Multiple-Choice Review Questions

1. Which of the following is true about a public good?
(A) One person’s consumption means others get less.
(B) Consumers can be excluded from its benefits by not paying for it.
(C) One more unit of a public good for some consumers means one less unit for other consumers.
(D) One person’s consumption does not exclude others from consuming it.
(E) Everyone pays the same amount for the good.

2. If there is a negative externality associated with a firm’s production of a private good, which of the following is an action by government that would most likely move the
market to an efficient outcome?
(A) Shut down the firm
(B) Give the firm a per-unit subsidy
(C) Place a per-unit tax on the firm
(D) Relocate the firm
(E) None of the above

3. If there is a positive externality associated with the production of a private good, which of the following is an action of government that would most likely move the market to an efficient outcome?
(A) Shut down the firm
(B) Give the firm a per-unit subsidy
(C) Place a per-unit tax on the firm
(D) Relocate the firm
(E) None of the above

4. For a polluting steel company, a government action to achieve an efficient outcome would produce what effect on the market equilibrium price and output?
(A) Output would increase; price would not change.
(B) Output would increase; price would decrease.
(C) Output would increase; price would increase.
(D) Output would decrease; price would decrease.
(E) Output would decrease; price would increase.

5. All of the following are true regarding externalities except:
(A) marginal social cost = marginal private cost + marginal external cost.
(B) marginal social benefit = marginal private benefit + marginal external benefit.
(C) a per-unit subsidy is a solution to a positive externality.
(D) if MSB > MSC, it is referring to a positive externality.
(E) the socially efficient production quantity is where MPB = MPC.

6. If there are positive externalities present when a good is produced, which of the following is true?
(A) The marginal social benefit is greater than the marginal social cost, and the problem can be corrected with a per-unit subsidy.
(B) The marginal social benefit is greater than the marginal social cost, and the problem can be corrected with a lump-sum subsidy.
(C) Consumers should be taxed so they will buy less of the good.
(D) The marginal private benefit is greater than the marginal social benefit, and the problem can be corrected with a per-unit tax.
(E) The marginal social benefit is less than the marginal social cost, and the problem can be corrected with a lump-sum tax.

7. One reason public goods are underproduced is because they cause free riders. What problem do free riders cause?
(A) Binding price ceilings
(B) Income inequality
(C) Positive externalities
(D) Smaller market demand
(E) Increased market demand

8. Which of the following is an example of a positive externality?
(A) Paying to watch a basketball game
(B) Paying to download a new game
(C) Enjoying you neighbor’s flower garden
(D) Enjoying loud music while disturbing your neighbors
(E) Hearing loud construction noise next door

9. Which of the following government policies will likely shift the Lorenz curve outward?
(A) Decreasing the sales tax
(B) Making the tax system regressive
(C) Making the tax system progressive
(D) Making the tax system proportional
(E) Imposing a per-unit tax on gasoline

Free-Response Review Question

1. Assume Firm A has been polluting rivers and lakes near its factory while producing steel, causing a negative externality in production. Draw a correctly labeled market for Firm A showing each of the following:
(a) The private market equilibrium price and quantity, labeled P_M and Q_M
(b) The socially optimal quantity and price of production, labeled P_S and Q_S
(c) The deadweight loss at the market equilibrium
(d) Explain what government action could result in a socially optimal outcome.