All the Answers Have Been Marked in Red

All the answers have been marked in red :

Question 1 (Multiple Choice Worth 4 points)

The poverty line is adjusted each year to show changes in which of the following?

Cost of living
Marginal income tax rate
The size of the average family
Net immigration into the U.S.
Level of government spending on aid programs such as welfare and food stamps

Only statement I is correct.

Only statements II and III are correct.

Only statements I and III are correct.

Only statements I, II, and III are correct.

All statements are correct.

Question 2 (Multiple Choice Worth 4 points)

If government wished to tax us based on consumption of goods and services (perhaps to reward savers over spenders), it should institute a (an)

income tax.

payroll tax.

property tax.

profits tax.

sales tax.

Question 3 (Multiple Choice Worth 4 points)

Jack earns $90,000 while Priscilla earns $130,000. A regressive social security tax of 5%, paid only up to $90,000, would mean that

Priscilla pays more tax dollars than Jack

both pay the same amount of dollars in the tax, but Jack pays a lower tax rate.

both pay the same amount of dollars in the tax and pay the same tax rate.

both pay the same amount of dollars in the tax, but Jack pays a higher tax rate.

Priscilla pays no taxes (income over $90,000) so the burden falls on Jack.

Question 4 (Multiple Choice Worth 4 points)

The distribution of income in an economy can be graphically shown by the

equation of exchange.

Keynesian model.

circular flow model.

poverty/income Curve.

Lorenz curve.

Question 5 (Multiple Choice Worth 4 points)

Virtually all economists agree that sales taxes are regressive, and the burden of the sales tax falls most heavily on those with lower incomes. Most consider this to be unfair. Which of the following statements correctly explain why most states have a sales tax?

The sales tax gives the poor an incentive to work harder.
There are more poor people, so to have them pay their fair share, they have to pay a higher percentage.
The sales tax is relatively easy for the state and local governments to collect.
If the rich pay most of the income taxes in America, then the poor can pay the sales tax.
States without sales taxes tend to have the lowest average incomes.

All statements are correct.

Only statement III is correct.

Only statements II and V are correct.

Only statements I and IV are correct.

Only statements I and V are correct.

Question 6 (Multiple Choice Worth 4 points)

Individuals move from one income quintile to another, due to a change in

their aspirations for luxury goods.

the household composition.

the income.

the household composition and the income.

the government policy.

Question 7 (Multiple Choice Worth 4 points)

Products with positive externalities are underconsumed, thus creating a market failure. How can the government correct this failure?

By taxing the output of the product to increase tax revenue
By paying subsidies to the producers, to lower the cost of the product to potential buyers
By reducing the marginal social benefit of the product, thus eliminating the externality
By requiring producers to manufacture more of the product
By producing it themselves and distributing it free or at very low cost to consumers

All statements are correct.

Only statements I, III, and IV are correct.

Only statements III and IV are correct.

Only statements II and V are correct.

Only statements I and IV are correct.

Question 8 (Multiple Choice Worth 4 points)

Which situation constitutes a market failure and requires government interference?

The demand for butter has decreased due to an increase in the price of margarine.

The demand for instant noodles has decreased with a rise in income.

The water of the Dale Lake is getting polluted due to factory wastes.

Teenagers are spending more hours watching television.

People over 40 years of age are reducing their working hours.

Question 9 (Multiple Choice Worth 4 points)

Which situation does not require government interference?

Increasing numbers of ATVs are increasing the level of carbon monoxide in the air.

Salt brine pollution is threatening the coastal mangrove vegetation.

Excessive electronic dumping has increased the risks of radiation.

An oil spill has spread along the coast of Alaska.

Obesity is increasing in the middle-income group.

Question 10 (Multiple Choice Worth 4 points)

When there is an external benefit involved in the production of a good or service, the marginal social cost is

lower than the marginal private cost.

the same as the marginal private cost.

higher than the marginal private cost.

higher than the marginal variable cost.

higher than the average variable cost.

Question 11 (Multiple Choice Worth 4 points)

A free rider problem can occur when the good or service concerned has

exclusion and non-rival shared consumption.

exclusion and rival consumption.

nonexclusion and non-rival shared consumption.

nonexclusion and rival shared consumption.

been imported.

Question 12 (Multiple Choice Worth 4 points)

Fly ash from a thermal power utility is settling in the surrounding fields and destroying the barley that farmers have planted there. The law is on the farmers’ side, but the price of eliminating the fly ash pollution is greater than the price of the barley that is destroyed. A Coase solution would suggest that

the farmers force the utility to install clean methods of production.

the utility forces the farmers to pay for the clean methods of production.

the utility pay the farmers for the price of the barley lost.

the farmers bear the price of the barley lost.

they deal with it in the court.

Question 13 (Multiple Choice Worth 4 points)

A Coase solution to a problem of externalities may not be possible if which of the following exists?

High transaction costs
High cost of communication between parties
One party is not willing to sell its legal rights of enforcement
Delays occur in bargaining
Too many parties are involved to reach a Coase solution

Only I, III and IV would prevent a Coase solution.

Only V would prevent a Coase solution.

Only III would prevent a Coase solution.

Only II and IV would prevent a Coase solution.

All of these would prevent a Coase solution.

Question 14 (Multiple Choice Worth 4 points)

This graph is set to the x-axis of Quantity and the y-axis of Price. It shows the downward sloping demand curve and two upward sloping supply curves (S1 and S2), with S2 to the left of S1. There is also a note marking the area between S1 and S2 as the New per unit tax.

Assume that the government has created a per unit tax on the production of a product, whizbangs, as illustrated in figure 5-1, above. Which of the following statements about this action is true?

This action was taken to increase output and cure a positive externality.
This action was taken to decrease production and reduce a negative externality.
This tax will increase the price and reduce the quantity produced.
This tax will reduce the abuse of a toll resource.
The seller will bear the entire burden of this tax.

All statements are correct.

Only statement II is correct.

Only statements II and III are correct.

Only statements II and IV are correct.

Only statement III is correct.

Question 15 (Multiple Choice Worth 4 points)

If there are positive externalities involved with the delivery or consumption of a product, the level of output will be

more than the efficient amount of production.

equal to the efficient amount of production.

less than the efficient amount of production.

dictated by public demand.

decided by the imposition of government quota.

Question 16 (Multiple Choice Worth 4 points)

A______is imposed by the government on activities that have negative externalities

subsidy

tax

property rights

licensing agreement

state regulation

Question 17 (Multiple Choice Worth 4 points)

Government approach to the problem of externalities include

regulations.
taxes and subsidies.
sales of licenses.

only I

only II

only III

I and II

I, II and III

Question 18 (Multiple Choice Worth 4 points)

For a commodity with a perfectly inelastic demand curve, an increase in a tax on that product implies a (an)

increase in the production and a reduction in the price.

decrease in the production and an increase in the price.

increase in the production with no change in the price.

increase in both the production and the price.

increase in the price with no change in the production.

Question 19 (Multiple Choice Worth 4 points)

The selling of fishing licenses by the government is an attempt to

generate more money for the federal government.
avoid situations like the Tragedy of the Commons.
regulate the use of common resources.

only I

only II

only III

I and II

II and III

Question 20 (Multiple Choice Worth 4 points)

The establishment of lobster fishing season in the state of Florida is an example of

government intervention in the economy.

government de-regulation of externalities.

government regulation of externalities.

positive externality.

negative externality.

Question 21 (Multiple Choice Worth 4 points)

Implementing a speed limit in the highways is the government way of

reducing highway accidents.

saving 10 percent of gas consumption.

avoiding a negative externality.

avoiding a positive externality.

achieving a social optimum equilibrium.

Question 22 (Multiple Choice Worth 4 points)

Income inequalities in the United States are caused by

education.
geographic mobility.
age and work experience.
resource endowment.

Only I

Only III

I and II

I, II and III

I, II, III and IV

Question 23 (Multiple Choice Worth 4 points)

The Gini coefficient represents the

ratio of income between the richest and poorest nations in the world.

ratio of income between the richest and poorest families in the United States.

progressive tax system in the United States.

New York Stock Exchange index.

ratio of labor per manufacturing industries in the United States.

Question 24 (Multiple Choice Worth 4 points)

The Lorenz curve is used to determine the

market distribution of income in the United States.

market distribution of capital in the United States.

market share concentration of a given product.

market distribution of labor in the United States.

market distribution of income in the world.

Question 25 (Multiple Choice Worth 4 points)

In an income distribution graph,

the “y” axis measures the real gross domestic product (GDP) of the United States.
the “x” axis measures the total population of the United States.
the Lorenz curve measures and represents the distribution of income.
the Lorenz curve is not required in an income distribution graph.

Only I

Only II

I and II

II and IV

I, II and III

Question 26 (Multiple Choice Worth 4 points)

Ms. Peterson buys a blue cardigan sweater from a departmental store in Tampa. Which type of good is the sweater?

Public good

Common pool resource good

Free rider good

Pure private good

Toll good

Question 27 (Multiple Choice Worth 4 points)

Common pool resources tend to be ______through markets.

overpriced

efficiently priced

underconsumed

overconsumed

preserved

Question 28 (Multiple Choice Worth 4 points)

A new children’s park is built by the city of Highland. This park is a good that has

exclusion and non-rival non-shared consumption.

nonexclusion and non-rival shared consumption.

exclusion and non-shared consumption.

nonexclusion and non-shared consumption.

exclusion and rival non-shared consumption.

Question 29 (Multiple Choice Worth 4 points)

Hallyho High School is the only private high school in town. Students pay a substantial tuition to attend this school. Schooling there is considered to have

exclusion and non-rival non-shared consumption.

nonexclusion and non-rival shared consumption.

exclusion and non-shared consumption.

nonexclusion and non-shared consumption.

exclusion and non-rival shared consumption.

Question 30 (Multiple Choice Worth 4 points)

Angus cattle and American buffalo are both animals that can provide humans with food and hides for shoes and clothing. Buffalo nearly became extinct in North America. Angus cattle were never endangered. Which of the following statements about these facts is correct?

There are clear property rights to the cattle, but not to the buffalo.
Buffalo meat was in greater demand than Angus steaks.
Ranchers have an incentive to protect and nurture the Angus cattle.
Buffalo were public goods; angus cattle were private goods.
Buffalo were private goods; angus cattle were public goods.

All statements are correct.

Only statement II is correct.

Only statements I, III, and IV are correct.

Only statements I, III, and V are correct.

Only statement III is correct.

FRQ

Question 1 (Essay Worth 20 points)

Some pollution seems to be a fact of everyday life in America, but how much pollution is acceptable to society? Explain the concept of socially optimal levels of pollution. Graphically illustrate your answer.

Answer : From an economic perspective the socially optimal level of pollution occurs when the marginal benefit of the last unit of pollution exactly equals the marginal cost of pollution. At this level the net benefits to society are maximized. If all of the externalities of pollution are accounted for, the resulting level of pollution will be optimal.

The optimum is always found at the point at which social marginal benefits and costs are equal, here point B.The optimal quantity of pollution reduction is R*: at that quantity, the marginal benefits of reduction (the damage done by pollution) and the marginal costs of reduction are equal. Note that setting the optimal amount of pollution reduction is the same as setting the optimal amount of pollution. If the free market outcome is pollution reduction of zero and pollution of Pfull, then the optimum is pollution reduction of R* and pollution of P*.

Question 2 (Essay Worth 20 points)

Explain the Coase Theorem and cite an example. Why is this an important concept in environmental economics? Will the Coase Theorem always work?

answer :

Inlaw and economics, theCoase theorem(pronounced /ˈkoʊs/) describes theeconomic efficiencyof an economicallocationor outcome in the presence ofexternalities. The theorem states that if trade in an externality is possible and there are sufficiently lowtransaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining.

The Externality of Planting Pear Trees:

The Jones family plants pear trees on their property which is adjacent to the Smith family. The Smith family gets an external benefit from the Jones family’s pear trees because they pick up whatever pears fall to the ground on their side of the property line. This is an externality because the Smith family does not pay the Jones family for utility received from gathering the fallen pears and, therefore, does not participate in the market transaction of pear production. It results in the pears being underproduced, which means too few pear trees are planted.

Let's assume the following:

Possible solutions to internalize the externality:

By applying the Coase Theorem two possible solutions arise for internalizing this externality. These solutions can occur because the positive external benefits are clearly identified and we assume that 1)transaction costs are low; 2)property rights are clearly defined.

After realizing that the Smith family gets utility from the Jones family’s pear trees, the Jones family thinks it is unfair that the Smiths get utility from picking up the pears that fall from their pear trees. The first option to eliminate the externality could be to put up a net fence that will prevent pears from falling to the ground of the Smith’s side property line, which will automatically decrease the Smith family’s marginal benefit to 0.

The second option for the Jones could be to impose a cost on the Smith family if they want to continue to get utility from their pear trees. Say, if the Jones family has a MC of $25 for each pear tree produced, it allows them to plant 3 pear trees a year (Jones’ MB = MC). However, if the cost is imposed on the Smiths, the optimal quantity of pear trees produced a year will increase to 4 (Jones’ MB + Smiths’ MB = MC). By internalizing the externality, both the Smith family and the Jones family increase their overall utility by increasing production from 3 pear trees a year to 4. It should be noted that $5 is the maximum price the Smiths are willing to pay for an additional, fourth, pear tree, which implies their marginal benefit to plant a fifth pear tree is 0.

The Problems with Coasian Solutions

This elegant theory would appear to rescue the standard competitive model

from this important cause of market failures and make government intervention

unnecessary (other than to ensure property rights). In practice, however,

the Coase theorem is unlikely to solve many of the types of externalities that

cause market failures. We can see this by considering realistically the problems

involved in achieving a “Coasian solution” to the problem of river pollution.

Question 3 (Essay Worth 40 points)

Externalities

a. What are externalities? Cite examples of positive and negative externalities.

• Air pollutionfrom burning fossil fuels causes damages to crops, (historic) buildings and public health.
• Anthropogenic climate changeis attributed togreenhouse gasemissions from burning oil, gas, and coal. TheStern Reviewon the Economics Of Climate Changesays "Climate change presents a unique challenge for economics: it is the greatest example ofmarket failurewe have ever seen."[7]
• Water pollutionby industries that adds effluent, which harms plants, animals, and humans.
• Noise pollutionwhich may be mentally and psychologically disruptive.

• Increasededucationof individuals can lead to broader society benefits in the form of greater economicproductivity, a lower unemployment rate, greater household mobility and higher rates of political participation.[14]
• Abeekeeperkeeps thebeesfor theirhoney. A side effect or externality associated with such activity is thepollinationof surrounding crops by the bees. The value generated by the pollination may be more important than the value of the harvested honey.
• An individual who maintains an attractive house may confer benefits to neighbors in the form of increased market values for their properties.

b. How do externalities impact output? Why?