Question

1. If property rights are clearly defined and transaction costs are low,

the free rider problem may still prevent mutually beneficial trades from taking place.

the possibility of trade means that all costs and benefits will be taken into account, so there will be no externalities.

the possibility of trade means that only positive externalities will occur.

there will still be some externalities, because property rights have only to do with ownership.

2. An incumbent president can take advantage of voters' myopia to win a reelection by

doing nothing.

applying policies with small immediate costs but large gains in the future.

applying policies with small immediate gains but large costs in the future.

applying only policies that have the same amount of gains as costs, so there is no net benefit.

3. If the government's goal is to discourage the use of a good, a tax will be more effective if demand is ________. If the government's goal is to raise revenue, it should tax goods with ________ demand.

elastic; elastic.

inelastic; inelastic.

elastic; inelastic.

inelastic; elastic.

Elasticity does not matter.

4. The demand for cigarettes is inelastic, while the supply of cigarettes is elastic. Smokers tend to have lower incomes than non-smokers. Suppose the government decides to help lower income people by paying a subsidy for each cigarette smoked. Which of the following would happen?

A "wedge" would be created between the price smokers pay and the price cigarette companies receive.

Most of the benefits of the subsidy would be captured by smokers in the form of lower prices.

The quantity of cigarettes smoked would increase.

All of the above would happen.

Only choices a and b.

Answer 1

1. the possibility of trade means that all costs and benefits will be taken into account, so there will be no externalities.
(According to Coase theorem, if property rights are clearly defined and transaction costs are low, then costs and benefits will be taken into account and there will be no externalities.)

2. applying policies with small immediate gains but large costs in the future.
(Advantage of voters' myopia can be taken advantage of with such a policy.)

3. elastic; inelastic.
(Elastic good should be taxed to discourage the use, and inelastic good should be taxed to raise revenue.)

4. All of the above would happen.
(All the given options are true.)