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 optimal quantity. B) is more than the socially optimal quantity. C) equals the socially optimal quantity. D) may be more than, less than, or equal to the socially optimal quantity. 2. If drivers decide to make phone calls without considering the costs imposed on others, the: A) number of phone calls made while driving will be above the socially optimal quantity. B) number of phone calls made while driving will be below the socially optimal quantity. C) marginal social cost curve will lie below the marginal cost of production curve. D) marginal social benefit curve will lie below the marginal social cost curve. 3. Suppose the production of roses generates a positive externality in that travelers enjoy the scenic rural vistas. Then an appropriate government policy yielding the efficient outcome would be a: A) Pigouvian tax. B) Pigouvian subsidy. C) system of rose production permits. D) reduction in transaction costs. 4. The difference between the marginal social benefit curve and the market demand curve is the: A) additional cost of producing an additional good. B) marginal external cost. C) marginal benefit to the consumers of the good. D) marginal external benefit. Page 1
Use the following to answer question 5: Table: The Marginal Social Cost of Batteries Price (P) Quantity supplied (QS) MSC1 MSC2 MSC3 MSC4 $20 5.00 $2.00 $10 $30 $20 26 7.00 2.60 16 36 26 28 7.67 2.80 18 38 28 32 9.00 3.20 22 42 32 36 10.33 3.60 26 46 36 38 11.00 3.80 28 48 38 5. (Table: The Marginal Social Cost of Batteries) The accompanying table lists several price (P) and quantity (QS) values along the market supply curve for batteries. Because batteries generate toxic wastes, there is an external cost associated with their production. The marginal external cost is estimated to be $10. The marginal social cost would then be indicated by the values in the column labeled: A) MSC1. B) MSC2. C) MSC3. D) MSC4. 6. The socially optimal quantity of pollution occurs where: A) the marginal social benefit of pollution is equal to the marginal social cost of pollution. B) the marginal social benefit of pollution is greater than the marginal social cost of pollution. C) the marginal social benefit of pollution is less than the marginal social cost of pollution. D) there is no pollution. 7. When an activity like education generates a positive externality, the: A) market demand curve is below the marginal social benefit curve. B) market demand curve is above the marginal social benefit curve. C) marginal cost of production is below the market demand curve. D) market will produce more than the efficient level of output. Page 2
8. Assume there are external benefits associated with the production of good X. Without government regulation, the market will: A) produce too much of good X. B) price good X less than the marginal social cost. C) price good X less than the marginal social benefit. D) price good X greater than the marginal cost. Use the following to answer question 9: Suppose that a paper factory dumps garbage into a nearby river, creating negative externalities for those living downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $350 per ton. S is the paper company's supply curve and MSC refers to the marginal social cost of paper production. The relevant information is depicted in the graph below. Page 3
9. To create an incentive for the firm to produce the socially optimal level of paper, the government can impose a Pigouvian. A) tax of $350 per ton of paper B) tax of $500 per ton of paper C) subsidy of $350 per ton of paper D) subsidy of $650 per ton of paper Use the following to answer question 10: The graph depicts the Supply (S), Demand (D), and Marginal Social Cost (MSC) curves for an industry that emits a toxic substance as a by-product of its production process. Page 4
10. What is the equilibrium price and quantity in this market in the absence of any governmental intervention? A) P = $13, Q = 11 million tons B) P = $15, Q = 9 million tons C) P = $17, Q = 7 million tons D) P = $13, Q = 7 million tons Use the following to answer question 11: The market for steel is depicted in the graph below. The quantity axis is stated in millions of tons of steel. Steel production generates pollution, a negative externality, as a by-product. Page 5
11. The marginal social cost of steel production reflects A) both the private cost and the external cost of steel production. B) only the private cost of steel production. C) only the external cost of steel production. D) the private cost minus the external cost of steel production. 12. An example of an activity that generates positive externalities for society is A) education. B) pollution. C) texting while driving. D) discount pricing at the local shopping mall. Page 6
Answer Key 1. B 2. A 3. B 4. D 5. C 6. A 7. A 8. C 9. A 10. A 11. A 12. A Page 7