markets to be a. inefficient. b. inequitable. c. unnecessary. d. overwhelmed.

Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action a. is always needed because private solutions can never be attained. b. is needed when private solutions fail to arise. c. will be needed only to correct for positive externalities. d. will be needed only to correct for negative externalities.

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct? a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs. c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs. d. There is not enough information to answer the question.

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called a. the transaction cost theorem. b. a corrective tax. c. the externality theorem. d. the Coase theorem.

If only a few people are affected by an externality, then it is likely that a. corrective taxes will provide the most efficient solution to the externality. b. command-and-control regulation will provide the most efficient solution to the externality. c. a private solution to the inefficiency will occur. d. a private solution will be very difficult to negotiate.

Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. Dick pays Jane $600 for her inconvenience. b. Jane pays Dick $650 to give the dog to his parents who live on an isolated farm. c. Jane pays Dick $800 to give the dog to his parents who live on an isolated farm. d. There is no private transaction that would improve this situation.

Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct? a. If Dick's benefit exceeds Jane's cost, government intervention is necessary. b. Dick will pay to keep his dog if his benefit exceeds Jane's cost. c. If Jane's cost exceeds Dick's benefit, dick will pay Jane to keep his dog. d. If Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial.

Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to a. stop her messy habits or else move out. b. pay you at least $100 but less than $200 to live with the clutter. c. continue to be messy and force you to move out. d. demand payment of at least $100 but no more than $200 to clean up after herself.

A gasoline tax is designed to correct each of the following problems except a. traffic congestion. b. traffic accidents. c. air pollution. d. EPA regulations.

The tax on gasoline is an example of a. a consumption tax. b. a corrective tax. c. an income tax. d. a command-and-control policy.

Which of the following statements is not correct? a. Corrective taxes can be used to place a price on the right to pollute. b. Corrective taxes allocate pollution to those producers who face the highest cost of reducing pollution. c. Corrective taxes provide incentives to develop cleaner technologies. d. Corrective taxes require the government to set a target level of pollution.

Suppose that meat producers create a negative externality. Further suppose that the government imposes a tax on the producers equal to the per-unit externality. What is the relationship between the equilibrium quantity and the socially optimal quantity of meat to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

Suppose that smoking creates a negative externality. What can the government do to equate the equilibrium quantity of cigarettes and the socially optimal quantity of cigarettes smoked? a. impose a tax on cigarettes that is equal to the per-unit externality b. offer a subsidy on cigarettes that is equal to the per-unity externality c. impose a regulation limiting the number of cigarettes that each consumer can purchase d. nothing

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $6 per-unit tax on the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. the equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

Which of the following is not an effective method to reduce negative externalities? a. relying on voluntary compliance b. taxing the output of industries that pollute c. creating legal environmental standards d. increasing public spending on cleanup and reduction of pollution