Assignment:
1. Which if of the following describes a spillover (positive externality)?
a) Air pollution from a factory that dirties clothes in a nearby dry cleaner.
b) Second-hand smoke in a crowded restaurant or concert venue.
c) The knowledge passed on by students to their family and friends.
d) The impact of one more driver on a freeway at rush hour.
2. Which of the following would NOT be a command-and-control action of the Environmental Protection agency?
a) Issuing tailpipe emission standards for passenger vehicles to limit carbon monoxide.
b) Publishing a list of hazardous chemicals that requires notification prior to use.
c) Requiring continuous monitoring of pollution-containing air and water discharges.
d) Implementing a Pigovian tax on releases of sulfur dioxide into the atmosphere.
3. The Clean Air Markets program is an example of:
a) a market-based approach to eliminating pollution externalities.
b) a command-and-control response to reduce the negative impacts of air pollution.
c) a system by which industrial gas companies colluded to keep their prices high.
d) yet another government program that failed to achieve its primary objective.
4. The effect of a negative externality is similar to:
a) A supply curve (marginal social cost) shifting to the left.
b) A supply curve (marginal social benefit) shifting to the right.
c) A demand curve (marginal social cost) shifting to the left.
d) A demand curve (marginal social benefit) shifting to the right.
5. A positive externality results from the purchase of smoke detectors. If smoke detectors are sold in a competitive market,
a) the marginal social benefit of smoke detectors is less than the marginal private benefit received by any consumer.
b) the marginal social benefit will exceed the marginal private benefit received by any consumer.
c) in equilibrium the marginal social cost of smoke detectors will equal the marginal social benefit.
d) in equilibrium the marginal social benefit of smoke detectors is zero.
6. The marginal external cost associated with paper production is constant at $10 per ton per year. The competitive market equilibrium for paper production is currently 10 million tons per year. A corrective tax on paper production:
a) will collect $100 million annually.
b) will collect more than $100 million annually.
c) will collect less than $100 million annually.
d) will reduce annual damages to those other than buyers and sellers of paper to zero.
7. Which of the following is true about command-and-control regulation that allows businesses to emit pollutants up to a certain point and bans emissions after that limit is reached?
a) They are equivalent to emissions charges.
b) They make firms pay the marginal cost of the damages done by their emissions, no matter what the level.
c) They allow firms to emit some pollutants at zero charge.
d) They will always minimize the cost of achieving any given reduction in emissions.
8. The Environmental Protection Agency was formed in 1970 to:
a) establish standards to describe the qualities of clean air and water.
b) create rules for allowable pollution levels from new and existing sources.
c) enforce environmental laws with fines and other sanctions.
d) all of the above.
9. If a government regulator forced a natural monopoly firm to charge a price equal to its marginal cost:
a) the firm would earn zero profit in equilibrium.
b) the firm's average revenue would exceed its average total cost.
c) the firm would most likely choose to shut down.
d) all of the above are true.
10. Governments attempt to discourage or eliminate monopolies in most industries:
a) because they charge a price that is too low versus the competitive equilibrium.
b) in order to increase the size of the dead-weight loss produced by monopolies.
c) because they produce a quantity that is too low versus the competitive equilibrium.
d) all of the above.
11. Which of these markets displays aspects of first degree price discrimination?
a) The market for college tuition.
b) The market for airline tickets.
c) The market for new automobiles.
d) all of the above.
12. When a firm has a natural monopoly, the firm's:
a) marginal cost always exceeds its average total cost;
b) total cost curve is horizontal;
c) average total cost curve is downward sloping;
d) marginal cost curve must lie above its average total cost curve.
13. The housing crash of 2007-2010 was caused, in part, by these market failures:
a) knowledge-based positive externalities.
b) common resources subject to congestion.
c) principal-agent type moral hazards.
d) market destroying adverse selections.
14. How did the Affordable Care Act (ACA) attempt to eliminate adverse selection in health care insurance markets?
a) It forced all individuals to stay in the insurance pool.
b) It forced large companies to provide insurance for their employees.
c) It forced individuals to reveal information about their health status to insurers.
d) The ACA did not attempt to eliminate adverse selection.
15. Which of the following is not a likely result of imperfect monitoring of agents by their principals?
a) incentives of agents to take excessive risks.
b) alignment of incentives between principles and agents.
c) incentives of agents to shirk their responsibilities.
d) a tendency of principals to overpay their agents.
Essay Question
16. The first part of this course has been devoted to making a case for government action in our economy by identifying market behaviors or outcomes that lead to inefficiencies or inequities. Please list four of the examples we have discussed, explain why these situations may be of concern to governments, and describe actions governments can and do take to resolve or minimize the impact of these problematic situations.