Chapter 6
A price ceiling is...
a legal maximum on the price at which a good can be sold
Isabelle values her time at $60 an hour. She spends 2 hours giving Jayla a massage. Jayla was willing to pay as much at $300 for the massage, but they negotiated a price of $200. In this transaction, _______.
consumer surplus is $20 larger than producer surplus
What is an externality
the uncompensated impact of a person’s actions on the well-being of a bystander
True or False
The free-rider problem occurs whenever a good is not rival in consumption.
False
The free-rider problem occurs whenever a good is not excludable. A good that is not excludable may also be not rival in consumption, but that characteristic does not determine whether or not free riding will occur.
What makes a price floor binding?
A price floor is binding if it is above the equilibrium...
Alexis, Bruno, and Camila each want an ice-cream cone. Alexis is willing to pay $12, Bruno is willing to pay $8, and Camila is willing to pay $4. The market price is $6. Consumer surplus equals _________.
8
True or False
If a beekeeper and the owner of an apple orchard enter into a contract, the two firms have internalized a positive externality.
True
National defense is often used as an example of a public good because it _______.
is difficult to exclude people from receiving the benefits from national defense once it is provided
National defense is often used as an example of a public good because it is easy to see that it is difficult to exclude people from receiving the benefits from national defense once it is provided and because providing national defense to one citizen does not diminish the nation's ability to provide it to another.
If the market price of burgers is $8 and the government sets a legal minimum at $9, the government has imposed a price _______.
Price floor
The demand curve for cookies slopes downward. When the price is $3 per cookie, the quantity demanded is 100. If the price falls to $2, what happens to consumer surplus?
It rises by more than $100.
According to the Coase theorem, _______.
private actors can reach agreement to solve the problem of externalities without the government
Both public goods and common resources are_______.
not excludable, but only public goods are not rival in consumption
When a good is taxed, the burden of the tax falls mainly on consumers if _______.
supply is elastic and demand is inelastic
Diego, Emi, and Finn are available to work as tutors for the semester. The opportunity cost of tutoring is $400 for Diego, $200 for Emi, and $100 for Finn. The university is hiring tutors at a price of $300. Producer surplus in this market is ______
$300
When the government intervenes in a market with negative externalities, it does so in order to _______.
protect the interests of bystanders
A meadow that is being damaged by overuse in a national park for which there is no entry fee would be an example of a _______.
Common resource
The national park has no entry fee, the meadow is not excludable. However, usage is at a level where use by one person decreases the enjoyment for others, so the meadow is rival in consumption. A good that is not excludable but rival in consumption is a common resource. If usage were low enough that additional users did not damage the meadow, the meadow would be a public good: not excludable and not rival in consumption.
In a market with a binding price ceiling, increasing the ceiling price will _________.
Decrease the shortage
An efficient allocation of resources maximizes _______.
consumer surplus plus producer surplus
Which of the following are examples of private solutions to the problem of externalities?
Charities and the Golden Rule only
Charities and the Golden Rule are private solutions. Charities encourage donations because our tax system allows an income tax deduction. The Golden Rule encourages people to internalize their externalities. Taxes and subsidies are public, not private, solutions.
Common resources are _______.
overused in the absence of government