Question

QUESTION 8

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

	a.	the market-equilibrium quantity of education exceeds the optimal quantity of education.
	b.	a negative externality requires a subsidy to move the market equilibrium closer to the social optimum.
	c.	the social cost of education exceeds the private cost of education.
	d.	the social value of education exceeds the private value of education.

4 points   

QUESTION 9

When an externality is present, the market equilibrium is

	a.	efficient, but the equilibrium does not maximize the total benefit to society as a whole.
	b.	inefficient, and the equilibrium does not maximize the total benefit to society as a whole.
	c.	inefficient, but the equilibrium maximizes the total benefit to society as a whole.
	d.	efficient, and the equilibrium maximizes the total benefit to society as a whole.

4 points   

QUESTION 10

In a market economy, government intervention

	a.	is necessary to control individual greed.
	b.	reduces efficiency in the presence of externalities.
	c.	will always improve market outcomes.
	d.	may improve market outcomes in the presence of externalities.

4 points   

QUESTION 11

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

	a.	Mary pays Cathy $16 so that Mary can smoke.
	b.	Mary pays Cathy $14 so that Mary can smoke.
	c.	Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke.
	d.	Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.

4 points   

QUESTION 12

The tax on gasoline

	a.	reduces efficiency by causing large deadweight losses.
	b.	enhances efficiency by serving as a corrective device in a market with positive externalities.
	c.	reduces efficiency by decreasing consumer surplus and producer surplus.
	d.	enhances efficiency by serving as a corrective device in a market with negative externalities.

Answer 1

8. d) the social value of education exceeds the private value of education.

As markets produce a smaller quantity than what is socially required due to positive externalities and to overcome this problem government subsidizes goods that have positive externalities.

9. b) inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

A product or service's price equilibrium does not exactly reveal the true costs as well as benefits of that product or service in presence of externalities which cause market failure.

10. d) may improve market outcomes in the presence of externalities

In presence of externalities government may intervene to impose taxes on goods/services having negative externalities and subsidize goods/services having positive externalities