Deck 15: The Economics of Illegal Drugs

Question 1

In the case of illegal drugs which of the following have contributed to market failure?

A)Prohibition
B)Externalities
C)Imperfect information
D)Both externalities and imperfect information

Answer 1

D

Question 2

Reference: Use the following diagram to answer questions 15 - 17.
In an unregulated market, the optimal level of production and consumption is

A)Q₁
B)Point A and P₁
C)Point B and P₂
D)Point C and P₃

Answer 2

C

Question 3

Demand-side policies have predominately been aimed at

A)Changing supplier's expectations to reduce preferences
B)Changing consumer's expectations to reduce preferences
C)Increasing people's preferences
D)Increase taxes on offenders

Answer 3

B

Question 4

A market failure associated with drugs that is caused because the true costs and benefits associated with the drug is not known is

A)The scale effect
B)A positive externality
C)A negative externality
D)Imperfect information

Question 5

The majority of efforts of the War on Drugs have been

A)Programs aimed at the prevention and treatment of drug abuse
B)Changing consumer expectations
C)Marketing campaigns
D)Supply-side policies aimed at drug suppliers

Question 6

If a tax is imposed on a negative externality, the tax should be

A)Equal to the amount of the externality
B)Less the amount of the externality
C)Such that demand is reduced
D)Such that supply is reduced

Question 7

Reference: Use the following diagram to answer questions 15 - 17.
The negative externality is represented by

A)Point A to Point C
B)Point A to Point B
C)Points B to Point C
D)Point A to P₁

Question 8

Which of the following would be an externality associated with drug use?

A)Violence stemming from a supplier because of late delivery of product
B)Violence stemming from a customer because of late delivery of a product
C)The violence from a drug user on other members of the drug user's family
D)The loss of a person's potential

Question 9

The trend in drug use in the U.S.since 200 has been

A)Less than the observed trend during the 1990s
B)Greater than the observed trend during the 1990s
C)The same as the observed trend during the 1990s
D)Is the same as the trends observed in the 1960s

Question 10

Costs to a third party from the consumption of a good is known as

A)The scale effect
B)A positive externality
C)A negative externality
D)Imperfect Information

Question 11

Reference: Use the following diagram to answer questions 15 - 17.
What would be the level of production and consumption best for society?

A)Q₁
B)Point A and P₁
C)Point B and P₂
D)Point C and P₃

Question 12

A highly controversial approach to the issue of drug use is

A)Legalization
B)Prohibition
C)Demand-side policies
D)Supply-side policies

Question 13

Which of the following is a correct statement?

A)MSC = MPC + external cost
B)MSC = MPC - external cost
C)MSC = MPB + external cost
D)MSC = MPB + external cost

Question 14

Externalities are effects of a transaction on

A)The consumers and suppliers
B)Consumers only
C)Suppliers only
D)Someone other than a consumer or supplier

Question 15

The most commonly used illicit drug used is

A)Alcohol
B)Marijuana
C)Methamphetamine
D)Cocaine

Question 16

Legalization of an illegal drug will most likely cause

A)Supply to become less elastic
B)Demand to become less elastic
C)Supply to increase
D)An increase in price

Question 17

Which of the following best describes a market failure?

A)The market is not producing a socially optimal amount of the good
B)The market has failed to operate
C)Society has failed to consume sufficient amount of the goods
D)The product has been replaced by something better

Question 18

Which of the following is a true statement?

A)Marginal Private Cost = Marginal Social Cost + Positive Externality
B)Marginal Social Cost = Marginal Private Cost + Negative Externality
C)Marginal Private Cost = Marginal Social Cost + Negative Externality
D)Marginal Social Cost = Marginal Private Cost + Positive Externality

Question 19

Imperfect information occurs when

A)Demanders or suppliers do not know the true costs and benefits associated with a good or service
B)Demanders or suppliers know the true costs and benefits associated with a good or service
C)All suppliers have different information about the true costs and benefits associated with a good or service
D)All consumers have the true costs and benefits associated with a good or service

Question 20

The changes in the prices and quantity of drugs traded that result from supply-side policies depend on

A)The negative externalities
B)The positive externalities
C)The elasticity of demand for drugs
D)The elasticity of supply for drugs

Question 21

The impact of supply-side policies are

A)A leftward shift of the supply curve resulting in an increase in price and decrease in quantity.
B)A rightward shift of the supply curve resulting in a decrease in price and increase in quantity
C)A leftward shift of the supply curve resulting in a decrease in price and increase in quantity
D)A rightward shift of the supply curve resulting in an increase in price and a decrease in quantity.

Question 22

Explain the marginal decision rule and provide a graph to illustrate your answer.

Question 23

Reference: Use the following graph for numbers 22 and 23.
Of the two above graphs which would depict a relative inelastic demand?

A)Right
B)Left

Question 24

When demand is relatively elastic, supply-side programs will generate

A)A small reduction in drug use but a large increase in drug price
B)A large reduction in drug use but a small increase in drug price
C)A small reduction in drug use but a small increase in drug price
D)A large reduction in drug use but a large increase in drug

Question 25

When demand is relatively inelastic, supply-side programs will generate

A)A small reduction in drug use but a large increase in drug price
B)A large reduction in drug use but a small increase in drug price
C)A small reduction in drug use but a small increase in drug price
D)A large reduction in drug use but a large increase in drug price

Question 26

Legalizing marijuana would most likely

A)Increase demand
B)Increase supply
C)Increase both demand and supply
D)Increase demand but not supply

Question 27

Reference: Use the following graph for numbers 22 and 23.
Of the two above graphs which would depict a relative elastic demand?

A)Right
B)Left

Question 28

The effect of legalization of marijuana on price and quantity would be

A)Increase price; decrease in quantity
B)Price is indeterminate; quantity increases
C)Price increases; quantity indeterminate
D)Decrease price; indeterminate quantity

Question 29

Researchers estimate that if supply-side programs were not in place for drugs like cocaine and heroin, the drugs would sell for prices that are comparable to aspirin.Explain this statement and graphically compare with marijuana and methamphetamine.

Question 30

Why would a negative externality create an inefficient overproduction?