# Chapter. Externalities CHAPTER CHECKLIST

Size: px
Start display at page:

Transcription

2 144 Part 3. HOW GOVERNMENTS INFLUENCE THE ECONOMY CHECKPOINT 10.1 Explain why negative externalities lead to inefficient overproduction and how property rights, pollution charges, and taxes can achieve a more efficient outcome. Quick Review external cost The cost of producing an additional unit of a good or service that falls on people other than the producer. Efficiency Efficiency is achieved when the marginal social benefit equals the marginal social cost. Coase theorem If property rights exist, only a small number of parties are involved, and transactions costs are low, then private transactions are efficient and the outcome is not affected by who is assigned the property right. Additional Practice Problems The figure illustrates the unregulated market for paper. When the factories produce paper, they also create air pollution. The cost of the pollution is \$1,500 per ton. The pollution is a marginal external cost. a. What is the quantity of paper produced in an unregulated market? What is the price of a ton of paper? b. Draw the marginal social cost curve in the figure. What is the efficient quantity of paper to produce? c. If the government imposed a tax on the firms, what must the tax equal to have the efficient quantity of paper produced? With this tax imposed, what is the equilibrium price of a ton of paper? 2. Two factories each emit 10 tons of the pollutant sulfur dioxide a week. The cost to eliminate a ton of sulfur dioxide to Factory A is \$4 and the cost to Factory B is \$2. The government wants to eliminate 10 tons of sulfur dioxide a week. a. If the government requires that Firm A decrease emissions by 10 tons a week, what is the cost of eliminating the pollution? b. If the government requires that Firm B decrease emissions by 10 tons a week, what is the cost of the eliminating the pollution? c. If the government gives each firm 5 marketable permits, each good for 1 ton of pollution, what will occur? Solutions to Additional Practice Problems a. The equilibrium is determined by the intersection of the demand and supply curves. So the equilibrium quantity is 4 tons of paper per week and the equilibrium price is \$2,000 per ton. 1b. The figure shows the marginal social cost curve, labeled MSC. At 1 ton of paper this curve lies \$1,500 above the supply curve; at 2 tons of paper it lies \$3,000 above the supply curve; and so on. The efficient quantity is where the marginal social cost equals the marginal benefit, which the figure shows is 2 tons of paper. 1c. To lead to efficiency, the tax must equal the marginal external cost. So the tax should be \$1,500 per ton. At the efficient quantity of 2 tons, the tax is \$3,000. With this tax, the equilibrium price is \$4,000 per ton of paper. 2a. The cost for Firm A to decrease emissions is \$4 a ton multiplied by 10 tons, which is \$40 a week. 2b. The cost for Firm B to decrease emissions is \$2 a ton multiplied by 10 tons, which is \$20 a week.

3 Chapter 10. Externalities 145 2c. Firm A is willing to buy permits from Firm B for any price less than \$4 per permit; Firm B is willing to sell permits to Firm A for any price greater than \$2 per permit. The two companies will settle on a price and Firm A will buy 5 permits from Firm B. Only Firm B will decrease its pollution and incur a cost of \$20 a week. Self Test 10.1 Fill in the blanks social cost equals marginal private cost (minus; plus) marginal external cost. A pollution externality creates an (efficient; inefficient) equilibrium. According to the Coase theorem, if property rights exist, then private transactions are efficient and the outcome (is; is not) affected by who is assigned the property right. By setting the tax rate equal to the marginal (external; private; social) cost, firms can be made to behave in the same way as they would if they bore the cost of the externality directly. True or false 1. All externalities are negative. 2. Smoking on a plane creates a negative externality. 3. social cost equals marginal private cost minus marginal external cost. 4. Copper mining creates land pollution. If the copper mining industry is unregulated, then the quantity of copper mined is less than the efficient quantity. 5. The Coase theorem concludes that if property rights to a polluted river are assigned to the polluter, the quantity of pollution will increase. 6. Emission charges allow the government to set the price for a unit of pollution. 7. By issuing marketable permits, the government sets the price for each unit of pollution produced. 8. If the government imposes a pollution tax on lead mining equal to its marginal external cost, the quantity of lead mined will be the efficient quantity. Multiple choice 11. Which of the following best describes an externality? a. something that is external to the economy b. a sales tax on a good in addition to the market price c. an effect of a transaction felt by someone other than the consumer or producer d. anything produced in other countries e. a change from what is normal 12. Pollution is an example of a externality. a. negative production b. positive production c. negative consumption d. positive consumption e. Coasian 13. The cost of producing one more unit of a good or service that is borne by the producer of that good or service a. always equals the benefit the consumer derives from that good or service. b. equals the cost borne by people other than the producer. c. is the marginal private cost. d. is the external cost. e. is the marginal social cost. 14. The cost of producing an additional unit of a good or service that falls on people other than the producer is a. the marginal cost. b. represented by the demand curve. c. represented by the supply curve. d. the marginal external cost. e. the marginal social cost.

4 146 Part 3. HOW GOVERNMENTS INFLUENCE THE ECONOMY 15. Which of the following is an example of something that creates an external cost? i. second hand smoke ii. sulfur emitting from a smoke stack iii. garbage on the roadside a. i only. b. ii only. c. iii only. d. ii and iii. e. i, ii, and iii. 16. The marginal cost of production that is borne by the entire society is the marginal a. private cost. b. social cost. c. external cost. d. public cost. e. user cost. 17. If the marginal private cost of producing one kilowatt of power in California is five cents and the marginal social cost of each kilowatt is nine cents, then the marginal external cost equals a kilowatt. a. five cents b. nine cents c. four cents d. zero cents e. fourteen cents 18. When the production of a good has a marginal external cost, which of the following will occur in an unregulated market? i. Overproduction relative to the efficient level will occur ii. The market price will be less than the marginal social cost at the equilibrium quantity iii. A deadweight loss will occur a. i only. b. ii only. c. iii only. d. i and ii. e. i, ii, and iii. 19. Figure 10.1 shows the market for a good with an external cost. The external cost equals per ton. a. \$5 b. \$10 c. \$15 d. \$20 e. \$ Figure 10.1 shows the market for a good with an external cost. If the market is unregulated, the equilibrium quantity is tons per year. a. 0 b. 100 c. 200 d. 300 e Figure 10.1 shows the market for a good with an external cost. The efficient quantity is tons per year. a. 0 b. 100 c. 200 d. 300 e. 400

5 Chapter 10. Externalities The Coase theorem is the proposition that if property rights exist and are enforced, private transactions are a. inefficient. b. efficient. c. inequitable. d. illegal. e. unnecessary. 13. A marketable permit a. allows firms to pollute all they want without any cost. b. allows firms to buy and sell the right to pollute at government controlled prices. c. eliminates pollution by setting the price of pollution permits above the marginal cost of polluting. d. allows firms to buy and sell the right to pollute. e. is the Coase solution to pollution. 14. If we compare air pollution today to air pollution in 1980, we see that a. pollution of all forms has increased. b. pollution of all forms has been substantially reduced. c. pollution of most types has been decreased. d. pollution from lead has increased. e. pollution of most types has not changed. 15. If a polluting producer is forced to pay an emission charge or a tax on its output, what is the effect on the supply and demand curves for the product? a. The quantity supplied along the firm s supply curve will increase. b. The firm s demand curve shifts leftward. c. The firm s supply curve shifts rightward. d. The firm s supply curve shifts leftward. e. Both the supply curve and the demand curve shift leftward. Complete the graph Quantity (megawatts per day) private cost (dollars) social cost (dollars) benefit (dollars) The table above shows the marginal private cost, marginal social cost, and marginal benefit schedules for generating electricity. a. In Figure 10.2, label the axes and then plot the marginal private cost curve, the marginal social cost curve, and the marginal benefit curve. b. How much electricity will an unregulated market produce? What is the marginal external cost at this amount of production? c. What is the efficient amount of electricity? Illustrate the deadweight loss resulting from the market equilibrium. d. At the efficient quantity of electricity, what is the marginal external cost? If the government imposes a tax on producing electricity to produce the efficient quantity, what should be the amount of tax? How much electricity is generated and what is its price?

6 148 Part 3. HOW GOVERNMENTS INFLUENCE THE ECONOMY Quantity (tons per day) private cost (dollars) benefit (dollars) The table above shows the marginal private cost and marginal benefit schedules for producing PBDE, a chemical flame retardant. Suppose that there is an external cost of \$100 per ton of PBDE produced. a. In Figure 10.3, label the axes and then plot the marginal private cost curve, the marginal social cost curve, and the marginal benefit curve. Short answer and numeric questions 1. If the marginal social cost curve lies above the marginal private cost curve, is there an external cost or benefit from production of the good or service? Quantity (tons of pesticide per day) private cost ton) external cost ton) social cost ton) The table above shows the costs of producing pesticide. Complete the table. 3. According to the Coase theorem, when are private transactions efficient? 4. What is a marketable permit? What advantage do marketable permits have over the government assigning each firm a limit on how much it can pollute? 5. The production of fertilizer creates water pollution. How do emission charges and taxes result in an efficient quantity of production? What information must the government possess to use emission charges and taxes effectively? CHECKPOINT 10.2 b. How much PBDE will an unregulated market produce? What is the equilibrium price? What is the amount of the marginal external cost at the equilibrium quantity of production? c. What is the efficient amount of PBDE? At the efficient quantity, what is the amount of the marginal external cost? d. If the government set an emission charge for producing PBDE, what must the charge equal to lead to the efficient quantity of PBDE? Explain why positive externalities lead to inefficient underproduction and how public provision, subsidies, vouchers, and patents can achieve a more efficient outcome. Quick Review external benefit The benefit from an additional unit of a good or service that people other than the consumer of the good or service enjoy.

7 Chapter 10. Externalities 149 Additional Practice Problems The figure shows the marginal private benefit, marginal social benefit, and marginal cost of a college education. a. How much does the marginal external benefit equal? b. If colleges are private and government has no involvement in college education, how many people will undertake a college education and what will be the tuition? c. What is the efficient number of students? d. If the government decides to provide public colleges, what tuition will these colleges charge to achieve the efficient number of students? What is the marginal cost of educating this many students? Why is it justified to charge a tuition that is less than the marginal cost? 2. A vaccine for chicken pox was recently developed. The company that developed the vaccine, Merck Incorporated, was required to submit a document comparing the costs and benefits of vaccinating children. The government would approve the drug only if the benefit of vaccination exceeded the cost. The producer reports that the marginal cost of a dose of vaccine is \$80. The marginal benefit to the child being vaccinated is estimated to be \$30 and an additional marginal benefit to the child s parents is estimated at \$60. a. How much is the marginal private benefit and the marginal external benefit? b. Based on these data, should the government have approved the vaccine? Solutions to Additional Practice Problems a. The marginal external benefit equals the vertical distance between the marginal social benefit curve, MSB, and the marginal private benefit curve, MB. In the figure the difference is \$8,000, so the marginal external benefit equals \$8,000. 1b. If the government has no involvement, the equilibrium tuition and number of students is determined by the equilibrium between supply and demand. The supply curve is the marginal private cost curve, S = MC, and the demand curve is the marginal private benefit curve, MB. The figure shows that the equilibrium tuition equals \$8,000 a year and the equilibrium enrollment is 200,000 students a year. 1c. The efficient number of students is 300,000 because this the quantity at which the marginal cost equals the marginal social benefit. 1d. The demand curve, which is the same as the marginal private benefit curve, shows that tuition must be \$4,000 in order for 300,000 students to attend college. The marginal cost of educating 300,000 students is \$12,000 students per year. It is justified to charge a tuition that is less than the marginal cost because education has external benefits so that society as well as the student benefits from the college education. 2a. The marginal private benefit is the benefit to the child being vaccinated and is \$30. The marginal external benefit is the benefit to the child s parents and is \$60. 2b. Based on the data that were submitted, the government should have approved the vaccine. The marginal social benefit equals the marginal private benefit to the child of \$30 plus the marginal external benefit to the parent of \$60, which is \$90. The marginal social benefit from the vaccine is greater than the marginal cost.

8 150 Part 3. HOW GOVERNMENTS INFLUENCE THE ECONOMY Self Test 10.2 Fill in the blanks (social; external) benefit is the benefit enjoyed by society from one more unit of a good or service. If the government leaves education to the private market, (overproduction; underproduction) occurs. A payment that the government makes to private producers that depends on the level of output is (a subsidy; public provision). The property rights of the creators of knowledge and other discoveries are (intellectual property; patent property) rights. True or false 1. The marginal private benefit from a good or service must exceed the marginal external benefit. 2. The expanded job opportunities from a college degree is a marginal private benefit enjoyed by college graduates. 3. A flu vaccination has an external benefit, so the marginal private benefit curve for flu vaccinations lies above the marginal social benefit curve for flu vaccinations. 4. An unregulated market underproduces products with external benefits, such as education. 5. A public community college is an example of public provision of a good that has an external benefit. 6. To overcome the inefficiency in the market for a good with an external benefit, the government can either tax or subsidize the good. 7. Vouchers can help overcome the inefficiency created by a good with an external cost but not the inefficiency created by a good with an external benefit. 8. A patent protects intellectual property rights by giving the patent holder a monopoly. Multiple choice 11. The benefit the consumer of a good or service receives is the a. social benefit. b. external benefit. c. private benefit. d. public benefit. e. consumption benefit. 12. An external benefit is a benefit from a good or service that someone other than the receives. a. seller of the good or service b. government c. foreign sector d. consumer e. market maker 13. When Ronald takes another economics class, other people in society benefit. The benefit to these other people is called the marginal benefit of the class. a. social b. private c. external d. opportunity e. extra 14. social benefit equals a. marginal external benefit. b. marginal private benefit. c. marginal private benefit minus marginal external benefit. d. marginal private benefit plus marginal external benefit e. marginal external benefit minus marginal private benefit. 15. If an external benefit is present, then the a. marginal private benefit curve lies above the marginal private cost curve. b. marginal social benefit curve lies above the marginal private benefit curve. c. marginal social cost curve lies above the marginal private benefit curve. d. marginal social benefit is equal to the marginal social cost. e. marginal social benefit curve is the same as the marginal private benefit curve.

9 Chapter 10. Externalities In an unregulated market with an external benefit, the a. quantity produced is greater than the efficient quantity. b. price charged is too high for efficiency. c. quantity produced is less than the efficient quantity. d. producer is causing pollution but not paying for it. e. government might impose a tax to help move the market toward the efficient amount of production. 17. Figure 10.4 shows the market for research and development, which has. a. only external costs b. only external benefits c. both external costs and external benefits d. neither external costs nor external benefits e. might have external benefits or external costs, but more information is needed 18. Figure 10.4 shows the market for research and development. If the market is unregulated, the equilibrium quantity of R&D is units per day. a. 0 b. 2 c. 3 d. 4 e Figure 10.4 shows the market for research and development. The efficient quantity of R&D is units per day. a. 0 b. 2 c. 3 d. 4 e If all education in the United States were provided by private, tuition charging schools, a. too much education would be consumed. b. too little education would be consumed. c. the efficient level of education would be provided. d. the government would provide both students and schools with vouchers. e. education would no longer have an external benefit. 11. Which of the following is a method used by government to cope with the situation in which production of a good creates an external benefit? a. removing property rights b. paying subsidies c. issuing marketable permits d. running a lottery e. imposing a Coasian tax 12. If tuition at a college is \$30,000 and the external benefit of graduating from this college is \$10,000, then i. in the absence of any government intervention, the number of students graduating is less than the efficient number ii. the government could increase the number of graduates by giving the college a \$10,000 subsidy per student iii. the government could increase the number of graduates by giving the students \$10,000 vouchers a. i only. b. i and ii. c. i and iii. d. ii and iii. e. i, ii, and iii.

10 152 Part 3. HOW GOVERNMENTS INFLUENCE THE ECONOMY 13. Public universities are a service that is an example of a. patent protection. b. vouchers. c. private subsidies. d. public provision. e. an emission charge. 14. Which of the following is an example of a voucher? a. the postal service b. police services c. social security d. food stamps e. a patent on a pharmaceutical drug 15. Which government device is associated with intellectual property rights? a. public provision b. private subsidies c. vouchers d. patents and copyrights e. taxes Complete the graph 1. Figure 10.5 illustrates the market for honey. a. Label the curves in the figure. b. Based on Figure 10.5, does the production of honey create an external cost? An external benefit? c. What is the efficient quantity of honey? What is the quantity that will be produced in an unregulated market? d. Shade the area that equals the deadweight loss in an unregulated market. Short answer and numeric questions Quantity (units of R&D per day) private cost unit of R&D) private benefit unit of R&D) social benefit unit of R&D) The table above shows the benefits and costs of research and development, R&D. a. Based on the table, what is the amount of the marginal external benefit? b. If the market for R&D was left unregulated, what would be the competitive amount of R&D? c. What is the efficient amount of R&D? d. Would a subsidy or a tax be the proper government policy to make the market for R&D more efficient? 2. Is efficiency guaranteed when production is such that the marginal private benefit equals the marginal private cost? Or does efficiency require that the marginal social benefit equal the marginal social cost? 3. Most elementary schools require that children be vaccinated before allowing the child to attend school. Can this policy be justified using economic analysis? 4. Is a private subsidy or a tax the correct government policy for a product that has an external benefit? 5. What is a voucher? How do vouchers work? Why is a voucher a proper policy to deal with the inefficiency created by a good or service that has an external benefit?

11 Chapter 10. Externalities 153 SELF TEST ANSWERS CHECKPOINT 10.1 Fill in the blanks social cost equals marginal private cost plus marginal external cost. A pollution externality creates an inefficient equilibrium. According to the Coase theorem, if property rights exist, then private transactions are efficient and the outcome is not affected by who is assigned the property right. By setting the tax rate equal to the marginal external cost, firms can be made to behave in the same way as they would if they bore the cost of the externality directly. True or false 1. False; page True; page False; page False; page False; page True; page False; page True; page 251 Multiple choice 11. c; page a; page c; page d; page e; page b; page c; page e; page b; page c; page b; page b; page d; page c; page d; page 251 Complete the graph 1. a. Figure 10.6 shows the MSC, MC, and MB curves; page 246. b. An unregulated market will produce 4 megawatts of electricity a day. The marginal external cost at this production is \$20 per megawatt; page 246. c. The efficient amount of electricity is 3 megawatts a day. The deadweight loss is illustrated in the figure; page 246. d. At the efficient quantity of electricity, the marginal external cost is \$15 a megawatt. The tax is \$15 a megawatt. With the tax, 3 megawatts of electricity are produced and the price is \$30 per megawatt; page a. Figure 10.7 shows the MSC, MC, and MB curves; page 246.

12 154 Part 3. HOW GOVERNMENTS INFLUENCE THE ECONOMY b. An unregulated market will produce 3 tons of PBDE a day. At this quantity the marginal external cost is \$300; pages c. The efficient quantity of PBDE is 2 tons per day. At this quantity the marginal external cost is \$200; pages d. The emission charge will equal \$100 per ton of PBDE; page 250. Short answer and numeric questions 1. If the marginal social cost curve lies above the marginal private cost curve, production of the good creates an external cost; page 245. Quantity (tons of pesticide per day) private cost ton) external cost ton) social cost ton) The completed table is above; page According to the Coase theorem, if property rights are assigned, the number of people involved is small, and transactions costs are low, then private transactions are efficient; page A marketable permit is a government issued permit given to firms that allows the company to pollute up to the limit of the permit. Permits can be bought and sold amongst firms. The advantage marketable permits have over assigning each firm a limit for its pollution is information. In order to assign each firm a limit and achieve efficiency, the government must know each firm s marginal cost schedule. Marketable permits do not require that the government know this information; page Emission charges and taxes are designed to charge polluting firms the cost of their pollution. By forcing a firm to pay this cost, the firm s marginal private cost becomes equal to the marginal social cost. To use emission charges or taxes to overcome the problem of pollution, the government must know the marginal external cost at different levels of output; page 250. CHECKPOINT 10.2 Fill in the blanks social benefit is the benefit enjoyed by society from one more unit of a good or service. If the government leaves education to the private market, underproduction occurs. A payment that the government makes to private producers that depends on the level of output is a subsidy. The property rights of the creators of knowledge and other discoveries are intellectual property rights. True or false 1. False; page True; page False; page True; page True; page False; page False; page True; page 259 Multiple choice 11. c; page d; page c; page d; page b; page c; page b; page c; page d; page b; page b; page e; pages d; page d; page d; page 259

13 Chapter 10. Externalities 155 Complete the graph 1. a. Figure 10.8 labels the curves; page 255. b. The production of honey has an external benefit but no external cost; page 255. c. The efficient quantity of honey is 300 tons, a year, at the intersection of the MSB curve and the S = MC curve. In an unregulated market, the equilibrium quantity is 200 tons a year, at the intersection of the D = MB curve and the S = MC curve; page 255. d. Figure 10.8 shades the deadweight loss; page 255. Short answer and numeric questions 1. a. The marginal external benefit equals the difference between the marginal social benefit and the marginal social cost, so it is \$90 per unit of R&D; page 254. b. The competitive equilibrium is where the marginal private cost (which determines the supply) equals the marginal private benefit (which determines the demand), so the equilibrium amount of R&D is 300 units per day; page 255. c. The efficient quantity is produced when the marginal social benefit equals the marginal cost, so the efficient amount is 400 units of R&D per day; page 255. d. A subsidy would be a proper government policy; page Efficiency is not guaranteed when production sets the marginal private benefit equal to the marginal cost. The efficient quantity is produced when the marginal social benefit equals marginal cost; page Vaccination protects not only the child who is vaccinated, but also makes it less likely for classmates to catch the disease. So a vaccination has an external benefit. Although the marginal cost of a vaccination can be greater than the marginal private benefit of a vaccination, the marginal social benefit exceeds the marginal private benefit. The market might be efficient when vaccination is required; page The correct government action to deal with a good or service that has an external benefit is a private subsidy, not a tax; page A voucher is a token that the government gives to households which they can use to buy specified goods or services. Vouchers increase the demand for the product and shift the demand curve (which is the same as the marginal private benefit curve, or MB curve) rightward, closer to the marginal social benefit curve. Vouchers reduce the inefficiency created by a good or service with an external benefit; page 258.

14

### Externalities C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to

Externalities CHAPTER9 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Explain why negative externalities lead to inefficient overproduction and

### Externalities. Chapter CHAPTER OUTLINE

Externalities Chapter CHAPTER OUTLINE I. Explain why negative externalities lead to inefficient overproduction and how property rights, pollution charges, and taxes can achieve a more efficient outcome.

### 17 EXTERNALITIES. Chapt er. Key Concepts. Externalities in Our Lives

Chapt er 17 EXTERNALITIES Key Concepts Externalities in Our Lives An externality is a cost or benefit that arises from production and falls on someone other than the producer or a cost or benefit that

### 2013 CH sample questions - 200

Class: Date: 2013 CH 9 17 18 sample questions - 200 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. When studying pollution and the environment, economists

Micro Chapter 6 -price ceiling or price cap: government regulation that makes it illegal to charge a price higher then a specified level -effects of the price cap on the market depend on whether the ceiling

### Efficiency and Fairness of Markets

Efficiency and Fairness of Markets Chapter 6 CHAPTER IN PERSPECTIVE In Chapter 6 we study the equilibrium quantities of goods, services, and factors of production to determine if markets are efficient.

Chapter 5 Lecture - Externalities, Environmental Policy, and Public Goods 1 What s the Best Level of Pollution? Is there a way to know what is the optimal level of pollution for a society? No pollution

### Chapter 5- Efficiency and Equity Resource Allocation Methods evaluate the ability of markets to allocate resources efficiently and fairly we must

Chapter 5- Efficiency and Equity Resource Allocation Methods evaluate the ability of markets to allocate resources efficiently and fairly we must compare it with its alternative resources are scare, must

### AP Microeconomics Chapter 4 Outline

I. Learning Objectives In this chapter students should learn: A. How to differentiate demand-side market failures and supply-side market failures. B. The origin of consumer surplus and producer surplus,

### ECON 2100 Principles of Microeconomics (Fall 2018) Externalities

ECON 21 Principles of Microeconomics (Fall 218) Externalities Relevant readings from the textbook: Mankiw, Ch. 1 Externalities Suggested problems from the textbook: Chapter 1 Quick Quiz Multiple Choice

### Econ 2113: Principles of Microeconomics. Spring 2009 ECU

Econ 2113: Principles of Microeconomics Spring 2009 ECU Chapter 12 Monopoly Market Power Market power is the ability to influence the market, and in particular the market price, by influencing the total

### Econ*1050 Introductory Microeconomics Instructor: Vitali Alexeev. Quiz 6 (Chapter 8)

Econ*1050 Introductory Microeconomics Instructor: Vitali Alexeev Quiz 6 (Chapter 8) 1) A tax on a good a. raises the price buyers pay and lowers the price sellers receive. b. raises both the price buyers

### To do today. Efficiency MB and MC Consumer surplus Producer surplus Deadweight loss. Theories of fairness

To do today Efficiency MB and MC Consumer surplus Producer surplus Deadweight loss Theories of fairness MB and consumer surplus A key concept in defining efficiency Consumer surplus is the MB from a

### Sample Exam Questions/Chapter 16

Sample Exam Questions/Chapter 16 1. Suppose the production of DVDs generates sulfur dioxide, an air pollutant. Then the equilibrium market quantity of DVDs produced and consumed: A) is less than the socially

### MICROECONOMICS - CLUTCH CH. 7 - EXTERNALITIES.

!! www.clutchprep.com CONCEPT: EXTERNALITIES SOCIAL BENEFITS AND SOCIAL COSTS Sometimes a market transaction can impose a cost or benefit on innocent bystanders. A negative externality ( ) imposes an on

### CH 21: Externalities & Market Failure. Lecture

CH 21: Externalities & Market Failure Lecture Market Failure Market failure: a situation in which the free market system fails to satisfy society s wants (when the invisible hand does not work) 3 sources

### Externalities. 5 Microeconomics ACTIVITY 5-2

ACTIVITY 5-2 Externalities A market externality refers to a situation where some of the costs or benefits from an activity fall on someone other than the people directly involved in the activity. Externalities

### EFFICIENCY EQUITY. Chapt er. Key Concepts

Chapt er 5 EFFICIENCY AND EQUITY Key Concepts Resource Allocation Methods Resources are scarce so they must be allocated to producing different goods. Some methods of resource allocation include: Market

### Public Goods and Common Resources

Public Goods and Common Resources Chapter CHAPTER CHECKLIST Chapter 11 studies the types of goods and services provided by the government. Distinguish among private goods, public goods, and common resources.

### PUBLIC CHOICES, PUBLIC GOODS, AND HEALTHCARE

Chapt er 16 PUBLIC CHOICES, PUBLIC GOODS, AND HEALTHCARE Key Concepts Public Choices All economic choices are made by individuals but some are private choices and some are public choices. Private choices

### 2015 Pearson. Why does tuition keep rising?

Why does tuition keep rising? Demand and Supply 4 When you have completed your study of this chapter, you will be able to CHAPTER CHECKLIST 1 Distinguish between quantity demanded and demand, and explain

### Notes - Gruber, Public Finance Section 5.1 Externalities Definition of a fundamental externality: An fundamental externality exists when the actions

Notes - Gruber, Public Finance Section 5.1 Externalities Definition of a fundamental externality: An fundamental externality exists when the actions of one party affect the welfare or the production possibilities

### Basics of Economics. Alvin Lin. Principles of Microeconomics: August December 2016

Basics of Economics Alvin Lin Principles of Microeconomics: August 2016 - December 2016 1 Markets and Efficiency How are goods allocated efficiently? How are goods allocated fairly? A normative statement

### 2. THEORIES OF EXTERNALITIES

2/17/19 2. THEORIES OF EXTERNALITIES Public Finance, 10 th Edition David N. Hyman; Chapter 3 Adapted by Chairat Aemkulwat for Theory of Public Expenditures 2943410 Outline: Lecture 2 THEORIES OF EXTERNALITIES

### AP Microeconomics. Sample Student Responses and Scoring Commentary. Inside: Free Response Question 3. Scoring Guideline.

2017 AP Microeconomics Sample Student Responses and Scoring Commentary Inside: Free Response Question 3 Scoring Guideline Student Samples Scoring Commentary 2017 The College Board. College Board, Advanced

### MONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes

1 MONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. A market might have a monopoly because: (1) a key resource is owned by a single firm; (2) the government gives a single firm the exclusive right

### Efficiency and Equity

Chapter 5: Efficiency and Equity Objectives After studying this chapter, you will be able to: Describe the alternative methods of allocating scarce resources Explain the connection between demand and marginal

### Copyright 2016 Pearson Canada Inc. 5-1 EFFICIENCY AND EQUITY. After studying this chapter, you will be able to:

5 EFFICIENCY AND EQUITY After studying this chapter, you will be able to: Describe the alternative methods for allocating scarce resources Explain the connection between demand and marginal benefit and

### China: Growth and Pollution

China: Growth and Pollution Growth the Good Consistent growth rates of approximately 10% per year Vast improvement in per capita income Millions of people pulled out of poverty Increased choices and freedom

### Policy Evaluation Tools. Willingness to Pay and Demand. Consumer Surplus (CS) Evaluating Gov t Policy - Econ of NA - RIT - Dr.

Policy Evaluation Tools Evaluating Gov t Policy - Econ of NA - RIT - Dr. Jeffrey Burnette In economics we like to measure the impact government policies have on the economy and separate winners and losers.

### Perfectly Competitive Markets, Market Equilibrium, Welfare Economics, Efficiency, and Market Failure

Perfectly Competitive Markets, Market Equilibrium, Welfare Economics, Efficiency, and Market Failure Markets--Putting Market Supply and Market Demand Together So far in this course, we have studied consumers

### Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture -29 Monopoly (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture -29 Monopoly (Contd ) In today s session, we will continue our discussion on monopoly.

### ECO 100Y INTRODUCTION TO ECONOMICS Term Test # 3

Department of Economics Prof. Gustavo Indart University of Toronto February 17, 2012 ECO 100Y INTRODUCTION TO ECONOMICS Term Test # 3 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total time

### Externalities. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

10 Externalities PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Externalities Government action can sometimes improve upon market outcomes Why markets sometimes fail to

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

PS8 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following conditions holds in an economically efficient competitive market

### Chapter 9. Applying the Competitive Model

Chapter 9. Applying the Competitive Model We know that a change in supply curve or demand curve will change the price and quantity. But how does this affect consumers and producers? How much do they lose

### Chapter. Demand and Supply CHAPTER IN PERSPECTIVE

Demand and Supply Chapter 4 CHAPTER IN PERSPECTIVE The tools of demand and supply explain how competitive markets work. We use the demand and supply tools to determine the quantities and prices of the

### Chapter 10 Externalities practice quiz

Chapter 10 Externalities practice quiz Multiple Choice Identify the letter of the choice that best completes the statement or answers the question Figure 10-1 1 Refer to Figure 10-1 This graph represents

### Chapter. The Economic Problem CHAPTER IN PERSPECTIVE

The Economic Problem Chapter CHAPTER IN PERSPECTIVE Chapter studies the production possibilities frontier, PPF. The PPF shows how the opportunity cost of a good or service increases as more of the good

### Version 1-Yellow. 1. My version of the quiz is a. Version 1 Yellow b. Version 2 Purple c. Version 3 Green d. Version 4 Pink e.

Midterm Exam 2 Version 1-Yellow Instructions: Answer each of the questions. Print your name and student number clearly on the answer sheet. Fill in the bubbles corresponding to your student number, leaving

### VE 04. Market Failure Varsity Economics Market Failure

Varsity Economics Market Failure 1 When producers do not have to pay the full cost of producing a product, they tend to A overproduce the product because of a demand-side market failure. B underproduce

### Economics 381/Environmental Studies 312 Review Assignment

Economics 381/Environmental Studies 312 Review Assignment This Review Assignment is worth 5% of your grade. The purpose of this part of the assignment is twofold. First, it is designed to help you recall

### Chief Reader Report on Student Responses:

Chief Reader Report on Student Responses: 2017 AP Microeconomics Free-Response Questions Number of Students Scored 87,858 Number of Readers 92 Score Distribution Exam Score N %At Global Mean 3.26 5 20,614

### ECON 101 KONG Midterm 2 CMP Review Session. Presented by Benji Huang

ECON 101 KONG Midterm 2 CMP Review Session Presented by Benji Huang Chapter 5 Efficiency and Equity Benefit, Cost, Surplus Consumers (1) A consumer benefits from the consumption of a product this benefit

### After studying this chapter you will be able to

3 Demand and Supply After studying this chapter you will be able to Describe a competitive market and think about a price as an opportunity cost Explain the influences on demand Explain the influences

What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have

### Chapter 10 Pure Monopoly

Chapter 10 Pure Monopoly Multiple Choice Questions 1. Pure monopoly means: A. any market in which the demand curve to the firm is downsloping. B. a standardized product being produced by many firms. C.

### Chapter 5: Supply Section 3

Chapter 5: Supply Section 3 Objectives 1. Explain how factors such as input costs create changes in supply. 2. Identify three ways that the government can influence the supply of goods. 3. Analyze other

### Mechanism through which buyers (demanders) and sellers (suppliers) communicate to trade goods and services.

By the end of this learning plan, you will be able to: Use marginal (Cost-Benefit) analysis in decision-making Apply supply and demand analysis to price determination Assess the role price plays in a market

November 17, 2009 90 minutes No calculators, no aids allowed. Economics 103 Second Midterm Dr. J. Friesen ANSWER KEY Multiple Choice. 3 marks each. Indicate your answers on the bubble sheet provided. 1)

### A situation in which the free-market system fails to satisfy society s wants.

A situation in which the free-market system fails to satisfy society s wants. 1. Monopolies 2. Unfair distribution of income 3. Externalities 4. ublic Goods In each of the above situations, the government

### Perfect Competition CHAPTER14

Perfect Competition CHAPTER14 MARKET TYPES The four market types are Perfect competition Monopoly Monopolistic competition Oligopoly MARKET TYPES Perfect Competition Perfect competition exists when Many

### Econ Microeconomics Notes

Econ 120 - Microeconomics Notes Daniel Bramucci December 1, 2016 1 Section 1 - Thinking like an economist 1.1 Definitions Cost-Benefit Principle An action should be taken only when its benefit exceeds

### ECON 1000 Contemporary Economic Issues (Summer 2018) Allocation Function of Government portions for Exam 3

ECON 1000 Contemporary Economic Issues (Summer 2018) Allocation Function of Government portions for Exam 3 Relevant Readings from the Required Textbooks: Chapter 10, Market Failure Definitions and Concepts:

### Chapter 7: Market Structures Section 2

Chapter 7: Market Structures Section 2 Objectives 1. Describe characteristics and give examples of a monopoly. 2. Describe how monopolies, including government monopolies, are formed. 3. Explain how a

### Chapter 7: Market Structures Section 2

Chapter 7: Market Structures Section 2 Objectives 1. Describe characteristics and give examples of a monopoly. 2. Describe how monopolies, including government monopolies, are formed. 3. Explain how a

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose an increase in demand causes the price to increase from \$2 to \$4 and the quantity

### Additional Questions. Externalities and Public Goods.

Additional Questions. Externalities and Public Goods. Problem 1. The purpose of this problem is to help you understand the difference in market demand for purely private and purely public good. For each

### To do today. Ariely ques0ons. Chapter 16 in text: Public choices and public goods

To do today Ariely ques0ons Chapter 16 in text: Public choices and public goods Choices governments make Why Governments Exist 1. Establish and maintain property rights. 2. Provide nonmarket mechanisms

### Externalities. (a short presentation)

Externalities (a short presentation) WHY EXTERNALITIES ARE IMPORTANT? Adam Smith s invisible hand : self-interested buyers and sellers maximize the total benefit that society can derive from a market.

### 2013 Pearson. Why did the price of coffee soar in 2010 and 2011?

Why did the price of coffee soar in 2010 and 2011? How do markets work? We have seen the circular flows diagram, which shows that households and firms interact in factor markets and goods markets. In this

### short run long run short run consumer surplus producer surplus marginal revenue

Test 3 Econ 3144 Name Fall 2005 Dr. Rupp 20 Multiple Choice Questions (50 points) & 4 Discussion (50 points) Signature I have neither given nor received aid on this exam Use this table to answer questions

### Monopoly CHAPTER. Goals. Outcomes

CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions

### Externalities and the Environment

Externalities and the Environment What is an Externality? When a person/firm does something that affects the interests of another person or firm without affecting prices. Examples: Traffic/telephone/internet

### MICROECONOMICS - CLUTCH CH MONOPOLY.

!! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLY A market is a monopoly when: Nature of Good: The goods for sale are - No close substitutes Setting Price: The sellers are - Only in the market

### A monopoly market structure is one characterized by a single seller of a unique product with no close substitutes.

These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 12 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter

### ECO201: PRINCIPLES OF MICROECONOMICS SECOND MIDTERM EXAMINATION

YOUR NAME Row Number ECO201: PRINCIPLES OF MICROECONOMICS SECOND MIDTERM EXAMINATION Prof. Bill Even November 11, 2013 FORM 3 Directions 1. Fill in your scantron with your unique-id and the form number

### ECO201: PRINCIPLES OF MICROECONOMICS SECOND MIDTERM EXAMINATION

YOUR NAME Row Number ECO201: PRINCIPLES OF MICROECONOMICS SECOND MIDTERM EXAMINATION Prof. Bill Even November 11, 2013 FORM 4 Directions 1. Fill in your scantron with your unique-id and the form number

### Top 10 Most Common Errors AP Economics 2011

Top 10 Most Common Errors AP Economics 2011 Overview of Trouble Spots 11. Finding the Socially Optimal Quantity 10. Deadweight Loss from a Positive Externality 9. Allocative Efficiency 7. Price Elasticity

### Midterm 2 Sample Questions. Use the demand curve diagram below to answer the following THREE questions.

! Midterm 2 Sample uestions Use the demand curve diagram below to answer the following THREE questions. 8 6 4 2 4 8 12 16 1. What is the own-price elasticity of demand as price decreases from 6 per unit

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Each correct answer gives you 1 pt.

AUBG, Fall 2015, Micro 101 with P. Stankov Sample midterm ------------------------------------------------------------------------------------------------ MULTIPLE CHOICE. Choose the one alternative that

### Externalities, Public Goods, Imperfect Information, and Social Choice

Chapter 15 Externalities, Public Goods, Imperfect Information, and Social Choice Prepared by: Fernando & Yvonn Quijano 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

### 3. At the price of \$60 each, sellers offer and buyers wish to purchase pairs of jeans a day. A. 60; 20 B. 8; 24 C. 16; 16 D. 24; 8

EC201 Exam II Review 1. Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, ticket prices are \$60. Ingrid's reservation price is \$75. But when Ingrid tries to

### 1 Applying the Competitive Model. 2 Consumer welfare. These notes essentially correspond to chapter 9 of the text.

These notes essentially correspond to chapter 9 of the text. 1 Applying the Competitive Model The focus of this chapter is welfare economics. Note that "welfare" has a much di erent meaning in economics

### ECON 1100 Global Economics (Section 08) Exam #2 Spring 2010 (Version A) Multiple Choice Questions ( 2. points each):

ECON 1100 Global Economics (Section 08) Exam #2 Spring 2010 (Version A) 1 Multiple Choice Questions ( 2 2 points each): 1. One of the principle functions of money is that it serves as a unit of account.

### ECON 101 MIDTERM 1 REVIEW SESSION SOLUTIONS (WINTER 2015) BY BENJI HUANG

ECON 101 MIDTERM 1 REVIEW SESSION SOLUTIONS (WINTER 2015) BY BENJI HUANG TABLE OF CONTENT I. CHAPTER 1: WHAT IS ECONOMICS II. CHAPTER 2: THE ECONOMIC PROBLEM III. CHAPTER 3: DEMAND AND SUPPLY IV. CHAPTER

### Problem Set 3 Eco 112, Spring 2011 Chapters covered: Ch. 6 and Ch. 7 Due date: March 3, 2011

Problem Set 3 Eco 112, Spring 2011 Chapters covered: Ch. 6 and Ch. 7 Due date: March 3, 2011 There are 30 multiple choice questions in this problem set. Answer these questions by the beginning of the class

### Unit 8.1: Externalities

Unit 8.1: Externalities Michael Malcolm June 18, 2011 1 Market Failure Market Failure occurs when the free market outcome is not efficient. The first welfare theorem establishes that, in general, competitive

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

HW 2 - Micro - Machiorlatti MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is measured by the price elasticity of supply? 1) A) The price

### Practice Exam for Section III Material

Practice Exam for Section III Material 1) If a monopolist s demand curve has slope - δ, then its marginal revenue curve has slope δ/2. 2) A market with 10 firms must have a lower HHI than a firm composed

### Monopoly and How It Arises

13 MONOPOLY Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists If a good has a close substitute, even if it is produced by only one

### Name: Class: Date: 2. Patents, quotas, tariffs, and government licensing can all create barriers to entry into oligopoly industries. a.

Indicate whether the statement is true or false. 1. Import tariffs in the United States are likely to reduce U.S. exports, both because of the resulting decrease in foreign earnings of dollars from exports

### 2000 AP Microeconomics Exam Answers

2000 AP Microeconomics Exam Answers 1. B Scarcity is the main economic problem!!! 2. D If the wages of farm workers and movie theater employee increase, the supply of popcorn and movies will decrease (shift

### I. An Introduction to Externalities and Market Failures. II. Externalities. EC 441: Handout 5A: Externalities and Solutions

I. An Introduction to Externalities and Market Failures A. The first part of the course addressed how a governments efforts to raise its revenues and its associated pattern of expenditures affect private

### Demonstrate understanding of government interventions to correct market failures

Economics 3.4 Internally assessed 5 credits Demonstrate understanding of government interventions to correct market failures This chapter covers aspects of Achievement Standard 91402 (Economics 3.4) Demonstrate

### Monopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly

### Economics E201 (Professor Self) Sample Questions for Exam Two, Fall 2013

, Fall 2013 Your exam will have two parts covering the topics in chapters 4 (page 91 through end of chapter), 5 and 6 from the Parkin chapters and chapter 10 (up to page 317, up to but not including the

### ECON (ENT) COURSE LESSON THREE. Supply and Demand. CHAPTER 7 Supply and Demand. Lesson Three Supply and Demand 93

ECON (ENT) COURSE LESSON THREE Supply and Demand CHAPTER 7 Supply and Demand Lesson Three Supply and Demand 93 EXERCISES Matching (28 points) From the list below, select the term that matches each of the

### Government Price Setting, and Taxes

CHAPTER 4 Economic Efficiency, Government Price Setting, and Taxes Chapter Summary and Learning Objectives 4.1 Consumer Surplus and Producer Surplus (pages 98 102) Distinguish between the concepts of consumer

### Economics 325: Public Economics Section A01 University of Victoria Midterm Examination #1 VERSION 1

Economics 325: Public Economics Section A01 University of Victoria Midterm Examination #1 VERSION 1 Section 1: Multiple Choice (3 points each) Select the most appropriate answer, and circle the corresponding

### Price MCI MSC MEC. q1 Firm output. Industry output

Pindyck and Rubinfeld, Chapter 18 Sections 18.1, 18.2, 18.6 Externalities and Public goods Externalities arise when one agent s production or consumption activities affect another agent s production or

### FIRMS IN COMPETITIVE MARKETS

14 FIRMS IN COMPETITIVE MARKETS WHAT S NEW IN THE FOURTH EDITION: The rules for profit maximization are written more clearly. LEARNING OBJECTIVES: By the end of this chapter, students should understand:

### 6) In the above figure of a monopolistically competitive firm, the area of economic profit is A) ADB. B) ABC. C) P 2 FEP 5. D) P 2 AD P 4.

1 1) The maximum total economic profit that can be made by colluding duopolists A) equals the economic profit made by a monopolist. B) exceeds the economic profit made by a monopolist. C) is less than

### Pricing with Market Power

Chapter 7 Pricing with Market Power 7.1 Motives and objectives Broadly The model of perfect competition is extreme (and hence wonderfully powerful and simple) because of its assumption that each firm believes

### Chapter 28. Government and Market Failure. Economics, 7th Edition Boyes/Melvin

Chapter 28 Government and Market Failure Economics, 7th Edition Boyes/Melvin Market Failure-define A market failure: when market forces fail to provide the socially optimal amount of a good or service.

### ECON 2100 (Summer 2009 Section 06) Final Exam. Multiple Choice Questions: (2 points each)

ECON 2100 (Summer 2009 Section 06) Final Exam Multiple Choice Questions: (2 points each) 1. Price Elasticity of Demand is defined as A. the unique price at which Total Consumer Expenditures on a good are