The Jones family plants pear trees on their property which is

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 :
In law and economics, the Coase theorem (pronounced /ˈkoʊs/) describes the economic
efficiency of an economic allocation or outcome in the presence of externalities. The theorem
states that if trade in an externality is possible and there are sufficiently low transaction 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.
Definition of 'Externality'
A consequence of an economic activity that is experienced by unrelated third parties. An
externality can be either positive or negative.
Many negative externalities are related to the environmental consequences of production and
use.

Air pollution from burning fossil fuels causes damages to crops, (historic) buildings and
public health.

Anthropogenic climate change is attributed to greenhouse gas emissions from burning oil,
gas, and coal. The Stern Review on the Economics Of Climate Change says "Climate change
presents a unique challenge for economics: it is the greatest example of market failure we
have ever seen."[7]

Water pollution by industries that adds effluent, which harms plants, animals, and humans.

Noise pollution which may be mentally and psychologically disruptive.
A positive externality (also called "external benefit" or "external economy") is an action of a
product on consumers that imposes a positive effect on a third party. Examples ofpositive
externalities (beneficial externality, external benefit, external economy, or Merit goods) include:

Increased education of individuals can lead to broader society benefits in the form of greater
economic productivity, a lower unemployment rate, greater household mobility and higher
rates of political participation.[14]

A beekeeper keeps the bees for their honey. A side effect or externality associated with such
activity is the pollination of 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?
The usual economic analysis of externalities can be illustrated using a standard supply and
demand diagram if the externality can be valued in terms of money. An extra supply or demand
curve is added, as in the diagrams below. One of the curves is the private cost that consumers
pay as individuals for additional quantities of the good, which in competitive markets, is the
marginal private cost. The other curve is the true cost that society as a whole pays for production
and consumption of increased production the good, or the marginal social cost.
Similarly there might be two curves for the demand or benefit of the good. The social demand
curve would reflect the benefit to society as a whole, while the normal demand curve reflects the
benefit to consumers as individuals and is reflected as effective demand in the market.
External costs[edit]
Demand curve with external costs; if social costs are not accounted for price is too low to cover
all costs and hence quantity produced is unnecessarily high (because the producers of the good
and their customers are essentially underpaying the total, real factors of production.)
The graph shows the effects of a negative externality. For example, the steel industry is assumed
to be selling in a competitive market – before pollution-control laws were imposed and enforced
(e.g. under laissez-faire). The marginal private cost is less than the marginal social or public cost
by the amount of the external cost, i.e., the cost of air pollution and water pollution. This is
represented by the vertical distance between the two supply curves. It is assumed that there are
no external benefits, so that social benefit equals individual benefit.
If the consumers only take into account their own private cost, they will end up at price Pp and
quantity Qp, instead of the more efficient price Ps and quantity Qs. These latter reflect the idea
that the marginal social benefit should equal the marginal social cost, that is that production
should be increased only as long as the marginal social benefit exceeds the marginal social cost.
The result is that a free market is inefficient since at the quantity Qp, the social benefit is less
than the social cost, so society as a whole would be better off if the goods
between Qp and Qs had not been produced. The problem is that people are buying and
consuming too muchsteel.
This discussion implies that negative externalities (such as pollution) are more than merely an
ethical problem. The problem is one of the disjuncture between marginal private and social costs
that is not solved by the free market. It is a problem of societal communication and coordination
to balance costs and benefits. This also implies that pollution is not something solved by
competitive markets. Some collective solution is needed, such as a court system to allow parties
affected by the pollution to be compensated, government intervention banning or discouraging
pollution, or economic incentives such as green taxes.
External benefits[edit]
Supply curve with external benefits; when the market does not account for additional social
benefits of a good both the price for the good and the quantity produced are lower than the
market could bear.
The graph shows the effects of a positive or beneficial externality. For example, the industry
supplying smallpox vaccinations is assumed to be selling in a competitive market. The marginal
private benefit of getting the vaccination is less than the marginal social or public benefit by the
amount of the external benefit (for example, society as a whole is increasingly protected from
smallpox by each vaccination, including those who refuse to participate). This marginal external
benefit of getting a smallpox shot is represented by the vertical distance between the two demand
curves. Assume there are no external costs, so that social cost equals individual cost.
If consumers only take into account their own private benefits from getting vaccinations, the
market will end up at price Pp and quantity Qp as before, instead of the more efficient
price Ps and quantity Qs. These latter again reflect the idea that the marginal social benefit should
equal the marginal social cost, i.e., that production should be increased as long as the marginal
social benefit exceeds the marginal social cost. The result in an unfettered
market is inefficient since at the quantity Qp, the social benefit is greater than the societal cost, so
society as a whole would be better off if more goods had been produced. The problem is that
people are buying too fewvaccinations.
The issue of external benefits is related to that of public goods, which are goods where it is
difficult if not impossible to exclude people from benefits. The production of a public good has
beneficial externalities for all, or almost all, of the public. As with external costs, there is a
problem here of societal communication and coordination to balance benefits and costs. This also
implies that vaccination is not something solved by competitive markets. The government may
have to step in with a collective solution, such as subsidizing or legally requiring vaccine use. If
the government does this, the good is called a merit good.
c. List and explain two potential solutions to externalities that the government can impose.
Illustrate these solutions graphically.
d. Why won’t the market produce the correct quantities?