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1

Answer on the basis of this information for a public good. P1 and P2 represent the prices individuals 1 and 2, the only two people in the society, are willing to pay for the last unit of a public good. Pc represents the price (or collective willingness to pay) for this public good, and Qs represents the quantity supplied of this public good at those prices. This society is willing to pay what amount for the first unit of the public good?
A)$10
B)$9
C)$8
D)$7
2
Given the supply curve Qs for the public good in Q #1, the optimal price and quantity of the public good in this society will be
A)$9 and 5 units
B)$5 and 3 units
C)$5 and 4 units
D)$3 and 2 units
3
If the good in Q #1 was a private good instead of a public good, the total quantity demanded at $4 would be
A)3 units
B)4 units
C)5 units
D)6 units
4

Assume that a government is considering a new anti-pollution program and may choose to include in this program any number of four different projects. The marginal cost and the marginal benefits of each of the four projects are given below. What total amount should this government spend on the anti-pollution program?
A)$2 million
B)$7 million
C)$17 million
D)$37 million
5
When the production and consumption of a product entails spillover costs, a competitive product market results in a(n)
A)Under-allocation of resources to the product
B)Over-allocation of resources to the product
C)optimal allocation of resources to the product
D)higher price for the product
6
A spillover benefit in the production of some product will result in
A)overproduction
B)underproduction
C)the optimal level of production if consumers are price takers
D)the optimal level of production if consumers are utility maximizers
7
One condition for the Coase theorem to hold is that there be
A)clear ownership of the property rights
B)a large number of people involved in the dispute
C)active government intervention to solve the externality problem
D)a sizeable cost for bargaining to settle the dispute between the private parties
8
Which of the following would be the most effective strategy for addressing a problem such as acid rain, which stems from the pollution of coal-burning electric utilities?
A)private negotiations between property owners and the utilities
B)lawsuits filed against the utilities by property owners
C)asking consumers to reduce electricity consumption
D)government taxes on utility emissions
9
If government were to sell pollution rights, an increase in the demand for pollution rights would
A)increase both the quantity of pollutants discharged and the market price of pollution rights
B)increase the quantity discharged and have no effect on the market price
C)have no effect on the quantity discharged and increase the market price
D)have no effect on either the quantity discharged or the market price
10
The data in the table show the marginal costs and marginal benefits to a city for five different levels of pollution abatement.
Pollution AbatementTotal CostTotal Benefit
(tons)($)($)
000
10070,000200,000
200180,000350,000
300300,000480,000
400450,000580,000
500700,000640,000

If the city seeks an optimal reduction of the externality, it will select how many tons of pollution abatement?
A)100
B)300
C)400
D)500
11
If the marginal benefit of pollution abatement in the table in Q #10 increased by $150,000 at each level because of the community's desire to attract more profitable and cleaner industry, the optimal level of pollution abatement in tons would be
A)200
B)300
C)400
D)500
12
An adverse selection problem arises when
A)a university admits only those students with the highest high school grades
B)automobile insurance companies charge higher premiums to young drivers
C)consumers purchase products without first doing sufficient research
D)individuals with poor health purchase generous life insurance policies







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