Preview Extract
CHAPTER 15—GOVERNMENT'S ROLE IN ECONOMIC EFFICIENCY
MULTIPLE CHOICE
1) Output per worker tends to be higher in countries with
a. low-quality infrastructures
b. high-quality infrastructures
c. perfectly competitive labor markets
d. low taxes
e. free riders
Answer: B
2) Contracts reduce the level of specialization in an economy.
a. True
b. False
Answer: B
3) Contracts tend to increase the level of specialization in an economy.
a. True
b. False
Answer: A
4) Price-fixing agreements among competing firms are a violation of the Sherman Antitrust
Act.
a. True
b. False
Answer: A
5) Price-fixing agreements among competing firms are a violation of the Clayton Antitrust
Act.
a. True
b. False
Answer: B
6) The Sherman Antitrust Act prohibits price fixing by competitors, monopolization of a
market, and attempts to monopolize a market.
a. True
b. False
Answer: A
7) Involuntary exchanges, such as robbery,
a. represent potential Pareto improvements
b. are positive externalities
c. are not Pareto improvements
d. are antitrust violations
e. may be Pareto improvements
Answer: C
8) Which of the following is not an example of a Pareto improvement?
a. You buy a dozen oranges at a produce stand.
b. Two children trade baseball cards.
c. Your sister buys a new car.
d. Two adults trade cars.
e. A man is robbed at gunpoint.
Answer: E
9) An economic function of criminal law is to
a. reduce opportunities for Pareto improvements
b. reduce the number of involuntary exchanges
c. define property rights
d. increase prices in the economy
e. protect involuntary exchanges in the economy
Answer: B
10) Property law
a. helps to ensure that only voluntary exchanges occur
b. tends to decrease the level of economic efficiency
c. helps define ownership rights to resources
d. establishes property taxes
e. helps to distribute government property
Answer: C
11) Economies with poorly defined property rights are often inefficient because
a. individuals spend time trying to protect their resources
b. there are no voluntary exchanges
c. all exchanges are voluntary
d. there are no side payments
e. of the absence of free riders
Answer: A
12) Individuals in countries with __________ often spend considerable time trying to secure
resources from others.
a. free riders
b. no criminal law
c. poorly defined property rights
d. side payments
e. Pareto efficiency
Answer: C
13) Robbery reduces economic efficiency by
a. creating voluntary exchanges
b. decreasing government spending
c. increasing unemployment
d. creating involuntary exchanges
e. lowering the number of potential Pareto improvements
Answer: D
14) An economic benefit of contracts is that they
a. protect property rights
b. encourage involuntary exchanges
c. reduce the number of possible Pareto improvements
d. encourage market concentration
e. encourage specialization
Answer: E
15) Which of the following helps encourage specialization?
a. property law
b. criminal law
c. contract law
d. tort law
e. constitutional law
Answer: C
16) If a widow is harmed by mail fraud,
a. she may be compensated under property law
b. her legal action will be in the category of antitrust law
c. she may be compensated under tort law
d. this is a potential Pareto improvement
e. an economic inefficiency has arisen
Answer: E
17) The rights of a co-owner to a share of a firm's profits are
a. protected under tort law
b. protected under contract law
c. not protected under any form of law
d. protected under antitrust law
e. less valuable than the costs of pursuing action against the company
Answer: B
18) Disputes over resource ownership are the domain of
a. property law
b. antitrust law
c. tort law
d. contract law
e. constitutional law
Answer: A
19) Antitrust law
a. protects consumers from fraud or similar harm
b. helps define resource ownership
c. is designed to enforce contracts
d. helps prevent firms from limiting competition
e. cannot be used to increase economic efficiency
Answer: D
20) One way in which antitrust law fosters economic efficiency is by
a. defining property rights for firms
b. encouraging voluntary trade
c. prohibiting firms from colluding to raise prices
d. enforcing contracts between firms
e. encouraging mergers that increase market power
Answer: C
21) If firms make agreements that reduce the amount of competition in a market,
a. the market price usually falls
b. they would face penalties under antitrust legislation
c. mergers will result
d. there must be diseconomies of scale in the industry
e. they would face penalties under contract law
Answer: B
22) Under Section 2 of the Sherman Act,
a. firms cannot act in ways that increase prices
b. contracts between parties are deemed binding
c. firms cannot operate in perfectly competitive markets
d. firms that earn short-run profits face penalties
e. a firm cannot attempt to monopolize an industry
Answer: E
23) By making involuntary exchanges illegal,
a. criminal law eliminates such exchanges
b. tort law contributes to economic efficiency
c. criminal law channels energies into activities that benefit everyone
d. criminal law reduces producer surplus while increasing consumer surplus
e. antitrust law contributes to monopolization of markets
Answer: C
24) If property rights are poorly defined
a. no one can really "own" property
b. time and energy are wasted in disputes about ownership
c. most exchanges are involuntary exchanges
d. consumer surplus cannot exist
e. producer surplus cannot exist
Answer: B
25) A contract
a. is an example of a side payment
b. eliminates the possibility of simultaneous exchange
c. is worthless unless it refers to a perfectly competitive market
d. often requires one party to do something first, and the other party to do something later
e. can be enforced through the application of criminal law
Answer: D
26) Which of the following is an example of a regulatory action?
a. Drivers who exceed the speed limit will pay a fine if caught.
b. Automobile manufacturers are required to include built-in infant seats.
c. Two firms receive $100,000 fines for engaging in a price-fixing agreement.
d. A junk mail solicitor is taken to jail for mail fraud.
e. The tobacco industry is required to pay for the hospital bills of a lifelong smoker who
develops cancer.
Answer: B
27) If all unwelcome or harmful activities were eliminated,
a. the benefits from eliminating these activities would exceed the cost of eliminating them
b. there would be no remaining potential Pareto improvements
c. society would be more efficient
d. society would be less efficient
e. the result would be Pareto efficient
Answer: D
28) Government can play a crucial role in promoting economic efficiency by
a. taxing income
b. providing physical and institutional infrastructures
c. establishing price ceilings to help certain buyers
d. establishing price floors to help certain sellers
e. creating barriers to market entry whenever there is a threat of excessive competition
Answer: B
29) Market failure occurs when
a. all Pareto improvements are undertaken
b. refusal to make a side payment reduces Pareto efficiency
c. the economy operates above the production possibilities frontier
d. markets are perfectly competitive
e. some Pareto improvements are not made
Answer: E
30) A market failure occurs when
a. a market equilibrium is economically inefficient
b. a market equilibrium is economically efficient
c. perfect competition maximizes the sum of consumer and producer surplus
d. crime is not completely eliminated
e. involuntary exchanges are not completely eliminated
Answer: A
31) Firms produce too little output
a. when tort laws are not enforced
b. in perfectly competitive markets
c. to achieve economic efficiency
d. when they have monopoly power
e. when there are no remaining Pareto improvements
Answer: D
32) Monopoly is a prime example of a market failure that leaves potential Pareto
improvements unexploited. This is demonstrated by the fact that
a. monopolies produce public goods rather than private goods
b. monopolies substitute excludability for rivalry
c. monopolies substitute rivalry for excludability
d. the price in a monopolized market is less than the marginal cost of production
e. the price in a monopolized market exceeds the marginal cost of production
Answer: E
33) A firm is said to have monopoly power
a. it if produces the quantity at which MR = MC.
b. if it produces the quantity at which P = MC.
c. when it can influence the price of its product
d. if it tries to monopolize a market
e. if it is the only firm that hires a particular kind of labor
Answer: C
34) A monopoly's
a. supply curve is the same as its marginal cost curve
b. supply curve is the same as its marginal revenue curve
c. marginal cost curve is downward sloping
d. demand curve is horizontal
e. marginal revenue curve is downward sloping
Answer: E
35) In a single-price monopoly market
a. total benefit (the sum of consumer and producer surplus) is as large as it can possibly be
b. price and output are higher than they would be in an otherwise similar perfectly
competitive market
c. price and output are lower than they would be in an otherwise similar perfectly competitive
market
d. the quantity produced is artificially low, thereby creating an inefficiency
e. the price charged is artificially low, thereby creating an inefficiency
Answer: D
36) Single-price monopoly is inefficient because
a. side payments are not made
b. a monopoly firm charges a price that exceeds its marginal cost
c. a monopoly firm charges a price equal to its marginal cost
d. a monopoly firm produces the quantity at which P = MR = MC.
e. a monopoly firm produces the quantity at which MR = MC.
Answer: B
37) A monopolist that price discriminates
a. produces too much output to be efficient
b. produces too little output to be efficient
c. produces the efficient level of output
d. charges a price equal to its marginal cost
e. faces an upward sloping demand curve
Answer: C
38) Using anti-trust law to break up a monopoly
a. will increase economic efficiency
b. makes sense if the market would function well under competitive conditions
c. makes sense if the monopoly resulted from network externalities
d. makes sense if the monopoly resulted from a patent or copyright
e. would increase producer surplus
Answer: B
39) Anti-trust law
a. has been used to create monopolies
b. has been used to eliminate patents and copyrights
c. has been used to maximize producer surplus
d. should not be used to break up a monopoly that results from network externalities
e. has been used to break up monopolies
Answer: E
40) If a monopoly arises as a natural monopoly
a. using anti-trust law to break it up is a poor remedy
b. anti-trust law should be used to break it up
c. that is most likely due to a patent or copyright
d. it will evolve into a perfectly competitive market in the long run
e. it should be encouraged, because it is "natural"
Answer: A
41) A natural monopoly
a. typically arises because of a patent or copyright
b. is a firm that, due to economies of scale, can serve a market at lower average cost than two
or more firm could
c. is a Pareto improvement as compared to a perfectly competitive market
d. enjoys diseconomies of scale, so average total cost falls as more output is produced
e. enjoys economies of scale, so average total cost rises as more output is produced
Answer: B
42) A natural monopoly, left to itself,
a. will take over other industries
b. will produce the quantity that minimizes long-run average total cost
c. will produce the quantity that minimizes marginal cost
d. will produce an inefficient level of output
e. will charge an inefficiently low price
Answer: D
43) Left to itself, a natural monopoly will produce
a. nothing
b. the efficient level of output
c. the quantity at which marginal cost equals marginal revenue
d. the quantity at which the marginal cost and demand curves intersect
e. the quantity at which the long-run average total cost and demand curves intersect
Answer: C
44) When breaking up a natural monopoly is not advisable
a. it should be left alone
b. government regulation should be used to set marginal revenue equal to marginal cost
c. government regulation should be used to set price equal to marginal revenue
d. government regulation should be used to set marginal cost equal to long-run average total
cost.
e. public ownership and operation may improve efficiency
Answer: E
45) When regulating a natural monopoly, government officials
a. can set an efficient price, but the firm will suffer a loss
b. can arrange a Pareto improvement by leaving the firm alone
c. should force the firm to set a price equal to minimum marginal cost
d. should force the firm to set a price equal to minimum long-run average total cost
e. will increase efficiency if they force the firm to produce where MR = MC.
Answer: A
46) One reason why it is difficult to regulate a natural monopoly is
a. the lack of relevant economic theory
b. determining what price the firm is actually charging its customers
c. determining the appropriate side payment
d. an information problem — the monopoly's managers have an incentive to overstate costs
e. an information problem — the monopoly's managers have an incentive to overstate
revenues
Answer: D
47) One way that natural monopolies are typically regulated is
a. by setting a price that makes economic profit zero.
b. by forcing the firm to set price equal to marginal cost
c. by setting a price that gives owners a "fair rate of return"
d. by forcing the firm to set price equal to minimum average total cost
e. by setting a price that maximizes the firm's economic profit
Answer: C
48) Using average cost pricing, regulators of a natural monopoly
a. force the firm's economic profit to zero
b. maximize the firm's economic profit
c. achieve Pareto efficiency
d. set price equal to cost where the LRATC curve crosses the demand curve
e. set price equal to marginal cost where the MC curve crosses the demand curve
Answer: D
49) One problem with average cost pricing for a natural monopoly is that
a. it requires a side payment
b. maximizes the firm's revenue
c. makes the firm's total cost equal to zero
d. maximizes the firm's profit
e. it provides no incentive for the firm to economize on capital
Answer: E
50) Pollution is a form of market failure called a negative externality.
a. True
b. False
Answer: A
51) Pollution is a form of market failure called a public externality.
a. True
b. False
Answer: B
52) Suppose that production of a good creates a negative externality. An excise tax equivalent
to the difference between the marginal social cost and the marginal private cost of production
can correct the inefficiency.
a. True
b. False
Answer: A
53) Talking loudly in a library creates
a. a market for noise
b. a positive externality
c. a side payment
d. a public good
e. a negative externality
Answer: E
54) An externality is defined as
a. the revenue generated by a firm in the external market
b. a byproduct of a good or activity that affects someone not immediately involved in the
transaction
c. an additional cost of consumption that is borne by a third party
d. a cost or benefit arising from price changes
e. the value of a good or service to a consumer
Answer: B
55) A market failure in the form of an externality arises when
a. production costs are included in the price of a good
b. not all costs and benefits are included in the price of a good
c. the benefits of consuming a good exceed the costs
d. a market fails to achieve equilibrium
e. equilibrium price is unstable
Answer: B
56) If consumption of a good by one person imposes costs on a party other than the producer,
a. the consumption creates a positive externality
b. the good is a public good
c. the consumption creates a negative externality
d. too little of the good is produced from society's point of view
e. the market will correct the problem if left alone
Answer: C
57) The noise inflicted on bystanders by users of chain saws, lawn mowers, and motorcycles
is an example of
a. a positive externality
b. a public good
c. nonexcludability
d. marginal private benefit exceeding marginal social benefit
e. marginal social cost and the free-rider problem
Answer: D
58) If an externality is created by a single person or firm, and affects only a single person or
firm, then
a. it is referred to as a single externality
b. the inefficiency caused by that externality may be resolved by those two parties
c. the externality takes the form of a side payment
d. Pareto efficiency is guaranteed
e. fairness dictates that the externality be removed
Answer: B
59) Suppose that Pat has the legal right to fly an extremely noisy airplane over Chris's
apartment and that he values that right at $1,000 per year. Chris would be willing to pay $800
per year to avoid the noise. In this case,
a. Pat will be required to eliminate the overflight
b. Chris will move to a new apartment
c. Pat and Chris have a powerful incentive to eliminate the overflight because both would
benefit from it
d. some governmental agency will step in to require Pat to choose a different flight pattern
e. there is no basis for an agreement to eliminate the overflight
Answer: E
60) Suppose that Pat has the legal right to fly an extremely noisy airplane over Chris's
apartment and that he values that right at $1,000 per year. Chris would be willing to pay
$1,200 per year to avoid the noise. In that case
a. Pat will be required to eliminate the overflight
b. Chris will move to a new apartment
c. Pat and Chris have a powerful incentive to agree to eliminate the overflight because both
would benefit from it
d. some governmental agency will step in to require Pat to choose a different flight pattern
e. some governmental agency will require Chris to move to a new apartment
Answer: C
61) According to the Coase Theorem
a. when side payments are costly, the private market cannot solve any externality problem
b. government intervention is needed to solve a negative externality problem
c. government intervention is needed to solve a positive externality problem
d. when side payments can be costlessly negotiated, the private market will solve any
externality problem
e. recourse to the legal system is the only way of eliminating negative externalities
Answer: D
62) Which of the following conditions is necessary in order for the private market to
efficiently solve an externality problem?
a. The person who creates the externality must have the legal right to do so.
b. The person harmed by the externality must have a legal right to be compensated.
c. The value of any side payment must be smaller than the marginal cost of producing the
externality.
d. The value of any side payment must be smaller than the marginal cost of creating the
externality.
e. Side payments must be arranged without cost.
Answer: E
63) Each of the following, except one, is a condition necessary for a private market solution
to an externality problem. Which is the exception?
a. Legal rights must be clearly established.
b. Legal rights must be easily transferred.
c. The number of people involved must be very small.
d. The amount of money involved must be very small.
e. Side payments must be arranged without cost.
Answer: D
64) According to the Coase theorem,
a. government intervention is necessary in order to solve an externality problem
b. an externality is a form of market failure
c. under certain conditions, the private market will solve externality problems efficiently
d. the private market will usually solve externality problems, except when side payments are
necessary
e. negative externalities are less efficient that positive externalities
Answer: C
65) The free rider problem occurs when
a. individual gainers will not contribute the side payment needed for an efficient outcome
b. those harmed will not contribute the side payment needed for an efficient outcome
c. side payments are not necessary for an efficient outcome
d. the marginal cost of arranging a side payment is zero
e. the total cost of arranging a side payment is zero
Answer: A
66) Because of the free rider problem
a. side payments are necessary in order to achieve an efficient outcome
b. a needed side payment can shrink until it is not large enough to compensate losers and still
leave gainers better off
c. efficient outcomes can never be achieved
d. the Coase Theory often applies to real-world situations
e. externalities are less common than they would otherwise be
Answer: B
67) Because of the free rider problem
a. private solutions to externality problems are often needed
b. side payments are needed in order to achieve Pareto improvements
c. governmental solutions to externality problems are often needed
d. side payments are needed in order to solve externality problems
e. private solutions to externality problems are common
Answer: C
68) A typical market supply curve
a. is identical to the firm's marginal cost curve
b. does not reflect any external cost borne by third parties
c. is identical to the firm's marginal revenue curve
d. reflects external benefits enjoyed by third parties
e. is perfectly inelastic
Answer: B
69) In the presence of a negative externality
a. the market marginal benefit curve lies above the market supply curve
b. a market will produce less than the efficient quantity
c. the market price will be too high for an efficient solution to exist
d. the marginal social cost curve lies above the market supply curve
e. Pareto optimality is automatically guaranteed
Answer: A
70) If a firm is not forced to take account of a negative externality it creates, it will produce
the quantity at which
a. the marginal cost of production equals the marginal private benefit
b. the marginal cost of production equals the marginal social benefit
c. the marginal social cost of production the equals marginal private benefit
d. the marginal social cost of production equals the marginal social benefit
e. price equals marginal social benefit
Answer: A
71) In the presence of a negative externality
a. the market solution is efficient, but the market price is too high
b. the market price is efficient, but the corresponding quantity is inefficient
c. the market solution results in too little output being produced
d. the efficient outcome is determined where the marginal social cost and market demand
curves intersect
e. the efficient outcome is determined where the marginal cost and market supply curves
intersect
Answer: D
72) The marginal social cost (MSC) curve
a. lies above the market demand curve
b. lies below the market supply curve
c. is perfectly elastic at the market price
d. is perfectly inelastic
e. indicates the total cost of production, when all costs are considered
Answer: E
73) A market with a negative externality
a. will be regulated by the government
b. is an example of a natural monopoly
c. will be Pareto efficient, as long as bargaining costs are high enough
d. will produce less than the efficient quantity, thereby creating a welfare loss
e. will produce more than the efficient quantity, thereby creating a welfare loss
Answer: E
74) One way to achieve efficiency in a market with a negative externality is
a. to raise the market demand curve to the position of the marginal social cost curve
b. to apply the Coase theorem
c. to lower the marginal social cost curve to the position of the market supply curve
d. to eliminate all side payments
e. to raise the market supply curve to the position of the marginal social cost curve
Answer: E
75) If production creates a negative externality, social welfare can be increased through
a. antitrust law
b. subsidization
c. taxation
d. free market policies
e. allocative efficiency
Answer: C
76) Suppose that production of the product in Figure 14-2 imposes a cost on society of $7.00
per unit. If the free market equilibrium is at the intersection of demand curve D and supply
curve S, what should the government do to internalize the externality?
a. impose a tax of $2.50 per unit
b. reduce the market output level by approximately 39 units
c. impose a tax of $350 per period
d. impose a tax of $7.00 per unit
e. impose a tax of $175 per period
Answer: D
77) Suppose that production of the product in Figure 14-2 imposes a cost on society of $7.00
per unit. If the government imposes a tax of $7.00 per unit of output on the producer the
equilibrium price will
a. rise by $7.00
b. fall by $7.00
c. rise by $2.50
d. fall by $2.50
e. not change
Answer: C
78) To make a market efficient in the presence of a negative externality, a tax could be
imposed that is equal to the marginal
a. social cost
b. private benefit
c. social cost minus marginal private cost
d. social cost minus marginal private benefit
e. private benefit minus marginal social benefit
Answer: C
79) Production involving a positive externality is inefficient.
a. True
b. False
Answer: A
80) A subsidy equal to the marginal private benefit of a good can be used to make a market
with a positive externality efficient.
a. True
b. False
Answer: B
81) Both positive externalities and negative externalities produce inefficiency.
a. True
b. False
Answer: A
82) Negative externalities produce inefficiency but positive externalities do not.
a. True
b. False
Answer: B
83) Which of the following is an example of a positive externality?
a. air pollution
b. littering in a public park
c. buying a new automobile
d. planting a nice garden in front of your neighbor's house
e. pollution of a stream
Answer: D
84) Higher education creates
a. side payments
b. negative externalities
c. a wedge between marginal social cost and marginal private cost
d. positive externalities
e. economic efficiency
Answer: D
85) Because there are positive externalities from higher education,
a. the private market would provide too little of it
b. the private market would provide too much of it
c. the government should impose a tax on college students
d. the government should impose a tax on students' families
e. higher education should not be produced
Answer: A
86) If consumption of a good creates positive externalities, then
a. private demand is greater than marginal social benefit
b. marginal private benefit is less than marginal social benefit
c. private cost is less than marginal social cost
d. marginal social cost is greater than marginal social benefit
e. marginal private cost is zero
Answer: B
87) The private sector of the economy produces mainly goods that are nonexcludable.
a. True
b. False
Answer: B
88) A pure private good has two characteristics: rivalry and excludability. Rivalry suggests
that a private market, rather than the public sector, should produce the good, and
excludability suggests a private market will provide it.
a. True
b. False
Answer: A
89) A good is nonexcludable if the benefits derived from consuming it cannot be easily
denied to those who do not purchase it.
a. True
b. False
Answer: A
90) A good is said to be excludable if
a. those who do not pay for it can be prevented from consuming it
b. those who do not produce the good can be prevented from consuming it
c. it is not traded in a public market
d. there is no rivalry in consuming it
e. its use can be continued indefinitely
Answer: A
91) The two defining characteristics of pure private goods are
a. nonrivalry and excludability
b. positive externalities and efficiency
c. nonexcludability and nonrivalry
d. efficiency and profitability
e. rivalry and excludability
Answer: E
92) Which of the following is an example of a nonrival good?
a. food
b. an automobile
c. a view of the sun rising
d. public housing
e. a private apartment
Answer: C
93) If a good is excludable and nonrival,
a. a private market will provide too much of it
b. a private market will provide the good
c. a private market will not provide the good
d. neither a private market nor a government will provide the good
e. only a government will provide the good
Answer: B
94) Which of the following is a pure public good?
a. cable TV service
b. fire protection
c. a fireworks display
d. corn flakes
e. higher education
Answer: C
95) A pure public good is one that is
a. rival and excludable
b. rival and nonexcludable
c. nonrival but excludable
d. nonrival and nonexcludable
e. provided by a government agency
Answer: D
96) A pure private good is one
a. that is nonrival and nonexcludable
b. that is rival but excludable
c. that is rival and excludable
d. that is nonrival but excludable
e. one whose production imposes a cost on third parties
Answer: C
97) If one person's consumption of a good means that no one else can consume it,
a. that good is called a pure public good
b. production of that good creates a negative externality
c. consumption of that good creates a positive externality
d. the good is said to be excludable
e. the good is said to be rival
Answer: E
98) If a person who does not pay for a good can be prevented from consuming it,
a. that good is said to be excludable
b. that good is said to be nonexcludable
c. consumption of that good creates a positive externality
d. production of that good creates a negative externality
e. that good is called a pure public good
Answer: A
99) Private markets are most likely to produce goods that are
a. neither rival nor excludable
b. rival, but not excludable
c. socially desirable, regardless of whether they are rival or not
d. both rival and excludable
e. rival, but not profitable
Answer: D
100) If a good is nonexcludable,
a. the providing it is Pareto optimal
b. people have an incentive to become free riders on that good
c. then it is probably also nonrival
d. then it is a pure public good
e. then it is a pure private good
Answer: B
101) To achieve economic efficiency, a pure public good
a. would have to be provided at marginal cost
b. would have to be provide at marginal revenue
c. should never be provided
d. should be provided to everyone
e. would have to be provide free of charge
Answer: A
102) Pure public goods
a. are goods that are provided by the government
b. are economically efficient
c. are economically inefficient
d. are both nonrival and nonexcludable
e. are Pareto optimal
Answer: D
103) Existing computer software
a. is a public good
b. is excludable but nonrivalrous
c. is rivalrous by not excludable
d. should be provided free of charge
e. has been produced efficiently
Answer: B
104) Many saltwater fish species are currently being overexploited. This is an example of
a. efficiency
b. the tragedy of the commons
c. Pareto optimality
d. a negative externality
e. a positive externality
Answer: B
105) Road traffic
a. should be provided free of charge
b. is efficient on a toll road
c. creates a positive externality
d. is efficient in London, England
e. creates a negative externality
Answer: E
106) Additional highway traffic
a. creates a positive externality
b. creates a negative externality when a highway is congested
c. creates a negative externality even if a highway is not congested
d. is Pareto optimal
e. requires a side payment
Answer: B
107) Highway traffic is a mixed good because
a. some people like it and others do not
b. drivers creates costs that are borne by other drivers
c. it is not free of charge
d. because highways are rivalrous, but not easily excludable
e. because highways are excludable, but not easily rival
Answer: D
108) When a negative externality exists, the marginal social cost curve
a. is the same as the market supply curve
b. is the same as the market demand curve
c. lies above the market demand curve
d. lies below the market supply curve
e. lies above the market supply curve.
Answer: E
109) When a positive externality exists, the marginal social demand curve
a. is the same as the market supply curve
b. is the same as the market demand curve
c. lies below the market demand curve
d. lies above the market demand curve
e. lies below the market supply curve.
Answer: D
110) A candy bar is an example of a good that is
a. both rival and excludable
b. non-rival but excludable
c. both non-rival and non-excludable
d. rival but non-excludable
e. rival but usually produced inefficiently
Answer: A
111) A movie at the movie theater is an example of a good that is
a. both non-rival and non-excludable
b. both rival and excludable
c. rival but non-excludable
d. non-rival but excludable
e. rival but whose consumption creates negative externalities
Answer: D
112) If consumption of a good creates positive externalities, then
a. the market will under produce it
b. the market will over produce it
c. the market must be perfectly competitive
d. the market must be constrained by barriers to entry
e. the market will produce the most efficient quantity
Answer: A
113) If production of a good creates negative externalities, then the market
a. will under produce it
b. will over produce it
c. must be perfectly competitive
d. must be constrained by barriers to entry
e. will produce the most efficient quantity
Answer: B
114) Which of the following is an example of a negative externality?
a. Picking up your trash
b. Going to class sick
c. Planting pretty flowers in your yard
d. Getting vaccinated
e. Going to class
Answer: B
115) All of the following are examples of negative externalities except
a. getting the flu vaccine.
b. smoking in a crowded bar.
c. driving while intoxicated.
d. littering in the park.
e. pouring paint down the storm drains.
Answer: A
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
