EC238 Lecture Notes - Lecture 3: State Ownership, Pareto Efficiency, Environmental Quality

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18 May 2016

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In the absence of externalities or other distortions, the market equilibrium maximizes total net social benefits. Economic efficiency is a balance between the marginal benefits and marginal costs of production: social efficiency captures the fact that the marginal benefits and marginal costs of production should include both market and non market values. Non-market values include things like the value individuals place on something that does not pollute and the damage costs resulting from the residuals from production and consumption. Figure 4-1: socially efficiency equilibrium for a market with no externalities or distortions. External costs resulting from production are not considered by firms when making output decisions but are real costs to some members of society. Socially efficient rates of output would be located where the marginal social cost curve intersects the marginal social benefit curve: marginal social costs (msc)= sum of marginal private costs (mpc) of the industry +

Related Questions

1. Which one of the following is the least-likely to be subject to exploitation as a common property resource?

A. The atmosphere

B. An open-ocean fishery

C. A public park

D. A parking lot

E. A river

2. What is the typical shape of a total product curve?

A. An S-shape

B. A U-shape

C. An inverted U-shape

D. A constantly increasing line

E. A constantly decreasing line

3. The open access equilibrium for a common property resource occurs at the point where...

A. Average revenue equals marginal cost

B. Total social benefits are maximized

C. Total private benefits are maximized

D. Marginal revenue equals marginal cost

E. Marginal revenue equals total costs

4. The economic optimum production level for a common property resource occurs where ...

A. Total revenue equals total costs

B. Average revenue equals marginal cost

C. Average revenue equals average cost

D. Marginal revenue equals total costs

E. Marginal revenue equals marginal cost

5. The open access equilibrium is usually ...

A. Economically efficient but ecologically unsustainable

B. Economically efficient and ecologically sustainable

C. Economically inefficient but ecologically sustainable

D. Neither economically efficient nor ecologically sustainable

E. Highly profitable for resource users

6. Which one of the following variables is most likely to increase as production effort is increased?

A. Net revenue

B. Marginal costs

C. Marginal revenue

D. Total costs

E. Average revenue

7. Which one of the following variables is most likely to decline as production effort increases?

A. Marginal cost

B. Total revenue

C. Marginal revenue

D. Total costs

E. Total production

8. The efficient price of a license fee is determined by the difference between ...

A. Marginal revenue and marginal cost

B. Average revenue and marginal cost

C. Total revenue and total cost

D. Average revenue and total cost

E. Total revenue and marginal cost

9. Which one of the following statements is false?

A. The economically optimal level of production is less than the open-access equilibrium level of production

B. The economically optimal level of production occurs at the maximum sustainable yield

C. Charging a license fee for access to a common resource will reduce the production level below the open-access equilibrium

D. The

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Question 1

An externality

		enhances market efficiency.
		is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
		is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
		refers to production or consumption that occurs outdoors.

5 points

Question 2

Externalities can be produced by:

		the high price of goods and services
		individuals; firms
		market prices; market incomes
		oceans; streams

5 points

Question 3

When an external cost exists that is NOT taken into account in the production of a product,

		the level of output is too high, and the supply curve should shift to the left to account for the externality.
		the price of the product is too high, and production should be expanded to lower the price.
		the level of output is optimal, and there should be no change in the supply curve.
		the level of output is too low, and the supply curve should shift to the right to account for the externality.

5 points

Question 4

Which of the following is correct?

		MSC = MPC - MD
		MPC = MSC + MD
		MSC = MPC + MD
		MD = MSC + MPC

5 points

Question 5

If external costs (costs of cleaning up) are included and added to a firm's private costs, then

		the demand curve will shift to the left.
		the supply curve will shift to the right.
		the demand curve will shift to the right
		the supply curve will shift to the left.

5 points

Question 6

The Coase Theorem states that

		government intervention is always needed if externalities are present.
		assigning property rights is the only thing the government should do in a market economy.
		if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
		a free-market equilibrium is the best solution to address externalities.

5 points

Question 7

Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never have been close to extinction. The difference is due to

		the use of private property rights on cattle and common property rights on buffalo.
		the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo.
		cattle existing in Europe also while buffalo were specific to North America.
		the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo.

5 points

Question 8

In theory, the Emissions Fee would

		cause firms to generate less pollution than their allowed limits.
		raise the production costs of all firms.
		cause firms to generate more pollution than their allowed limits.
		lower the production costs of all firms.

5 points

Question 9

A cap-and-trade policy

		has a set number of permits.
		allows polluters to trade permits.
		caps the total level of pollution allowed.
		all of the above.

Question 10

A Pigouvian tax corrects for

		market congestion.
		market losses.
		inefficient sales.
		low market prices.

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home / study / business / economics / questions and answers / Question 1 Which Of The Following Is The Best Example ... Question: Question 1 Which of the following is the best exam... Bookmark Question 1 Which of the following is the best example of a positive externality? A car company lays off 10,000 employees in order to cut costs. An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere. An individual smokes in a restaurant, which bothers other patrons. A child is vaccinated against a disease, which reduces the probability that other children will catch the disease. 4 points Question 2 As a result of a negative externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. As a result of a positive externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. high; high. low; low. high; low. low; high. 4 points Question 3 Based on the diagram below, the deadweight loss area associated with the market equilibrium equals: Week06_graph1.jpg $10 $50 $80 $1,000 4 points Question 4 A firm's accounting profit is given by total revenue: less implicit costs. less explicit costs. less economic profit. less implicit and explicit costs. 4 points Question 5 Suppose an activity has a private cost equal to $30 and a private benefit equal to $30. The associated social cost equals $35 and the social benefit equals $30. Which of the following statements is true about this activity? There is a negative externality associated with this activity but not a positive externality. There is a positive externality associated with this activity but not a negative externality. There is both a positive and a negative externality associated with this activity. There is neither a positive nor a negative externality associated with this activity. 4 points Question 6 The Coase Theorem implies that: the efficient level of an externality is generally zero. private individuals living in market economies should not be concerned with externalities. government intervention is not always needed to arrive at the efficient level of an externality. government laws are unnecessary. 4 points Question 7 An industry in which a small number of large firms sell products that are either close or perfect substitutes is: perfectly competitive. monopolistically competitive. an oligopoly. a monopoly. 4 points Question 8 When a negative externality is present in a market: a tax can increase the level of economic surplus. the social benefits are greater than the private benefits. there is generally too little of the good produced by private markets. the government should ensure that there are zero external costs associated in all markets. 4 points Question 9 In the presence of a positive externality, the government can arrive at the socially optimal output level by: paying producers a subsidy equal to the amount of social benefits associated with the activity. charging producers a tax equal to the amount of social costs associated with the activity. paying producers a subsidy equal to the amount of external benefits associated with the activity. charging producers a tax equal to the amount of external costs associated with the activity. 4 points Question 10 The tragedy of the commons is that: too few individuals have access to high quality healthcare. common people overconsume public goods. the quality of life for lower income people is generally lower than that of higher income people. a resource with no price tends to be exploited until its marginal benefit falls to zero. 4 points Question 11 One potential remedy to the tragedy of the commons is to: never allow a single individual to consume more than one percent of the common resource. criminalize the usage of common resources. allow individuals to use a common resource as long as they receive some benefit from doing so. place a common resource under private ownership. 4 points Question 12 As a result of a positional externality: contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. there is generally an underinvestment in performance enhancement. the market price of performance enhancement materials is too high. the quality of performance in competitive situations is lower than the socially optimal level. 4 points Question 13 Which of the following statements is true regarding health insurance? Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless. Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs. Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services. First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II. 4 points Question 14 A strategy that yields a higher payoff no matter what the other players in the game choose is known as a: prisoner's strategy. dominated strategy. dominant strategy. Nash strategy.

EC238 Lecture Notes - Lecture 3: State Ownership, Pareto Efficiency, Environmental Quality

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