In a market economy, government intervention

• will always improve market efficiency.

• reduces efficiency in the presence of market failures.

• may improve market efficiency in the presence of market failures.

• is necessary as individuals and firms are self-interest.

Which of the following is an example of a positive externality?

• air pollution

• a person littering in a public park

• a nice garden in front of your neighbor's house

• the pollution of a stream

Consider the market for plastic. Suppose that the production of plastic creates a social cost which is depicted in the graph above. Without any government regulation, what would happen to the quantity of plastic produced in the market?

• The market would produce 150 tons less than the social optimal level.

• The market would produce 300 tons less than the social optimal level.

• The market would produce 150 tons more than the social optimal level.

• The market would produce 300 tons more than the social optimal level.

Again consider the market for plastic. If you would like to solve the negative externalities problem, how much tax would you charge for the plastic production?

• Equal to the social cost at $5 per ton.

• Equal to the private cost at $3.5 per ton.

• Equal to the value of positive externalities at $1.5 per ton.

• Equal to the value of negative externalities at $1.5 per ton.

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called

• the Pigovian theorem.

• a corrective tax.

• the externality theorem.

• the Coase theorem.

The idea that “externalities arise because something of value has no price attached to it” is associated with

• public goods, but not with common resources.

• common resources, but not with public goods.

• both public goods and common resources.

• neither public goods nor common resources.

Which of the following is not a typical solution to the “Tragedy of the Commons?”

• taxing the use of the common resource

• turning the common resource into a club good

• turning the common resource into a private good

• regulating the use of the common resource

Granting a pharmaceutical company a patent for a new medicine will lead to

(i) a product that is priced higher than it would be without the exclusive rights.

(ii) incentives for pharmaceutical companies to invest in research and development.

(iii) higher quantities of output than without the patent.

• (i) and (ii) only

• (ii) and (iii) only

• (i) and (iii) only

• (i), (ii), and (iii)

Which of the following relationships involves asymmetric information?

• An employee knows more than his employer knows about his work effort.

• A borrower knows more than the lender about his ability to repay the loan.

• The seller of a 30-year-old house knows more than the buyer about the condition of the house.

• All of the above are correct.

Which of the following offers an explanation as to why the principal-agent problem exists for a firm?

• The firm cares less about profit and more about cost when there are many competitors in the market.

• The firm offers an employee-incentive program in which employees share in the firm’s profits.

• The firm operates in a market with many competitors forcing the firm to pay its employees more to keep them from switching to another firm.

• The firm operates to maximize profit while the employees attempt to work as little as possible to earn their paychecks.