ECON 3300, Exam 2, Spring 2021

Name ___________________________________________________ ECON 3300, Exam 2, Spring 2021

Multiple Choice (3 points each)

Identify the letter of the choice that best completes the statement or answers the question.

____ 1. The Federal agency in charge of food labeling is making changes to the law and forcing food companies to provide more complete and meaningful information on the label. For example, the agency could consider the requirement that labels include “teaspoons of sugar” instead of “grams of sugar”. Could this be an efficient policy change? Consider the example of soda.

Yes, since it reduces the incomplete information market failure, where people know what a teaspoon is but not a gram and having complete information that a can of soda contains 10 teaspoons of sugar will reduce sales more than the equivalent 39 grams of sugar.

Yes, since it reduces the positive externality market failure, where people can be more positive about their soda purchases.

No, additional government regulation is never efficient as it simply burdens soda companies with extra costs.

No, since it increases the property right market failure where people have the right to buy soda with uncluttered packaging.

____ 2. An elected official proposes a higher corrective tax on alcohol with all of the tax revenue used to subsidize universal pre-k education. Which of the following statements is correct?

This official clearly doesn’t understand the double dividend benefits of corrective taxes.

If this policy was implemented the gross benefits to society from alcohol and education would increase.

If this policy was implemented the gross benefits to society from education would increase but the gross benefits to society from alcohol would decrease.

If this policy was implemented the gross benefits to society from education and alcohol would decrease because taxes lead to deadweight loss.

____ 3. The next president proposes blanketing the nation with free basic Wi-Fi everywhere. Any citizen can use the free basic national Wi-Fi but there will be a download speed limit so that there are no congestion issues. What type of good is this free basic Wi-Fi?

A private good.

A public good.

A common resource.

A private good causing a positive externality.

____ 4. Previously in chapter three we showed that government subsidies cause deadweight loss and thus negative Gross Benefits. We discussed government subsidies again in chapter 5. When is it possible for a government subsidy to have positive Gross Benefits?

Never.

If the subsidy is for a private good that causes positive externalities.

If the subsidy is for sellers to directly provide a public good.

Both (b) and (c) are correct.

____ 5. Refer to Figure 10-2. The figure above shows the market for “green products”. Many companies are falsely advertising that their products are “green”, i.e., more environmentally friendly. Also assume these companies advertising campaign is successful with positive net benefits for them, i.e., higher profits. If the government takes no action, the market quantity of ____ units is inefficient because at that quantity ____.

8; true marginal willingness to pay exceeds marginal cost.

8; marginal cost exceeds true marginal willingness to pay.

10; marginal cost exceeds true marginal willingness to pay.

10; true marginal willingness to pay exceeds marginal cost.

____ 6. Refer to Figure 10-2. A government policy that may have positive net benefits is

do nothing as there is no market failure here.

subsidize the sellers in this market.

direct regulation on the sellers such as truth-in-advertising laws.

Either (b) or (c) above is a possibility.

____ 7. Refer to Figure 10-2. Prof. Kevin Egan just analyzed this market for a novel solution never before proposed. He proposes a corrective tax of T* in the market. What are the Gross Benefits from this policy?

nothing as there is no market failure here.

area E, gaining back part of the negative consumer surplus lost from the consumers being fooled into overpaying and purchasing too much of the good.

Area D+E, gaining back all of the negative consumer surplus lost from the consumers being fooled into overpaying and purchasing too much of the good.

Area H+D+E, gaining back all of the negative consumer surplus lost from the consumers being fooled into overpaying and purchasing too much of the good.

____ 8. Which of the following is not a market failure?

A market where buyers have too many options.

A private good causing a positive externality.

A good that is not excludable and thus has ill-defined property rights, such as public goods.

None of the above are market failures.

____ 9. Continuing with the free basic national Wi-Fi proposal, assume there are two Wi-Fi markets: a basic Wi-Fi market (allows for basic internet searches for information but no large data downloading) and an advanced Wi-Fi market (fast streaming of movies, etc.). Assume if the government plan is implemented all private sellers in the basic Wi-Fi market are driven out of business by the free government alternative. Assume the advanced Wi-Fi market is not impacted at all. In other words, companies continue to sell higher speed Wi-Fi to those who want to stream movies etc. How would you estimate the Gross Benefits to society from this government project?

The market value of the free Wi-Fi used.

The total dollar value spent to build the free Wi-Fi network.

The decreased net social surplus in the basic Wi-Fi market, with decreased producer surplus greater than increased consumer surplus.

The increased net social surplus in the basic Wi-Fi market, with decreased producer surplus less than the increased consumer surplus.

____ 10. The production of many private goods, such as gasoline, cause air pollution, a negative externality.

Which of the following statements is correct concerning these private goods?

Gross benefits in the markets for these private goods will be maximized when some, but not all air pollution is eliminated, and thus total external cost is still greater than zero.

Gross benefits in the markets for these private goods is maximized when all air pollution is eliminated and thus total external cost is zero.

It is efficient for the government to establish policies so that all private firms consider only their marginal costs.

The market outcome maximizes the gross benefits to society.

____ 11. Which of the following statements is NOT true about public goods?

The nonexcludability of public goods leads to the free-rider problem.

Since public goods are nonrival it is correct to add together everyone’s marginal willingness to pay for additional units of the public good.

Government failures are NOT present in regards to environmental public goods like wetlands.

The free-rider problem is a major issue with achieving the efficient quantity of public goods.

____ 12. A fertilizer industry representative says that any corrective tax on fertilizer will reduce fertilizer consumption and thus reduce jobs in producing fertilizer and thus will harm the economy. Which of the following statements is correct?

The representative is correct, all taxes cause deadweight loss and job loss.

The representative is correct, there may be job losses in the fertilizer industry.

The representative is not correct the ultimate impact is a harm to “the economy”. We consider “the economy” to be everyone in society has standing, including bystanders who are impacted by certain market activities.

(b) and (c) are both correct.

____ 13. “Herd immunity” is defined as the resistance to the spread of an infectious disease within a population that is achieved by a high proportion of individuals previously being infected or being vaccinated. When “herd immunity” is achieved, which type of good is it? a. Private good.

Public good.

Common resource.

Club good.

$10

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Figure 11

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