Education.com
Try
Brainzy
Try
Plus

Public Goods, Externalities, and the Role of Government Review Questions for AP Economics

based on 1 rating
By — McGraw-Hill Professional
Updated on Mar 2, 2011

The study guides for these review questions can be found at:

Questions

  1. In the figure below, Xrepresents
    1. spillover benefits.
    2. a potential producer subsidy to eliminate an externality.
    3. a potential consumer subsidy to eliminate an externality.
    4. both A and C.
    5. A, B, and C.
  2. Review Questions

  3. Which of the following scenarios best describes a negative externality?
    1. A roommate subscribes to a monthly CD club and you share the same taste in music.
    2. Your neighbor has a swimming pool and you have an open invitation to come on over for a pool party.
    3. Your neighbor has a swimming pool and their six-year-old child has his first grade friends over every day for a pool party.
    4. Your roommate's mom has decided that your apartment needs TiVo and pays for it.
    5. Your dad has purchased a new sports coupe and has agreed that you can drive it to the prom.
  4. Which of the following is the best example of a public good?
    1. A lighthouse on a rocky coastline.
    2. Tickets to the Super Bowl.
    3. A granola bar.
    4. A cup of coffee.
    5. A magazine subscription.
  5. Production of energy (i.e, electricity, natural gas, heating oil) creates a negative externality in the form of air pollution blown to communities downwind from the source of the pollution. Of the choices below, which is the most appropriate policy to remedy this negative externality?
    1. a per unit tax on consumers of subway tickets and city bus passes.
    2. a per unit tax on producers of energy.
    3. a per unit subsidy for energy consumers.
    4. a per unit tax on consumers of energy efficient light bulbs.
    5. a per unit subsidy for energy producers.
  6. Jason earns $1000 a week and pays a total of $200 in taxes. Jennifer earns $2000 a week and pays a total of $300 in taxes. We can conclude from this information that their income is taxed with a(n)
    1. progressive tax.
    2. proportional tax.
    3. regressive tax.
    4. tax bracket.
    5. egalitarian tax.
  7. You learn that one nation has a Gini ratio of .25 and another nation has a Gini ratio of .85. Based on this you might conclude:
    1. the nation with the higher Gini ratio has a more equal distribution of wealth and income.
    2. the nation with the higher Gini ratio has a more unequal distribution of citizens with college degrees.
    3. the nation with the lower Gini ratio has more societal barriers like discrimination.
    4. the nation with the higher Gini ratio has fewer societal barriers like discrimination.
    5. the nation with the lower Gini ratio has more oligopolistic industries.

Answers and Explanations

  1. E—This vertical distance between society's demand curve and the market demand curve represents spillover benefits, or additional benefits to society not captured by market demand. However, it could also be the amount of a producer or consumer subsidy if the government chose to eliminate the externality.
  2. C—A negative externality is a situation where a third party is harmed by the actions of consumers and/or producers. The first grade pool party is the best candidate for such a situation as all of the other choices are likely to benefit you, rather than impose cost upon you.
  3. A—A public good is a good that is nonrival and nonexcludable. In other words, if one person consumes it, all others can still consume it.
  4. B—The presence of the negative externality should rule out any choice that refers to a subsidy of either producers or consumers of energy. To reduce consumption and production, we must reduce the market quantity, not encourage more of it. Subsidies could be used to encourage more energy-efficient behavior, but choices A and D would actually inhibit this kind of action. The per unit tax on producers of the negative externality is the most appropriate choice as the tax shifts the market supply inward, making it closer to the socially optimal supply of energy.
  5. C—Jennifer's weekly income is twice Jason's, yet she pays less than double his taxes. This is a regressive tax. A proportional tax would require Jennifer to pay $400 and a progressive tax would require that she pay more than $400 in weekly taxes.
  6. B—The distribution of human capital is a factor in determining the distribution of income and wealth. A nation that has a more unequal distribution of educational attainment would therefore likely have a more unequal distribution of income.
Add your own comment

Ask a Question

Have questions about this article or topic? Ask
Ask
150 Characters allowed