Principles of Economics 1B - Microeconomics

  Chapter 17

____    1.   When consumption of a good or service produces benefits or costs that are not reflected in the market price for the good, this is known as a(n)

a.	externality
b.	common pool problem
c.	nonexcludable resource
d.	public good
e.	renewable resource

____    2.   The most likely reason why Los Angeles has so much smog is that residents

a.	do not have strong, enforceable property rights to rapid transit
b.	do not have strong, enforceable property rights to clean air
c.	prefer dirty air to the inconvenience of rapid transit
d.	prefer dirty air to the inconvenience of carpools
e.	prefer dirty air to the inconvenience of eliminating smog

____    3.   If tuna in the sea are open-access resources, they will be used until the marginal value of additional use equals (Hint:  If you get something for "free" you would continue to consume until?)

a.	the marginal product of the resource
b.	the marginal revenue of the resource
c.	infinity
d.	negative infinity
e.	zero

____    4.   When a resource is an open-access resource (Hint:  Examples of open access resources include the buffalo in the old west and whales in the 19th century.),

a.	each individual in the society owns it
b.	the group owns it
c.	no one owns it
d.	the government owns it
e.	some nonprofit agency owns it

Exhibit 17-1

____    5.   In Exhibit 17-1, the socially efficient level of output is

a.	0 units
b.	100 units
c.	between 100 and 160 units
d.	160 units
e.	the answer cannot be determined from the information given

____    6.   Economists view pollution as an economic problem that arises because (Hint:  Why do negative externalities occur?)

a.	private enterprise always minimizes the amount of pollution produced
b.	profitable firms rarely pollute
c.	as the economy grows, the level of pollution declines
d.	firms that pollute do not pay the full social cost of producing their output
e.	pollution costs are borne by the consumer

____    7.   Marginal social cost is equal to (Hint:  MSC includes the cost to the producer as well as the costs to other members of society.)

a.	total private cost
b.	marginal private cost
c.	marginal external cost
d.	marginal private cost plus marginal external cost
e.	marginal private cost divided by marginal external cost

____    8.   The optimal level of pollution is

a.	zero
b.	the level at which the marginal social cost of air quality equals the marginal social benefit
c.	the level at which the average social cost of air quality equals the average social benefit
d.	the level at which the total social cost of air quality equals the total social benefit
e.	the level at which the marginal social cost of air quality is minimized

Exhibit 17-3

____    9.   In Exhibit 17-3, the welfare loss (from society's perspective) that results from 70 units of air quality is shown by area (Hint:  The loss is the amount by which the cost exceeded the benefit of the cleaner air.)

a.	edcb
b.	eda
c.	bac
d.	adc
e.	there is no loss

____   10.   Which of the following is most likely to happen to open-access wildlife resources?

a.	They will be used efficiently.
b.	They will not be used at all.
c.	It will be unprofitable to use them.
d.	They will be used but will generate no profit.
e.	They will become extinct.

____   11.   The Coase theorem says that, if the appropriate property right is assigned to __________, an efficient solution to an externality problem will be achieved.  (Hint:  The genius of Coase is that his solution is contrary to what might be expected.)

a.	the party causing the externality
b.	the victim of the externality
c.	the party that can avoid the externality at the higher cost
d.	the party that can avoid the externality at the lower cost
e.	either one of the parties involved

____   12.   The Coase solution to the problem of externalities

a.	applies in every situation where externalities are present
b.	only applies to activities that generate positive externalities
c.	only works under perfect competition
d.	only works when bargaining costs are low
e.	can lead to an increase in the common pool problem

____   13.   A pollution tax

a.	is itself a form of negative externality
b.	is a positive externality used to offset a negative one
c.	is a price per unit of discharge of pollution
d.	is a tax on pollution control equipment
e.	may cause a common pool problem

____   14.   Other things equal, if the government increased the quantity of pollution rights to be sold,  (Hint:  What happens to the price of anything if you increase the quantity supplied?)

a.	pollution would not be affected
b.	the price of pollution rights would rise, and the amount of pollution would decrease
c.	the price of pollution rights would fall, and the amount of pollution would decrease
d.	the price of pollution rights would fall, and the amount of pollution would increase
e.	the price of pollution rights would rise, and the amount of pollution would increase

____   15.   In the United States, what percentage of smog comes from automobiles?

a.	5 percent
b.	15 percent
c.	25 percent
d.	40 percent
e.	80 percent

____   16.   More water pollution in the United States comes from __________ than any other source.

a.	factories
b.	sulfur dioxide (i.e., acid rain)
c.	cars
d.	chemicals (used in pesticides and fertilizers) and sewage
e.	garbage

____   17.   When a citizens' group opposes expansion of the prison located in town, the basis of the opposition is that the larger prison will produce

a.	a negative externality for the community
b.	a positive externality for the community
c.	more jobs in the community
d.	tax revenue for the community
e.	improved criminal justice options

____   18.   In Japan most garbage is

a.	either recycled or burned
b.	recycled
c.	burned
d.	deposited in landfills
e.	used for fuel

____   19.   Most waste generated in the U.S. ends up in landfills because

a.	the low opportunity cost of time discourages recycling
b.	Americans earn low incomes
c.	the price of land is relatively low
d.	the low wages in the repair industry encourages repairs
e.	of low productivity and high wages in the waste disposal industry

____   20.   Education confers positive externalities because

a.	some education is done outside the market (i.e., in public schools)
b.	curricula are regulated by the government, even in private schools
c.	an educated person consuming education gains many benefits he or she did not expect when the process started
d.	an educated person who has consumed education usually behaves in a way that benefits others
e.	education gives benefits to individuals in excess of the costs they pay to get it

Economics 1B  Answers for  Chapter 17

            1.   ANS:  A.   An externality is a benefit or a cost that occurs that is not recognized or taken into account by the doer of the action.  For example, a negative externality occurs when I drive my car because the exhaust from my car contributes to smog and to health problems for other people.  In the case of negative externalities, there tends to be over production because I do not take into account the costs that I impose on others when I drive, so I over estimate the benefits relative to the costs and thus tend to drive more than would be socially optimal -- the best for society.  In the case of positive externalities, there are benefits to others that I do not take into account.  For example, if own a dilapidated house in a nice neighborhood and I fix it up, the value of my house increases (private benefit) AND the value of surrounding houses increase (social benefit).  However, when deciding how much to spend on fixing up my house I consider only the private benefits and the private costs, so I understate the total benefits of my actions and thus tend to invest too little in fixing up my house.

            2.   ANS:  B.  The problem with air is the common pool problem.  No one owns the air, so no one has an incentive (or legal right) to try to conserve or protect the air.  This is a case of market failure, so the government has played a role in setting standards and rules that limit the amount of pollutants firms and individuals can put into the air.

            3.   ANS:  E.  The open-access resource would be used until the marginal value of the resource is equal to zero (the cost of the resource).

            4.   ANS:  C.  No one owns the open-access resource which is the basic problem.  Since no one owns the resource, then no one has either the incentive or the legal right to keep others from using the resource; hence, the resource would tend to be completely depleted. 

            5.   ANS:  B.  The optimal level is where the Marginal Social Cost is equal to the Marginal Benefit.  The marginal benefit is shown by the demand curve; therefore, the socially optimal output is at 100 units.  The supply curve reflects the marginal private costs.

            6.   ANS:  D.  Pollution is a negative externalities which means that at least some of the costs of production (for example, smog or noise)  are imposed on some people who were not involved in either the production or consumption of the good.   Hence, firms that pollute do not pay the full social cost of producing their output and therefore when looking at the costs and benefits of their actions they do no consider the full costs (private plus external) and therefore tend to overproduce.

            7.   ANS:  D. 

            8.   ANS:  B.  Even though it seems reasonable that the optimal level of pollution would be zero, this would only be true if the marginal social cost of preventing or cleaning up the pollution was also zero.  Since society is almost always going incur costs when they try to prevent or clean up pollution, the optimal level of pollution will not be zero.  The level at which the marginal social cost of air quality equals the marginal social benefit is the optimal level.  See the diagram on page 362.

            9.   ANS:  C.  The loss is the difference between the benefit and the cost, so when the cost (MSC) is above the benefit (MSB) there is a loss and the sum of the losses is equal to the area bac or abc or cba.  They are all the same area.

           10.   ANS:  E.  Since no one owns the open access resource, there will be no incentive to conserve or preserve the resource.  Consequently, the resource will tend to be completely used up. In the case of a certain type of fish or whales, the resource could become extinct.  A cattle rancher would not kill ALL of his cows in one year because then he wouldn't be able to have a herd in the future.  Because the cattle rancher owns the cows, it is in his best long-term interest to "harvest" only a few of the cows each year so that his herd can continue to reproduce and grow.  If no one owned the cows, then the incentive would be to take (kill) every cow because if you do not take the cow, then someone else will. 

           11.   ANS:  E.  The amazing and unexpected result of Coase's theorem is that the property rights could be assigned to either party and the final solution would be the same.  Coase's original example was of a farmer who grew corn and a cattle rancher whose cows liked to eat the corn.  If the property rights were given to the corn farmer -- the corn farmer could legally keep the cows out of his field  -- then if the value of the corn to the cattle rancher as feed for his cows exceeded the value to the corn farmer of being able to sell his corn in the market, then the cattle rancher would pay to be allowed to have his cows eat the corn.  If the property rights were assigned to the cattle rancher, then the cattle rancher would allow his cows to eat the corn unless the value of the corn in the market was greater than the value as feed to his cows an in that case the corn farmer would pay to not have the cows eat the corn.

           12.   ANS:  D.  Coase's solution is for the two parties to "trade" or come to some agreement as to who bears the cost.  Typically, this can only happen when the costs of negotiating an agreement are low.  Coase also notes that the inital assignment of rights to pollute or to ownership do not affect the final outcome though the assignment of rights does affect the distrubtion of wealth.

           13.   ANS:  C.  The tax is not an externality because the person paying the tax is the one creating the pollution  -- no externality.  However, the way that a pollution tax works is to tax the polluter in proportion to the damage done to others.  The best way to do this is to charge a fee based upon the amount of pollutant emitted.

           14.   ANS:  D.  Pollution rights are like any other good.  If the supply is increased, the price will go down.  Also, if the supply of pollution rights is increased, then there will be more pollutants emitted into the atmosphere.

           15.   ANS:  D

           16.   ANS:  D 

           17.   ANS:  A.  A negative externality could be greater traffic congestion because of the extra employees or visitors to the prison.  The perceived risk to nearby residents may increase because some prisoners might escape.  Some of the visitors might not be the kind of people that you would want going through (or stopping in ) your neighborhood.  All of these costs are potentially imposed on the community. 

           18.   ANS:  A.  The answer is near the middle of page 373 in your text.

           19.   ANS:  C.  This answer is also on page 373 in your text.  The comment is that the Japanese tend to recycle a larger proportion of their waste because land in Japan is much more expensive than in the U.S., so the use of landfills in Japan is very expensive compared to recycling. 

 20.   ANS: D.  You and I both benefit from the fact that other people can read and write.  What would our world or our economy be like if the other people in society could neither read nor write?