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| 1 | |
Which of the following is the best example of a positive externality? |
| | A) | A car company lays off 10,000 employees in order to cut costs. |
| | B) | An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere. |
| | C) | An individual smokes in a restaurant, which bothers other patrons. |
| | D) | A child is vaccinated against a disease, which reduces the probability that other children will catch the disease. |
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| 2 | |
As a result of a negative externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. As a result of a positive externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. |
| | A) | high; high. |
| | B) | low; low. |
| | C) | high; low. |
| | D) | low; high. |
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| 3 | |
Use the diagram below representing a negative externality to answer the following question:
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The deadweight loss area associated with the market equilibrium equals |
| | A) | $10 |
| | B) | $50 |
| | C) | $80 |
| | D) | $1,000 |
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| 4 | |
Suppose an activity has a private cost equal to $30 and a private benefit equal to $30. The associated social cost equals $35 and the social benefit equals $30. Which of the following statements is true about this activity? |
| | A) | There is a negative externality associated with this activity but not a positive externality. |
| | B) | There is a positive externality associated with this activity but not a negative externality. |
| | C) | There is both a positive and a negative externality associated with this activity. |
| | D) | There is neither a positive nor a negative externality associated with this activity. |
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| 5 | |
The Coase Theorem implies that: |
| | A) | the efficient level of an externality is generally zero. |
| | B) | private individuals living in market economies should not be concerned with externalities. |
| | C) | government intervention is not always needed to arrive at the efficient level of an externality. |
| | D) | government laws are unnecessary. |
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| 6 | |
When a negative externality is present in a market: |
| | A) | a tax can increase the level of economic surplus. |
| | B) | the social benefits are greater than the private benefits. |
| | C) | there is generally too little of the good produced by private markets. |
| | D) | the government should ensure that there are zero external costs associated in all markets. |
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| 7 | |
In the presence of a positive externality, the government can arrive at the socially optimal output level by: |
| | A) | paying producers a subsidy equal to the amount of social benefits associated with the activity. |
| | B) | charging producers a tax equal to the amount of social costs associated with the activity. |
| | C) | paying producers a subsidy equal to the amount of external benefits associated with the activity. |
| | D) | charging producers a tax equal to the amount of external costs associated with the activity. |
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| 8 | |
The tragedy of the commons is that: |
| | A) | too few individuals have access to high quality healthcare. |
| | B) | common people overconsume public goods. |
| | C) | the quality of life for lower income people is generally lower than that of higher income people. |
| | D) | a resource with no price tends to be exploited until its marginal benefit falls to zero. |
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| 9 | |
One potential remedy to the tragedy of the commons is to: |
| | A) | never allow a single individual to consume more than one percent of the common resource. |
| | B) | criminalize the usage of common resources. |
| | C) | allow individuals to use a common resource as long as they receive some benefit from doing so. |
| | D) | place a common resource under private ownership. |
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| 10 | |
As a result of a positional externality: |
| | A) | contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. |
| | B) | there is generally an underinvestment in performance enhancement. |
| | C) | the market price of performance enhancement materials is too high. |
| | D) | the quality of performance in competitive situations is lower than the socially optimal level. |
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