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If there are external benefits or positive externalities associated with the consumption of a good or service:


A) the private demand curve will overestimate the true demand curve.
B) the private demand curve will underestimate the true demand curve.
C) consumers will be willing to pay for all these benefits in private markets.
D) the market demand curve will be the vertical summation of the individual demand costs.

E) A) and B)
F) A) and C)

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Which of these is an example of an external cost?


A) an increase in the value of land you own when a nearby development is completed.
B) the costs paid by a company to build an automated factory.
C) decreased property values in a neighbourhood where several houses are burglarized.
D) the higher price you pay when you buy a heavily advertised product.

E) A) and D)
F) B) and D)

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Refer to the supply and demand graph for a public good.Line segment ad represents the amount at Q1 by which the: Refer to the supply and demand graph for a public good.Line segment ad represents the amount at Q<sub>1</sub> by which the:   A)  marginal benefit of this public good is less than the marginal cost. B)  total benefit of this public good is less than the total cost. C)  marginal benefit of this public good is greater than the marginal cost. D)  total benefit of this public good is greater than the total cost.


A) marginal benefit of this public good is less than the marginal cost.
B) total benefit of this public good is less than the total cost.
C) marginal benefit of this public good is greater than the marginal cost.
D) total benefit of this public good is greater than the total cost.

E) A) and B)
F) A) and C)

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Refer to the below diagram of the market for product X.Curve S t embodies all costs (including spillovers) and Dt embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q1,we can conclude that the existence of spillover: Refer to the below diagram of the market for product X.Curve S <sub>t</sub> embodies all costs (including spillovers) and D<sub>t</sub> embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q<sub>1</sub>,we can conclude that the existence of spillover:   A)  costs have resulted in an over-allocation of resources to X. B)  benefits have resulted in an over-allocation of resources to X. C)  costs have resulted in an under-allocation of resources to X. D)  benefits have resulted in an under-allocation of resources to X.


A) costs have resulted in an over-allocation of resources to X.
B) benefits have resulted in an over-allocation of resources to X.
C) costs have resulted in an under-allocation of resources to X.
D) benefits have resulted in an under-allocation of resources to X.

E) A) and D)
F) All of the above

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Refer to the supply and demand graph for a public good.Which one of the following statements is correct? Refer to the supply and demand graph for a public good.Which one of the following statements is correct?   A)  The supply curve reflects the marginal cost and the demand curve reflects the marginal benefit of this public good. B)  The demand curve reflects the marginal cost and the supply curve reflects the marginal benefit of this public good. C)  There will be an overallocation of resources at output level Q<sub>1</sub>. D)  There will be an underallocation of resources at output level Q<sub>3</sub>.


A) The supply curve reflects the marginal cost and the demand curve reflects the marginal benefit of this public good.
B) The demand curve reflects the marginal cost and the supply curve reflects the marginal benefit of this public good.
C) There will be an overallocation of resources at output level Q1.
D) There will be an underallocation of resources at output level Q3.

E) B) and C)
F) A) and D)

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One condition for individual bargaining to occur according to the Coase Theorem is that there must be:


A) clearly defined property rights.
B) many people affected and involved.
C) government intervention to establish bargaining.
D) government creation of a market for externalities.

E) A) and C)
F) B) and C)

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Refer to the diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production,including external costs.Assume that the number of people affected by these external costs is large.If the government wishes to establish an optimal allocation of resources in this market,it should: Refer to the diagram in which S is the market supply curve and S<sub>1</sub> is a supply curve comprising all costs of production,including external costs.Assume that the number of people affected by these external costs is large.If the government wishes to establish an optimal allocation of resources in this market,it should:   A)  not intervene because the market outcome is optimal. B)  subsidize consumers so that the market demand curve shifts leftward. C)  subsidize producers so that the market supply curve shifts leftward (upward) . D)  tax producers so that the market supply curve shifts leftward (upward) .


A) not intervene because the market outcome is optimal.
B) subsidize consumers so that the market demand curve shifts leftward.
C) subsidize producers so that the market supply curve shifts leftward (upward) .
D) tax producers so that the market supply curve shifts leftward (upward) .

E) All of the above
F) None of the above

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Efficiency loss refers to:


A) the situation where the maximum willingness to pay for a product is less than minimum acceptable price.
B) the situation where the maximum willingness to pay for a product is equal to the minimum acceptable price.
C) the difference between consumer and producer surplus.
D) the sum of consumer and producer surplus.

E) B) and C)
F) C) and D)

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If there are significant external benefits associated with the production or consumption of a good or service,there will be an under-allocation of resources to its production unless some corrective action is taken.

A) True
B) False

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The following information is for a public good.Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good,rather than do without it.These people are the only two members of society. Refer to the data below.If the marginal cost of this good at the optimal quantity is $4,the optimal quantity must be: The following information is for a public good.P<sub>a</sub> and P<sub>b</sub> are the prices that individuals A and B are willing to pay for the last unit of a public good,rather than do without it.These people are the only two members of society. Refer to the data below.If the marginal cost of this good at the optimal quantity is $4,the optimal quantity must be:   A)  1 unit. B)  2 units. C)  3 units. D)  4 units.


A) 1 unit.
B) 2 units.
C) 3 units.
D) 4 units.

E) A) and B)
F) None of the above

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The MB curves in the diagram slope downward because of the law of: The MB curves in the diagram slope downward because of the law of:   A)  conservation of matter and energy. B)  diminishing returns. C)  diminishing marginal utility. D)  increasing cost.


A) conservation of matter and energy.
B) diminishing returns.
C) diminishing marginal utility.
D) increasing cost.

E) B) and C)
F) A) and B)

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Productive efficiency means that the society is producing the combination of the output most desirable by consumers.

A) True
B) False

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The marginal benefit to society of reducing pollution declines with increases in pollution moderation because of the law of:


A) increasing costs.
B) diminishing returns.
C) diminishing marginal utility.
D) conservation of matter and energy.

E) A) and B)
F) None of the above

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Answer the next question on the basis of the following information is for public good.Pa and Pb represent the prices that citizens (a) and (b) ,the only two people in this nation,are willing to pay for additional units of a quantity (Qc) of the public good.Qs represents the quantity of the public good supplied by government at each of the collective prices. Refer to the information below.If the collective willingness to pay for an additional unit of this public good is $6,then the collective quantity demanded will be: Answer the next question on the basis of the following information is for public good.P<sub>a</sub> and P<sub>b</sub> represent the prices that citizens (a) and (b) ,the only two people in this nation,are willing to pay for additional units of a quantity (Q<sub>c</sub>) of the public good.Q<sub>s</sub> represents the quantity of the public good supplied by government at each of the collective prices. Refer to the information below.If the collective willingness to pay for an additional unit of this public good is $6,then the collective quantity demanded will be:   A)  1 unit and the socially optimal quantity supplied will be 5 units. B)  2 units and the socially optimal quantity supplied will be 4 units. C)  3 units and the socially optimal quantity supplied will be 3 units. D)  4 units and the socially optimal quantity supplied will be 2 units.


A) 1 unit and the socially optimal quantity supplied will be 5 units.
B) 2 units and the socially optimal quantity supplied will be 4 units.
C) 3 units and the socially optimal quantity supplied will be 3 units.
D) 4 units and the socially optimal quantity supplied will be 2 units.

E) A) and C)
F) None of the above

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A public good can be best defined as one which:


A) has no externals associated with its production or consumption.
B) entails rising costs of production.
C) yields widespread benefits which cannot readily be denied to the public at large.
D) yields benefits only to the individual who decides to buy it.

E) None of the above
F) B) and C)

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Refer to the below competitive market diagram for product Z.Assume that the current market demand and supply curves for Z are D2 and S2.If there are substantial positive externalities associated with the production of Z,it can be argued that: Refer to the below competitive market diagram for product Z.Assume that the current market demand and supply curves for Z are D<sub>2</sub> and S<sub>2</sub>.If there are substantial positive externalities associated with the production of Z,it can be argued that:   A)  efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits. B)  an output smaller than G would improve resource allocation. C)  government should levy a per unit excise tax on Z to shift the demand curve toward D<sub>1</sub>. D)  an output greater than G would result in a more efficient allocation of resources.


A) efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits.
B) an output smaller than G would improve resource allocation.
C) government should levy a per unit excise tax on Z to shift the demand curve toward D1.
D) an output greater than G would result in a more efficient allocation of resources.

E) All of the above
F) A) and B)

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Refer to the supply and demand graph for a public good.Point c on the graph shows where the: Refer to the supply and demand graph for a public good.Point c on the graph shows where the:   A)  total benefit equals the total cost of the public good. B)  marginal benefit equals the marginal cost of the public good. C)  average benefit equals the average cost of the public good. D)  total benefit equals the marginal cost of the public good.


A) total benefit equals the total cost of the public good.
B) marginal benefit equals the marginal cost of the public good.
C) average benefit equals the average cost of the public good.
D) total benefit equals the marginal cost of the public good.

E) B) and D)
F) B) and C)

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The proposition that under some circumstances externalities can get resolved through private negotiation is known as:


A) the paradox of externalities.
B) the median-voter theory.
C) the Coase Theorem.
D) logrolling.

E) B) and C)
F) A) and D)

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Producer surplus refers to:


A) The total amount producer spends for making the product
B) The area under the demand curve above the equilibrium price
C) The price the producer receives.
D) The difference between producer's revenue from selling the product and the cost of producing it.

E) B) and D)
F) B) and C)

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Refer to the below diagram of the market for product X.Curve St embodies all costs (including spillovers) and Dt embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q2,we can conclude that the existence of spillover: Refer to the below diagram of the market for product X.Curve S<sub>t</sub> embodies all costs (including spillovers) and D<sub>t</sub> embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q<sub>2</sub>,we can conclude that the existence of spillover:   A)  costs have resulted in an over-allocation of resources to X. B)  benefits have resulted in an over-allocation of resources to X. C)  costs have resulted in an under-allocation of resources to X. D)  benefits have resulted in an under-allocation of resources to X.


A) costs have resulted in an over-allocation of resources to X.
B) benefits have resulted in an over-allocation of resources to X.
C) costs have resulted in an under-allocation of resources to X.
D) benefits have resulted in an under-allocation of resources to X.

E) A) and D)
F) A) and C)

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