In drilling a new oil well in an existing oil field, the fact that output on existing wells is reduced means that
a. existing wells have negatively sloped marginal cost curves.
b. existing wells and new wells are owned by different people.
c. existing wells and new wells are owned by the same people.
d. there is a discrepancy between private and social marginal costs.
QUESTION 2In perfect competition, environmental externalities need not distort the allocation of resources providing
a. transactions costs are zero.
b. average costs are constant for all output levels.
c. firms install pollution control equipment.
d. the government sets realistic pollution standards.
QUESTION 3Which of the following externalities does not distort the allocation of resources? I. An individual's unwillingness to cut his or her own lawn in an otherwise immaculately kept neighborhood. II. Smoke produced by a new firm in an area that raises the costs of other firms. III. A new firm's bidding up skilled wages in an area, thus raising costs of other firms. IV. An individual's unwillingness to obtain job training, thereby lowering the total GNP.
a. I, III, and IV.
b. III and IV.
c. III only.
d. IV only.
QUESTION 4To reach an economically efficient output level, the size of an excise tax imposed on a firm generating a negative externality should be
a. the firm's marginal cost.
b. the social marginal cost.
c. the difference between the social marginal cost and the firm's marginal cost.
d. the sum of the social marginal cost and the firm's marginal cost.
QUESTION 5Each of the following provides incentives to reduce a negative externality except:
a. a merger with affected firms.
b. subsidizing consumption of the good being produced.
c. bargaining among firms.
d. taxation of the externality.
QUESTION 6In the case of a positive externality, social marginal cost will
a. exceed private marginal cost.
b. be equal to private marginal cost.
c. fall short of private marginal cost.
d. have no specific relation to private marginal cost.
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