CH 1 PRACTICE PROBLEMS

1) What tradeoffs would be involved if society or government requires that firms reduce pollution?

COSTS
-some firms may have to close
-reduced profits and incomes to the firms owners and employees
-the cost of reducing pollution may fall on some firms more than others, giving some firms a competitive advantage

BENEFITS

-reduced pollution may lead to cleaner air and better health
-reduced pollution may reduce effects on the climate
-reduced pollution may improve water quality, biodiversity

2) Prices balance the marginal benefit of consuming a good with the marginal cost of supplying a good. Therefore a person’s willingness to pay for a good represents:

a) availability
b) corporate greed
c) profit
d) the marginal benefit that an extra unit of the good would provide for that person
Ans: D

3) Which statement best describes making rational decisions at the margin:

a) Making decisions that are associated with no marginal cost
b) Making only decisions that can easily be reversed
c) Making decisions only after comparing the marginal benefits and marginal costs
d) Only making decisions if the choices are certain
Ans: C

4) Define: see definitions in the text margins or the glossary in the back of the book

Market failure
Externality
Property Rights
Equity
Efficiency
Opportunity Cost
Market Economy
Marginal Changes
Incentive



5) Explain two main causes of market failure and give an example of each.

1)Market Power: ability of a single person or small group to influence market prices. Ex: town with only 1 cable company.

2) Externality: the impact of one persons actions on the well being of a bystander. Ex: pollution

6) What are two method s of correcting an externality that we spoke about in class?

In the case of a negative externality, such as pollution, two methods of correction include pollution taxes, or assigning property rights such as in the form of tradable pollution permits.