Chapter 30-31 Externalities and

Taxation
Mr. Duffer
AP Microeconmics
1. The two main characteristics of a public good are:
A) production at constant marginal cost and rising demand.
B) nonexcludability and production at rising marginal cost.
C) nonrivalry and nonexcludability.
D) nonrivalry and large spillover costs.

2. The market system does not produce public goods because:

A) there is no need or demand for such goods.
B) private firms cannot stop consumers who are unwilling to pay for such goods from
benefiting from them.
C) public enterprises can produce such goods at lower cost than can private enterprises.
D) their production seriously distorts the distribution of income.

3. Because of the free-rider problem:

A) the market demand for a public good is overstated.
B) the market demand for a public good is nonexistent or understated.
C) government has increasingly yielded to the private sector in producing public goods.
D) public goods often create moral hazard and adverse selection problems.

Externalities and government intervention

4. A positive externality or spillover benefit occurs when:

A) product differentiation increases the variety of products available to consumers.
B) the benefits associated with a product exceed those accruing to people who consume
it.
C) a firm produces at the P = MC output.
D) economic profits are zero in the long run.

5. A negative externality or spillover cost occurs when:

A) firms fail to achieve allocative efficiency.
B) firms fail to achieve productive efficiency.
C) price exceeds marginal cost.
D) the total cost of producing a good exceeds the costs borne by the producer.
Use the following to answer questions 6-7:

6. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting
the prices Alvin and Elmer are willing to pay for a public good, rather than do without it.
The collective willingness to pay for the 1st unit of this public good is:
A) $18.
B) $14.
C) $10.
D) $6.

7. Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting
the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. If
the marginal cost of the optimal quantity of this public good is $10, the optimal quantity
must be:
A) 1 unit.
B) 2 units.
C) 3 units.
D) 4 units.
Use the following to answer questions 8-10:

8. Refer to the above diagrams for two separate product markets. Assume that society's
optimal level of output in each market is Q0 and that government purposely shifts the
market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We can
conclude that the government is correcting for:
A) spillover costs in diagram (a) and spillover benefits in diagram (b).
B) spillover benefits in diagram (a) and spillover costs in diagram (a).
C) spillover costs in both diagrams.
D) spillover benefits in both diagrams.

9. Refer to the above diagrams for two separate product markets. Assume that society's
optimal level of output in each market is Q0 and that government purposely shifts the
market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The
shift of the supply curve from S to S1 in diagram (a) might be caused by a per unit:
A) subsidy paid to the producers of this product.
B) tax on the producers of this product.
C) subsidy paid to the buyers of this product.
D) tax on the buyers of this product.

10. Refer to the above diagrams for two separate product markets. Assume that society's
optimal level of output in each market is Q0 and that government purposely shifts the
market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The
shift of the supply curve from S to S2 in diagram (b) might be caused by a per unit:
A) subsidy paid to the producers of this product.
B) tax on the producers of this product.
C) subsidy paid to the buyers of this product.
D) tax on the buyers of this product.
Use the following to answer questions 11-13:

11. Refer to the above diagram of a market for pollution rights. Which of the following would
best explain the P1 to P2 increase in price of pollution rights?
A) implementation of improved technology for reducing pollution
B) an expansion of the number of firms
C) a subsidy of P1P2 to polluters
D) a shift of the supply curve of pollution rights from some point to the left of S to S

12. Refer to the above diagram of a market for pollution rights. The increase in the price of
pollution rights from P1 to P2 will:
A) reduce the quantity of pollution rights.
B) increase the quantity of pollution rights.
C) increase the incentive for environmental groups to buy pollution rights.
D) increase the opportunity cost of polluting.

13. Refer to the above diagram of a market for pollution rights. Without this market for
pollution rights, the quantity (tons) of pollution would be:
A) Q3, if demand is D2.
B) Q1, if demand is D1.
C) Q2, if demand is D2.
D) Q1, if demand is D2.

Asymmetric information

14. Where there is asymmetric information between buyers and sellers.

A) product shortages will occur at the equilibrium price.
B) product surpluses will occur at the equilibrium price.
C) markets can produce inefficient outcomes.
D) markets will fail due to the "free-rider problem."

15. Buyers will opt out of markets in which:

A) there are significant negative externalities.
B) standardized products are being produced.
C) there is inadequate information about sellers and their products.
D) there are only foreign sellers.

16. Sellers will opt out of markets in which:

A) there are significant negative externalities.
B) standardized products exist.
C) there are only foreign buyers.
D) information about buyers is inadequate, and some buyers can impose high costs on
the sellers.
Chapter 31
Use the following to answer questions 17-19:

Answer the next question(s) on the basis of the following table that shows the total costs and total
benefits facing a city of five different potential baseball stadiums of increasing size. All figures are
in millions of dollars.

S t a d i Tu o m t a l Tc oo st ta l b e n e f i t
A $ 8 0 $ 1 4 0
B 1 0 0 2 0 0
C 1 3 0 2 5 0
D 1 6 5 2 9 0
E 2 2 0 3 0 0

17. Refer to the above table. Suppose a five-person city council must decide via majority
voting which of these stadiums to build. Also suppose that each of the stadium sizes has
the support of one council member. According to the median voter model, the council will
ultimately vote in favor of stadium:
A) A.
B) B.
C) C.
D) D.

18. Refer to the above table. The marginal cost and marginal benefit of stadium B (relative to
A) are:
A) $20 million and $50 million, respectively.
B) $100 million and $200 million, respectively.
C) $30 million and $50 million, respectively.
D) $20 million and $60 million, respectively.

19. Refer to the above table. Based on cost-benefit analysis, the city should:
A) not build any of these stadiums.
B) build stadium E.
C) build stadium C.
D) build stadium D.

Benefits received; ability-to-pay

20. Which of the following best reflects the ability-to-pay philosophy of taxation?
A) a tax on residential property
B) a progressive income tax
C) an excise tax on gasoline
D) an excise tax on coffee
Use the following to answer questions 21-23:

21. In which of the above market situations will the largest portion of an excise tax of a
specified amount per unit of output be borne(reduce the price received) by producers?
A) 4
B) 3
C) 1
D) 2

22. In which of the above market situations will the largest portion of an excise tax of a
specified amount per unit of output be borne by buyers?
A) 4
B) 3
C) 1
D) 2

23. In which of the above market situations will the efficiency loss of an excise tax be the
greatest?
A) 4
B) 3
C) 1
D) 2
Use the following to answer questions 24-26:

24. Refer to the above figure in which S is the before-tax supply curve and St is the supply
curve after an excise tax is imposed. The total tax collection from this excise tax will be
area:
A) ABCE + ECF.
B) ABCE.
C) ECF.
D) 0BCG.

25. Refer to the above figure in which S is the before-tax supply curve and St is the supply
curve after an excise tax is imposed. The efficiency loss of this tax will be area:
A) ABCE.
B) ABCE + ECF.
C) 0AEG.
D) ECF.

26. Refer to the above figure in which S is the before-tax supply curve and St is the supply
curve after an excise tax is imposed. The burden of this tax is borne:
A) equally by consumers and producers.
B) most heavily by consumers.
C) most heavily by producers.
D) only by consumers.

27. If the demand for a product is perfectly inelastic, the incidence of an excise tax will be:
A) entirely on the buyer.
B) mostly on the buyer.
C) entirely on the seller.
D) mostly on the seller.

28. The efficiency loss of a tax is:

A) the net value of sacrificed output caused by the tax.
B) that portion of the tax paid by producers minus the portion paid by consumers.
C) that portion of the tax paid by consumers minus the portion paid by producers.
D) the total tax revenue minus the output loss caused by the tax.
Chapter 30-31 Test
-continued-

Solar Powered Calculator Market

S + Tax
P

$25 S

$20

$15

$10

$5

0
30 100 150 Quantity

Use the graph above to answer questions 29-

29. What was the price and quantity before the tax?
A. $25 and 100
B. $20 and 100
C. $15 and 150
D. $15 and 100
E. $10 andSolar
30 Powered Calculator Market

S +tax?
30. What was the consumer surplus before the Tax
A. $10 P
B. $100
C. $150$25 S
D. $500
E. $1000
$20
31. What was the producer surplus before the tax?
$15
A. $10
B. $100
$10
C. $150
D. $500
$5
E. $1000
D

0
30 100 150 Quantity
Assume that the tax is now imposed:
32. What is the value of the tax per unit?
A. $1
B. $2
C. $5
D. $10
E. $25

33. What price do the consumers pay after the tax?

A. $25
B. $20
C. $15
D. $10
E. $5
Solar Powered Calculator Market
34. What is the net price received by the sellers after the tax?
S + Tax
A. $25
P
B. $20
C. $15
25 S
D. $10
E. $5
20
35. What is the amount of tax revenue collected in this market?
A. $1,500 15
B. $1,000
C. $500 10
D. $300
E. $150 5

0
30 100 150 Quantity
36. What is the consumer surplus after the tax?
A. $75
B. $150
C. $500
D. $1,000
E. $1,500

37. What is the producer surplus after the tax?

A. $75
B. $150
C. $500
D. $1,000
E. $1,500

38. Choose the description that best describes the deadweight loss (DWL):
A. There is no DWL because the tax was not large enough
B. The DWL is represented by the area spanning 0-100 quantity and $10-$20
C. The DWL is represented by the area spanning 30-100 quantity and $10-$20
D. The DWL is represented by the area spanning 100-150 quantity and $25-$5
E. The DWL is irrelevant because the consumers who choose not to buy are ignorant.

39. Was the price change for consumers after the tax elastic, inelastic, or unit elastic?
A. Unit elastic
B. Inelastic because the price increased and the total revenue decreased
C. Elastic because the price increased and the total revenue increased
D. Elastic because the price increased and the total revenue decreased
E. Elastic because the price elasticity of demand was less than one

40. Assuming no externalities, which of the following would be the best way to describe the
implication of the tax on allocative efficiency (refer to graph on previous page):
A. The market is still allocatively efficient because people are getting what they want.
 B. The market is no longer efficient because supply exceeds demand
C. the market is no longer allocatively efficient AND there is a deadweight loss
D. the market is no longer allocatively efficient AND total surplus increases
E. As long as the market is productively efficient the allocative efficiency is irrelevant

Product Z

25 S=MSC

20

15

10
D=MSB
5 Tax

D=MPB

0
30 100 150 Quantity

Use the graph above for questions 41-43:

41. What type of allocation does the product Z market have?

A. The private market is overallocating product Z by 70 units
B. The private market is underallocating product Z by 70 units
C. Society desires a lower quantity of this unit
D. None of the above

42. What type of correction would the government use to correct the allocation issue?
A. A subsidy to the consumer to increase the quantity
B. A subsidy to the consumer to reduce the quantity
C. A tax to the consumer to increase the quantity
D. A tax to the consumer to reduce the quantity

43. Is there a deadweight loss without government intervention?

A. Yes
B. No
C. Not enough information from the graph to determine deadweight loss
D. Who cares?