Question 1

When negative externalities from production exist, the deadweight loss from a competitive market may be larger than with a monopoly.

Accepted Answer

If the competitive market and the monopoly produce more than the social optimum, the monopoly will produce less so the deadweight loss will be smaller.

Question 2

Explain how a specific tax equal to the marginal harm of pollution can increase or decrease total welfare in a monopoly market.

Accepted Answer

The answer of Explain how a specific tax equal to...

Question 3

The exclusive privilege to use an asset is called a(n)
A)property right.
B)exclusive use agreement.
C)property privilege.
D)right to work privilege.

Accepted Answer

The term used in the question, "exclusive privilege to use an asset," refers to property rights, which are exclusive rights to use and dispose of a particular asset. The other options given are not appropriate descriptions of this concept.

Question 4

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the surrounding neighbors. The marginal cost of production is zero for the firm. According to Coase's Theorem, which of the following scenarios is most likely to lead to the socially optimal level of pollution?
A)The firm owns the river and there are a thousand surrounding neighbors.
B)The firm owns the river and there is just one nearby neighbor.
C)The river is jointly owned by one thousand surrounding neighbors.
D)The firm owns the river, and therefore produces the social optimum no matter what.

Accepted Answer

Coase's Theorem suggests that if transaction costs are low and property rights are clearly defined, parties will negotiate to correct externalities and reach a socially optimal outcome. With only one nearby neighbor, transaction costs (e.g., for bargaining or reaching an agreement) are likely to be lower than in a scenario with many neighbors, making it easier for the firm and the neighbor to negotiate an optimal level of pollution.

Question 5

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the surrounding neighbors. The marginal cost of production is zero for the firm. If property rights are not defined, how much pollution will occur?
A)0 units
B)500 units
C)1000 units
D)more than 1000 units

Accepted Answer

The answer of 
-The above figure shows the marginal benefit...

Question 6

-The above figure shows the marginal benefit from pollution for two firms. If each firm receives a marketable permit to produce 25 units of pollution, which one of the following is most likely to happen?
A)Firm B will sell some pollution rights to firm A.
B)Firm A will sell some pollution rights to firm B.
C)Firm A will produce all 50 units of pollution.
D)Both firms will produce 25 units of pollution.

Accepted Answer

The answer of 
-The above figure shows the marginal benefit...

Question 7

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the firm's neighbor. The marginal cost of production is zero for the firm. If there is just one neighbor who owns the river, how much pollution is likely to occur?
A)0 units
B)500 units
C)1000 units
D)more than 1000 units.

Accepted Answer

The optimal amount of pollution occurs where the marginal benefit to the firm equals the marginal cost to the neighbor. This is typically at the intersection point of the marginal benefit and marginal cost curves, which, based on the description, is at 500 units.

Question 8

If a product provides a positive externality, a duopoly
A)will provide more social welfare than a monopoly.
B)will provide less social welfare than a monopoly.
C)will provide the same social welfare as a monopoly.
D)introduces an interesting and untested twist to the externality story.

Accepted Answer

A positive externality means that there is a benefit to society beyond what the consumer of the product receives. In a monopoly, the monopolist will only produce until the marginal cost equals the marginal revenue, which is less than the socially optimal level of production. However, in a duopoly, there is competition and each firm will try to produce more to capture a larger share of the market. This leads to a higher level of output and closer to the socially optimal level of production, resulting in greater social welfare compared to a monopoly.

Question 9

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if
A)someone is assigned property rights to the park.
B)government limits the use of the park.
C)nobody catches Al leaving the trash.
D)Bert moves.

Accepted Answer

Coase's Theorem states that if property rights are well-defined and transaction costs are low, then bargaining between parties will lead to an efficient outcome regardless of the initial allocation of property rights. If property rights to the park are assigned to one of the neighbors, then that neighbor will have an incentive to keep the park clean and can negotiate with Al to stop leaving trash. This could result in an optimal level of trash in the park. The other options do not address the root cause of the problem and may not lead to an efficient outcome.

Question 10

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if
A)Al is fined by the government.
B)Al has the right to leave trash and Bert cannot do anything about it.
C)Al has the right to leave trash and Bert can pay him to limit his dumping.
D)Bert moves.

Accepted Answer

According to Coase's Theorem, if the property rights are assigned clearly and transaction costs are low, then the most efficient outcome will be achieved through bargaining between parties. In this case, if Al has the right to leave trash in the park, Bert can negotiate with him to limit his dumping by offering to pay him. This will incentivize Al to keep the park clean, as he can earn additional income from Bert. Therefore, choice C is the best option.

Question 11

The existence of externalities is due mainly to the fact that
A)monopolies tend to produce too little of a good anyway.
B)the optimal level of pollution is zero.
C)pollution is not a serious problem.
D)property rights are poorly defined.

Accepted Answer

Externalities arise because property rights are not well defined. For instance, if a firm emits pollutants into the air or water, it does not bear the full cost of its actions since those affected by pollution (people living nearby, aquatic life, etc.) do not have property rights to the air or water. As a result, the firm has no financial incentive to reduce its emissions, leading to overproduction of the pollutant.

Question 12

Monopolizing the sale of liquor
A)can lead to an increase in total welfare.
B)will decrease total welfare.
C)results in a deadweight loss.
D)is anti-competitive and thus lowers total welfare.

Accepted Answer

The answer of Monopolizing the sale of liquor
A)can lead to...

Question 13

Suppose that the market for steel is shown in the above figure. Is social welfare greater under monopoly or under competition?

Accepted Answer

The answer of Suppose that the market for steel is...

Question 14

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the surrounding neighbors. The marginal cost of production is zero for the firm. If the firm owns the river and there is just one neighbor affected by the pollution, how much pollution is likely to occur?
A)0 units
B)500 units
C)1000 units
D)more than 1000 units

Accepted Answer

Given that the firm owns the river and there is only one neighbor affected by the pollution, the firm will likely pollute until its marginal benefit equals the marginal cost to the neighbor. This is typically represented by the intersection point on a graph of marginal benefit and marginal cost curves, which, based on standard economic theory, would suggest an equilibrium point. Without seeing the actual figure, the scenario described implies that the firm will continue to pollute as long as the benefits of doing so (to the firm) outweigh the costs (borne by the neighbor). Assuming a rational economic model, this would likely result in a specific, finite amount of pollution that balances these factors, rather than an extreme or zero amount.

Question 15

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called
A)a Nash Equilibrium.
B)Coase Theorem.
C)Bargaining Theorem.
D)English Bargaining.

Accepted Answer

The Coase Theorem states that, under certain circumstances, externalities can be internalized through bargaining between the affected parties without the need for government intervention. Therefore, option B, Coase Theorem, is the correct answer. Options A, C, and D are incorrect. A – Nash Equilibrium is a concept in game theory that refers to a stable state of play in which no player has an incentive to change their strategy. C – Bargaining Theorem is not a recognized concept in economics. D – English Bargaining is a term used to describe a specific form of bargaining in which one party makes an offer and the other party accepts or rejects it without any further negotiations.

Question 16

Suppose twenty neighbors share a park. One of the neighbors, Al, leaves trash in the park. This bothers the other neighbors. According to Coase's Theorem, assigning the property rights to the park to Al
A)will achieve the socially optimal quantity of trash.
B)will result in zero trash being dumped in the park.
C)might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly.
D)is unfair.

Accepted Answer

While assigning property rights to Al might result in a more efficient outcome than if no property rights were assigned, it may still not achieve the socially optimal quantity of trash if coordinating the other nineteen neighbors to negotiate with Al is costly or difficult. This is because Coase's Theorem assumes that transaction costs are low and that parties can bargain costlessly, which may not be the case in reality. Additionally, assigning property rights to Al may be seen as unfair since the other neighbors have a shared interest in the park and are negatively affected by Al's behavior.

Question 17

A tax on a previously untaxed monopoly-produced good will necessarily lower total welfare if
A)the demand curve is relatively inelastic.
B)the demand curve is relatively elastic.
C)less than the socially optimum is produced before the tax.
D)more than the socially optimum is produced before the tax.

Accepted Answer

The answer of A tax on a previously untaxed monopoly-produced...

Question 18

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the surrounding neighbors. The marginal cost of production is zero for the firm. If the firm owns the river and there are thousands of surrounding neighbors, how much pollution is likely to occur?
A)0 units
B)500 units
C)1000 units
D)more than 1000 units

Accepted Answer

The answer of 
-The above figure shows the marginal benefit...

Question 19

Because a monopoly will produce less of a good than a competitive market will, welfare is always greater under monopoly than under competition in the presence of a negative externality.

Accepted Answer

If monopoly produces more than the social optimum, then it does generate greater welfare than competition. If monopoly produces less than the social optimum, then it may or may not generate greater welfare.

Question 20

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, one necessary condition to alleviate the externality is that
A)Al is fined by the government.
B)Al has the right to leave trash and Bert cannot do anything about it.
C)Bert has the right to a clean park and Al cannot leave trash.
D)Either Al or Bert owns the park.

Accepted Answer

Coase's Theorem states that if property rights are well-defined and transaction costs are low, then the allocation of resources will be efficient regardless of how property rights are assigned. In this case, if either Al or Bert owns the park, they have the incentive to keep it clean in order to maintain its value. If the property rights are not assigned clearly, it would be difficult to negotiate a solution as transaction costs might be high. Therefore, the best choice is D, that either Al or Bert owns the park.

Quiz 18: Externalities, Open-Access, and Public Goods

When negative externalities from production exist, the deadweight loss from a competitive market may be larger than with a monopoly.

Explain how a specific tax equal to the marginal harm of pollution can increase or decrease total welfare in a monopoly market.

The exclusive privilege to use an asset is called a(n)

-The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output, and the marginal cost to the surrounding neighbors. The marginal cost of production is zero for the firm. If property rights are not defined, how much pollution will occur?

-The above figure shows the marginal benefit from pollution for two firms. If each firm receives a marketable permit to produce 25 units of pollution, which one of the following is most likely to happen?

If a product provides a positive externality, a duopoly

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if

The existence of externalities is due mainly to the fact that

Monopolizing the sale of liquor

Suppose that the market for steel is shown in the above figure. Is social welfare greater under monopoly or under competition?

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called

Suppose twenty neighbors share a park. One of the neighbors, Al, leaves trash in the park. This bothers the other neighbors. According to Coase's Theorem, assigning the property rights to the park to Al

A tax on a previously untaxed monopoly-produced good will necessarily lower total welfare if

Because a monopoly will produce less of a good than a competitive market will, welfare is always greater under monopoly than under competition in the presence of a negative externality.

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, one necessary condition to alleviate the externality is that