Question 1

The Coase theorem will ________ if the number of people involved is small.

Accepted Answer

The Coase theorem is more likely to apply when the number of people involved is small because transaction costs are lower, making it easier for parties to negotiate and reach an agreement on the allocation of resources or rights.

Question 2

Taxes on a producing firm's ________ are meant to force decision makers to consider the full costs of their actions.

Accepted Answer

Taxes on a producing firm's spillovers (or negative externalities) are meant to internalize the external costs imposed on society that are not accounted for in the market price of a good or service. This encourages firms to consider the full social costs of their production decisions.

Question 3

For production to be at the ________ level of output, marginal benefit must equal social cost.

Accepted Answer

For production to be at the efficient level of output, the marginal benefit (the additional benefit received from consuming one more unit of a good or service) must equal the social cost (the total cost society pays for the production of an extra item, including both the private cost and any external costs). This principle ensures that resources are allocated in a way that maximizes the overall benefit to society.

Question 4

When a perfectly competitive firm weighs price and marginal cost and no externalities exist, it is weighing the ________ benefits to society of additional production against the ________ costs to society of that production.

Accepted Answer

The answer of When a perfectly competitive firm weighs price...

Question 5

________ states that under certain conditions, private parties can arrive at an efficient solution without government involvement.

Accepted Answer

The Coase theorem posits that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

Question 6

Which of the following conditions are necessary for the Coase theorem to apply?

Accepted Answer

The Coase theorem applies when property rights are clearly defined (A), there are no costs to bargaining (B), and it does not limit the number of people involved, but in practice, it's more easily applied or observed with fewer people due to lower transaction costs (C). Thus, all the conditions listed are necessary for the Coase theorem to apply effectively.

Question 7

If a subsidy is granted to perfectly competitive firms that provide external benefits to society, the firm's ________ curve will shift down and the industry ________ curve will shift to the right.

Accepted Answer

When a subsidy is granted to firms, it effectively lowers their costs of production. This is reflected in a downward shift of the marginal cost curve for the firm, as it becomes cheaper for them to produce each additional unit. For the industry as a whole, this translates into an increased ability to supply goods at any given price, hence the industry supply curve shifts to the right.

Question 8

Your upstairs neighbor has the right to practice his clog dancing at night. But you find the best time to study is at night, and the noise from the clog dancing makes it hard for you to concentrate. You tell your neighbor that you will wash his car every week if he does not practice his clog dancing at night and he agrees to this. This is an example of the

Accepted Answer

This scenario exemplifies the Coase theorem, which suggests that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this case, you and your neighbor negotiated a solution to the noise problem (the externality) that works for both of you, demonstrating the theorem in action.

Question 9

There are 25,000 families in a small community that are affected by air pollution from a local factory. The air pollution could be reduced if the company spent $10,000 on upgraded ventilators. The company agrees to install the ventilators if the families in the community contribute the $10,000. Since there are so many families they fail to come to a resolution to which they will all agree. This outcome is an example of the

Accepted Answer

This scenario is an example of a collective action problem, which occurs when a large group of individuals fails to achieve a common goal due to the difficulty of coordinating and agreeing on a course of action among a large number of parties.

Question 10

There are 12 families in a gated community that are affected by air pollution from a local factory. The pollution could be reduced if the company spent $24,000 on upgraded ventilators. The company agrees to install the ventilators if the affected families contribute the $24,000. Since there are no legal restrictions governing the factory's air pollution the negotiations fail. This outcome is an example of the

Accepted Answer

The situation illustrates a problem that arises when property rights are not defined, leading to negotiation failures.

Question 11

You spend $150 every month planting flowers in your front yard. Your neighbor has told you that she derives $20 a month in enjoyment from being able to look at your beautiful flowers. Which of the following is true?

Accepted Answer

The efficient level of flower planting would be greater than $150 a month if you considered the external benefits your neighbor derives from enjoying the view of your flowers, in addition to your own benefits. This is because the total benefit to society (you and your neighbor) from the flowers exceeds your personal cost.

Question 12

Suppose that you rent a house next to a dog kennel. The kennel holds up to 200 dogs at a time, and these dogs bark all day long. You now have to spend $150 more per month on earplugs and headache medicine because of the noise. You could move to another house far enough away from the factory, but the rent for that house is $125 more than you now pay. The efficient solution to this problem is that

Accepted Answer

Moving to the new house is the efficient solution because the additional rent ($125) is less than the cost of earplugs and headache medicine ($150) due to the noise from the kennel.

Question 13

________ protect property rights.

Accepted Answer

Injunctions and liability rules are legal mechanisms used to protect property rights. Injunctions can prevent or require actions by parties to protect someone's property rights, while liability rules impose costs or damages on those who infringe upon others' property rights.

Question 14

MSC - MC reflects

Accepted Answer

MSC - MC reflects an external cost, which is a cost that affects parties who are not directly involved in the transaction or decision. It represents the difference between the marginal social cost (MSC) and the marginal cost (MC) to the producer, highlighting costs imposed on society that are not accounted for by the producer.

Question 15

There are 500 families in a neighborhood that are affected by air pollution from a local factory. The pollution is within legal limits, but could be reduced further if the company spent $10,000 on upgraded ventilators. The company agrees to install the ventilators if the affected families contribute the $10,000. A committee starts to collect donations to pay for the ventilators. Which of the following is most likely to occur?

Accepted Answer

This scenario is an example of the free-rider problem, where individuals may not contribute to a public good (in this case, cleaner air) because they can benefit from it without paying for it, leading to under-provision of that good.

Question 16

The market will produce ________ level of education when we ________ its external benefits.

Accepted Answer

When the external benefits of education (such as a more informed citizenry, lower crime rates, etc.) are not considered, the market will produce less than the efficient level of education because it does not account for these positive externalities in its production decisions.

Question 17

If the production of a good generates external ________, the government could increase efficiency by ________ production of the good.

Accepted Answer

When a good's production generates external benefits (positive externalities), subsidizing its production can increase efficiency by encouraging more of its production, thus aligning private and social benefits.

Question 18

If firms have to account for external costs of production, then they will ________ compared with what they would do if they did not have to account for the external costs.

Accepted Answer

When firms have to account for external costs of production, such as pollution, they will likely produce less to minimize these costs and charge higher prices to cover the additional expenses associated with mitigating or compensating for these externalities. This leads to underproduction and overpricing compared to a scenario where these costs are ignored.

Question 19

If a tax is placed on perfectly competitive firms that impose external costs on society, the firm's ________ curve will shift up and the industry ________ curve will shift to the left.

Accepted Answer

Imposing a tax on firms that generate external costs effectively increases their production costs. This results in the marginal cost curve shifting upwards because it now costs more to produce each additional unit. At the industry level, this translates to a decrease in the overall quantity supplied at any given price, which is represented by the supply curve shifting to the left. Demand curves are not directly affected by changes in the firm's production costs.

Question 20

If ________ bargaining to resolve an externality is to result in an efficient outcome, the initial assignment of rights must be clear to ________ parties.

Accepted Answer

The statement refers to the Coase Theorem, which posits that if property rights are clearly defined and transaction costs are low, private bargaining will lead to an efficient outcome regardless of the initial allocation of rights. This requires that both parties involved in the negotiation understand their rights and responsibilities.

Quiz 16: Externalities, Public Goods, and Common Resources

The Coase theorem will ________ if the number of people involved is small.

Taxes on a producing firm's ________ are meant to force decision makers to consider the full costs of their actions.

For production to be at the ________ level of output, marginal benefit must equal social cost.

When a perfectly competitive firm weighs price and marginal cost and no externalities exist, it is weighing the benefits to society of additional production against the costs to society of that production.

________ states that under certain conditions, private parties can arrive at an efficient solution without government involvement.

Which of the following conditions are necessary for the Coase theorem to apply?

If a subsidy is granted to perfectly competitive firms that provide external benefits to society, the firm's curve will shift down and the industry curve will shift to the right.

You spend $150 every month planting flowers in your front yard. Your neighbor has told you that she derives $20 a month in enjoyment from being able to look at your beautiful flowers. Which of the following is true?

________ protect property rights.

MSC - MC reflects

The market will produce level of education when we its external benefits.

If the production of a good generates external , the government could increase efficiency by production of the good.

If firms have to account for external costs of production, then they will ________ compared with what they would do if they did not have to account for the external costs.

If a tax is placed on perfectly competitive firms that impose external costs on society, the firm's curve will shift up and the industry curve will shift to the left.

If bargaining to resolve an externality is to result in an efficient outcome, the initial assignment of rights must be clear to parties.