Chapter 16 QUIZ ANSWERS

Public Goods, Externalities, and Information Asymmetries

1. The two main characteristics of a public good are: 
A. production at constant marginal cost and rising demand.
B. nonexcludability and production at rising marginal cost.
C. nonrivalry and nonexcludability.
D. nonrivalry and large negative externalities.

2. Unlike a private good, a public good: 
A. has no opportunity costs.
B. has benefits available to all, including nonpayers.
C. produces no positive or negative externalities.
D. is characterized by rivalry and excludability.

3. Which of the following is an example of a public good? 
A. a weather warning system
B. a television set
C. a sofa
D. a bottle of soda

4. The market system does not produce public goods because: 
A. there is no need or demand for such goods.
B. private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
C. public enterprises can produce such goods at lower cost than can private enterprises.
D. their production seriously distorts the distribution of income.

5. Because of the free-rider problem: 
A. the market demand for a public good is overstated.
B. the market demand for a public good is nonexistent or understated.
C. government has increasingly yielded to the private sector in producing public goods.
D. public goods often create moral hazard and adverse selection problems.

6. At the optimal quantity of a public good: 
A. marginal benefit exceeds marginal cost by the greatest amount.
B. total benefit equals total cost.
C. marginal benefit equals marginal cost.
D. marginal benefit is zero. 

7. Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the 5th unit of a public good; Kara, $15, and Susie, $25. Government should produce the 5th unit of the public good if the marginal cost is less than: 
A. $25.
B. $15.
C. $60.
D. $300.

8. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. The collective willingness to pay for the 1st unit of this public good is: 
A. $18.
B. $14.
C. $10.
D. $6.

9. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. If the marginal cost of the optimal quantity of this public good is $10, the optimal quantity must be: 
A. 1 unit.
B. 2 units.
C. 3 units.
D. 4 units.

10. Cost-benefit analysis attempts to: 
A. compare the real worth, rather than the market values, of various goods and services.
B. compare the relative desirability of alternative distributions of income.
C. determine whether it is better to cut government expenditures or reduce taxes.
D. compare the benefits and costs associated with any economic project or activity.

The following data are for a series of increasingly extensive flood control projects:

11. Refer to the above data. For Plan D marginal costs and marginal benefits are: 
A. $72,000 and $64,000 respectively.
B. $28,000 and $12,000 respectively.
C. $24,000 and $18,000 respectively.
D. $16,000 and $28,000 respectively.

12. Refer to the above data. On the basis of cost-benefit analysis government should undertake: 
A. Plan D.
B. Plan C.
C. Plan B.
D. Plan A.

13. Refer to the above data. Plan C entails: 
A. marginal benefits in excess of marginal costs.
B. fewer spillovers than either Plan A or Plan B.
C. an overallocation of resources to flood control.
D. an underallocation of resources to flood control.

14. According to the marginal-cost-marginal-benefit rule: 
A. only government projects (as opposed to private projects) should be assessed by comparing marginal costs and marginal benefits.
B. the optimal project size is the one for which MB = MC.
C. the optimal project size is the one for which MB exceeds MC by the greatest amount.
D. project managers should attempt to minimize both MB and MC.

15. Economists consider governments to be "wasteful:" 
A. whenever they over- or underallocate resources to a project.
B. only when they overallocate resources to a project.
C. only when they underallocate resources to a project.
D. whenever they attempt to correct a market failure.

16. A positive externality or spillover benefit occurs when: 
A. product differentiation increases the variety of products available to consumers.
B. the benefits associated with a product exceed those accruing to people who consume it.
C. a firm produces at the P = MC output.
D. economic profits are zero in the long run.

17. Refer to the above diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should: 
A. not intervene because the market outcome is optimal.
B. subsidize consumers so that the market demand curve shifts leftward.
C. subsidize producers so that the market supply curve shifts leftward (upward).
D. tax producers so that the market supply curve shifts leftward (upward).

18. Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q₀ and that government purposely shifts the market supply curve from S to S₁ in diagram (a) and from S to S₂ in diagram (b). We can conclude that the government is correcting for: 
A. negative externalities in diagram (a) and positive externalities in diagram (b).
B. positive externalities in diagram (a) and negative externalities in diagram (b).
C. negative externalities in both diagrams.
D. positive externalities in both diagrams.

19. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₂ and S₂. If there are substantial external benefits associated with the production of Z, then: 
A. efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits.
B. an output smaller than G would improve resource allocation.
C. government should levy a per unit excise tax on Z to shift the demand curve toward D₁.
D. an output greater than G would result in a more efficient allocation of resources.

20. Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D₂ and S₂. If there are substantial external costs associated with the production of Z, then: 
A. a price lower than B and an output greater than G would improve resource allocation.
B. government should levy a per unit excise tax on Z to shift the demand curve to the right.
C. government should levy a per unit excise tax on Z to shift the supply curve toward S₁.
D. government should subsidize the production of Z to lower equilibrium price and increase equilibrium output.

21. Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that: 
A. the display creates negative externalities.
B. government should tax the producers of holiday lighting.
C. resources are currently overallocated to the provision of holiday lighting in Anytown.
D. resources are currently underallocated to the provision of holiday lighting in Anytown.

22. The Coase theorem states that: 
A. government should levy excise taxes on firms that generate spillover or external costs.
B. taxes should be levied such that they change private behavior as little as possible.
C. bargaining between private parties will remedy externality problems where property rights are clearly defined, the number of people involved are few, and bargaining costs are small.
D. trading of votes to secure favorable voting outcomes may increase efficiency.

23. The tragedy of the commons is the idea that: 
A. society has a tendency to overuse and thus abuse common resources.
B. total external costs in society far outweigh total external benefits.
C. matter can be transformed to other matter or into energy but can never vanish.
D. crime rates typically are higher in public places than where property is privately owned.

24. Refer to the above diagram of a market for pollution rights. The increase in the price of pollution rights from P₁ to P₂will: 
A. reduce the quantity of pollution rights.
B. increase the quantity of pollution rights.
C. increase the incentive for environmental groups to buy pollution rights.
D. increase the opportunity cost of polluting.

25. Refer to the above diagram of a market for pollution rights. Without this market for pollution rights, the quantity (tons) of pollution would be: 
A. Q₃, if demand is D₂.
B. Q₁, if demand is D₁.
C. Q₂, if demand is D₂.
D. Q₁, if demand is D₂.

26. A cap-and-trade program causes the: 
A. supply of pollution rights to be perfectly inelastic.
B. supply of pollution rights to be perfectly elastic.
C. demand for pollution rights to be perfectly inelastic.
D. demand for pollution rights to be perfectly elastic.

27. The socially optimal amount of pollution abatement occurs where society's marginal: 
A. benefit of abatement exceeds its marginal cost of abatement by the greatest amount.
B. benefit of abatement equals its marginal cost of abatement.
C. benefit of abatement is zero.
D. cost of abatement is at its maximum.

28. Buyers will opt out of markets in which: 
A. there are significant negative externalities.
B. standardized products are being produced.
C. there is inadequate information about sellers and their products.
D. there are only foreign sellers.

29. Sellers will opt out of markets in which: 
A. there are significant negative externalities.
B. standardized products exist.
C. there are only foreign buyers.
D. information about buyers is inadequate, and some buyers can impose high costs on the sellers.

30. Because the Federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates: 
A. the adverse selection problem.
B. the moral hazard problem.
C. a failure of the market for externalities.
D. the existence of positive externalities.

31. On buying a car having airbags, Indy begins to drive recklessly. This is an example of the: 
A. principal-agent problem.
B. adverse selection problem.
C. moral hazard problem.
D. free-rider problem.

32. On learning that his auto transmission is about to fail, Ray Roma sells his car to an unsuspecting buyer. This circumstance illustrates: 
A. asymmetric information.
B. the Coase theorem.
C. the moral hazard problem.
D. the principal-agent problem.