Question

Which of the following statements is FALSE?

• A.

  Private bargaining will lead to an efficient outcome in the case of externalities, regardless of transaction costs.

• B.

  Due to non-excludability of public goods, many people are unwilling to pay for their own consumption.

• C.

  An outcome is efficient when marginal social benefit equals marginal social cost.

• D.

  The external cost resulting from a negative externality can be reduced by imposing a Pigouvian tax.

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Question

Suppose that the market for honey can be characterized by the following equations: P=50-QD and P=5+2QS. The marginal social cost of honey can be represented by P=3+2QS. Based on this information, we can conclude that the market for honey must have a _________ externality in ___________.

• A.

  Negative; consumption

• B.

  Positive; consumption

• C.

  Positive; production

• D.

  Negative; production

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Question

As a result of concerns about the health effects of cigarettes, the US government decides to impose a quota on the production of cigarettes. Suppose that supply for cigarettes can be represented by P=10+5QS and demand for cigarettes can be represented by P=100-4QD. Which of the following should the government impose for a binding quota?

• A. Q = 6
• B. None.
• C. Q = 15
• D. Q = 11

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Question

Refer to the table : Suppose the market for gadgets is initially in equilibrium; then, the government imposes a price floor of $75. After the price floor, what will be the quantity bought and sold of gadgets.

The table below shows the supply and demand equations for gadgets.

Supply	Demand
P=20+QS	P=200-5QD

• A.

  15

• B.

  25

• C.

  55

• D.

  30

Answer 1

1> A. Private bargaining will lead to an efficient outcome in the case of externalities, regardless of transaction costs.

If transaction cosr is high, private bargaining fails and thus the option is incorrect.

2> C. Positive; production

Marginal social cost is 3+2Q<5+2Q = Marginal private cost

So, we have a reduction in the cost, so there must be a positve externality, since it is helping the producers in cost reduction, it is a producer externality.

3> A. Q = 6

For a free market demand = supply, so we have 10+5Q=100-4Q

Q=90/9=10

Thus, for a quota to be binding, it must be less than 10 and thus option A.

4> B.25

In a free market, supply = demand and thus 20+Q=200-5Q

Q=180/6=30

P=20+30=50

Since price floor 75 is binding, thus there will be a surplus and thus the QD=(200-75)/5 =25 (Ans)