Exam 2: 7, 10, 11

Question 1

Welfare economics is the study of how

Answer 1

the allocation of resources affects economic well-being

Question 2

Which of the Ten Principles of Economics does welfare economics explain more fully?

Answer 2

Markets are usually a good way to organize economic activity.

Question 3

Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin’s first movie. Each has in mind a maximum amount that he will bid. This maximum is called

Answer 3

willingness to pay.

Question 4

Consumer surplus is

Answer 4

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

Question 5

Consumer surplus in a market can be represented by the

Answer 5

area below the demand curve and above the price.

Question 6

A seller’s opportunity cost measures the

Answer 6

amount she is paid for a good minus her cost of providing it.

Question 7

Producer surplus measures the

Answer 7

benefits to sellers of participating in a market.

Question 8

Which of the following will cause a decrease in producer surplus?

Answer 8

the imposition of a binding price ceiling in the market

Question 9

Economists typically measure efficiency using

Answer 9

total surplus

Question 10

Total surplus is

Answer 10

the total value of the good to buyers minus the cost to sellers of providing the good.

Question 11

What is an externality?

Answer 11

The uncompensated impact of one person’s actions on the well being of a bystander

Question 12

Externalities can be what depending on if they are adverse or beneficial?

Answer 12

Positive or negative

Question 13

What is a private cost?

Answer 13

The cost paid by consumer and the producer

Question 14

What is an external cost?

Answer 14

The cost paid by bystanders by people other than the consumer and producer

Question 15

The social cost is

Answer 15

the cost to everyone, private and external

Question 16

Externalities are

Answer 16

the uncompensated external cost and benefits that fall on bystanders

Question 17

What is a social surplus?

Answer 17

The consumer surplus, the producer surplus, and the bystander surplus

Question 18

When there are significant external costs…

Answer 18

the market will not maximize social surplus

Question 19

What is the Pigouvian tax?

Answer 19

the social costs will bring the supply costs to the socially efficient curve, less people will be incentivized to buy (brings in negative externalities)

Question 20

External benefits are received by what type of people?

Answer 20

People other than the consumers or producers trading in the market, a benefit to bystanders (ex- flu shot, more social value than private value)

Question 21

A subsidy is what type of benefit?

Answer 21

Social benefit, brings the market quantity to the socially efficient

Question 22

What is the Coase theorem?

Answer 22

If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own (some people like owners or residence don’t have bargaining power)

Question 23

What is the difference between a rival and an excludable?

Answer 23

A rival is one person using something that prevents another person from using it/getting the benefit, an excludable can stop someone from using it

Question 24

Give an example of each: private goods, common resources, club goods, and public goods.

Answer 24

private: banana, jeans, housing
common: clean water, fish stocks, timber (tragedy of commons)
club: WiFi, satellite TV
public: National Defense, firework displays (free rides/forced riders)

Question 25

What is the difference between a free and forced rider?

Answer 25

A free rider is someone who gets all the benefits and none of the cost, while a forced rider is someone who is forced to participate in something like taxes or a union

Question 26

What are some policy options to prevent overconsumption?

Answer 26

• Regulate the use of the resource
• Societal Norms & community shame
• Impose a corrective tax to internalize the externality (hunting/fishing license)
• Auction off permits allowing the use of the resource

Question 27

The impact of one person’s actions on the well-being of a bystander is called

Answer 27

an externality.

Question 28

An externality results in

Answer 28

an equilibrium that does not maximize the total benefits to society.

Question 29

All externalities cause

Answer 29

markets to fail to allocate resources efficiently.

Question 30

Melissa engages in an activity that influences the well-being of a bystander. In order for Melissa’s activity to give rise to an externality, it must be the case that

Answer 30

Melissa neither pays nor receives any compensation for her activity.

Question 31

The difference between social cost and private cost is a measure of the

Answer 31

cost of an externality.

Question 32

Emission controls on automobiles are an example of a

Answer 32

command-and-control policy to increase social efficiency.

Question 33

The tax on gasoline enhances

Answer 33

efficiency by serving as a corrective device in a market with negative externalities.

Question 34

The Coase theorem suggests that private solutions to an externality problem

Answer 34

will usually allocate resources efficiently if private parties can bargain without cost.

Question 35

Abe owns a dog; the dog’s barking annoys Abe’s neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that

Answer 35

Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

Question 36

Once tradable pollution permits have been allocated to firms,

Answer 36

firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.