question
the private cost of producing a good will differ from the social cost
answer
--> when there is an externality, such as acid rain generated by the production of electricity
--> when there is an externality, such as lower crime rates generated by the consumption
--> when there is an externality, such as lower crime rates generated by the consumption
question
when will the private benefit from consuming a good differ from the social benefit?
answer
--> when there is an externality, such as second-hand smoke generated by the consumption of cigarettes
--> when there is an externality, such as fewer diseases generated by the consumption of vaccines
--> when there is an externality, such as fewer diseases generated by the consumption of vaccines
question
the case theorem states that
answer
if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities
question
the parties involved in an externality have an incentive to reach an efficient solution because...
answer
both parties become better off when an efficient solution is reached
question
which of the following is an example of a transaction cost associated with negotiating the reduction of a negative externality?
an example of a transaction cost is
an example of a transaction cost is
answer
the cost associated with monitoring an agreement to reduce a negative externality
question
how might transaction costs affect private solutions to externality problems?
transaction costs
transaction costs
answer
may make private solutions to reduce negative externalities no longer feasible
question
Writing in the New York Times, Michael Lewis argues:
"Good new technologies are a bit like good new roads: Their social benefits far exceed what any one person or company can get paid for creating them."
1) Does this observation justify the government subsidizing the production of new technologies?
2) How might the government do this?
The government could subsidize new technology and pay for it with taxes or collect fees from those who use the new technology.
"Good new technologies are a bit like good new roads: Their social benefits far exceed what any one person or company can get paid for creating them."
1) Does this observation justify the government subsidizing the production of new technologies?
2) How might the government do this?
The government could subsidize new technology and pay for it with taxes or collect fees from those who use the new technology.
answer
1) Yes. When marginal social benefits exceed marginal private benefits, subsidies can increase output to achieve efficient outcomes.
2) True
2) True
question
Compared to a command and control government approach to reducing pollution, a market based system of tradable pollution allowances is:
answer
more efficient because polluters that can only reduce pollution at high cost do not and instead buy allowances
question
rivalry is the situation that occurs when
answer
one person's consuming a unit of a good means no one else can consume it
question
excludability is the situation that occurs when
answer
anyone who does not pay for a good cannot consume it
question
a private good is 1) _______ and 2) _______
a public good is 3) _______ and 4) _______
a quasi-public good is 5) _______ and 6) _______
a common resource is 7) _______ and 8) _______
a public good is 3) _______ and 4) _______
a quasi-public good is 5) _______ and 6) _______
a common resource is 7) _______ and 8) _______
answer
1) rival and 2) excludable
3) non rivalrous and 4) non excludable
5) non rivalrous and 6) excludable
7) rival and 8) non excludable
3) non rivalrous and 4) non excludable
5) non rivalrous and 6) excludable
7) rival and 8) non excludable
question
the midpoint method for calculating price elasticity of demand is
answer
the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices
question
how else can you calculate the price elasticity of demand?
answer
--> price elasticity of demand can be calculated using final values for price and quantity
--> price elasticity of demand can be calculated using initial values for price and quantity
--> price elasticity of demand can be calculated using initial values for price and quantity
question
what is the advantage of the midpoint method?
answer
the midpoint formula will give the same value whether moving from the higher price to the lower price or from the lower price to the higher price
question
the key determinants of the price elasticity of demand for a product are:
answer
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget
question
which determinant is the most important?
answer
the availability of close substitutes is the most important determinant
question
Economists estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the NY Times contained the following statement from the Centers for Disease Control and Prevention:
"A 10 % increase in the price of cigarettes reduces consumption by 3 to 5 %"
1) According to the article, the price elasticity of demand for cigarettes ranges from ________ (the lowest end of the range in absolute value) to ________.
2) the price elasticities in this range
3) if manufacturers raise prices, then their revenue will
"A 10 % increase in the price of cigarettes reduces consumption by 3 to 5 %"
1) According to the article, the price elasticity of demand for cigarettes ranges from ________ (the lowest end of the range in absolute value) to ________.
2) the price elasticities in this range
3) if manufacturers raise prices, then their revenue will
answer
1) -.3 to -.5
2) are inelastic because they are less than one (in absolute value)
3) increase because the percentage increase in price will be larger than the percentage decrease in quantity
2) are inelastic because they are less than one (in absolute value)
3) increase because the percentage increase in price will be larger than the percentage decrease in quantity
question
consider firms that introduce new products, such as DVDs in 2001. When firms introduce new products, how do they typically determine the price elasticity of demand for those products?
firms with new products often
firms with new products often
answer
estimate price elasticity of demand by experimenting with different prices
question
income elasticity of demand is
answer
the percentage change in quantity demanded divided by the percentage change in income
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