Question 1

A Pigouvian tax can lead to the efficient level of production and consumption of:

Accepted Answer

A Pigouvian tax is used to account for the external costs associated with consumption or production of a good, and aims to align private incentives with social costs. Common resources create negative externalities when they are overused, so a Pigouvian tax can lead to the efficient level of production and consumption. Choice A is incorrect because public goods do not have excludability or rivalry, making them difficult to tax efficiently. Choice C is incorrect because an artificially scarce good is not subject to negative externalities, so a Pigouvian tax is not appropriate. Choice D is incorrect because Pigouvian taxes can correct market failures and promote efficiency.

Question 2

The marginal social cost of a common resource is than an individual's marginal cost, and without government intervention the market will allow provision of of the
Common resource than is socially optimal.

Accepted Answer

The marginal social cost of a common resource is greater than an individual's marginal cost because individuals do not account for the external costs imposed on others. Without government intervention, the market will allow provision of more of the common resource than is socially optimal, leading to overuse and potential depletion.

Question 3

The government can intervene in fishing markets to avoid overfishing by:

Accepted Answer

Assigning property rights ensures that individuals have a stake in the health of the fishery and are incentivized to fish sustainably. Imposing a tax on usage disincentivizes excessive fishing and can provide funds for conservation efforts. Granting a limited number of tradable fishing permits helps to limit the total amount of fishing that can occur and rewards those who can fish sustainably. Using all three methods can provide a comprehensive approach to avoid overfishing.

Question 4

Figure: Model of a Market for a Common Resource
(Figure: Model of a Market for a Common Resource) The figure Model of a Market for a Common Resource shows the intersection of the private supply and demand curves.Without any consideration of the marginal social cost of using a common resource, the quantity of the common resource used at Q will be:

Accepted Answer

Without considering the marginal social cost, the market will operate based solely on private costs and benefits, resulting in a quantity that is larger than is socially desirable. This is known as the Tragedy of the Commons, where individuals act in their own self-interest and consume more of the common resource than is sustainable in the long term.

Question 5

Traffic congestion causes higher costs and discomfort to residents of a city.An outcome like this arises for common resources because:

Accepted Answer

Traffic congestion causes higher costs and discomfort to residents of a city because the marginal social cost of any one individual's use of the roads is greater than the individual marginal cost. This is due to the fact that when one individual uses the road, it not only affects them but also affects the overall traffic flow and congestion, leading to increased costs and discomfort for everyone using the road. As a result, the overall cost to society is greater than the cost to the individual, leading to negative externalities.

Question 6

Whenever a species is threatened with extinction, it is likely that:

Accepted Answer

If no one has exclusive property rights to the threatened species, it is more difficult to regulate or protect it. Without clear ownership, individuals or organizations may not have a reason to invest resources in protecting the species. Additionally, if there are conflicting interests in the use of the species or its habitat, it can become more difficult to reach agreements on how to manage or conserve it. Thus, clear property rights can incentivize conservation and help prevent extinction. If no one has exclusive property rights to the species, then it is more vulnerable to exploitation and destruction. Lack of clear property rights often leads to the tragedy of the commons, where individuals act in their own self-interest and deplete a shared resource. Government regulation can actually help prevent extinction by creating protections for endangered species. Greed is not necessarily the cause of extinction, but rather a symptom of the larger issue of unsustainable practices.

Question 7

The problem with common resources is similar to the problem with negative externalities because:

Accepted Answer

Both common resources and negative externalities result in a situation where the production or consumption of a good or service has an impact on society as a whole. In the case of common resources, the marginal social cost of producing another unit exceeds the individual's marginal cost, leading to overuse and depletion of the resource. In the case of negative externalities, the marginal social cost of producing another unit exceeds the marginal private cost, leading to an overproduction of goods that generate harmful external effects on society. Therefore, the answer is C, as both scenarios involve a divergence between individual and social costs.

Question 8

Figure: Correcting for Market Failure   (Figure: Correcting for Market Failure) Assume that there is an external cost involved in the market illustrated in the figure The figure Correcting for Market Failure.If the government forces the private-sector firms to face the external cost, then:

Accepted Answer

When the government forces private-sector firms to face the external cost, it increases the cost of production for the firms. As a result, the supply curve shifts to the left, from S1 to S2, as the firms are willing to supply less at any given price. This leads to an increase in the price per unit to reflect the increased cost of production.

Question 9

Consumption of a common resource is inefficiently too because the marginal social cost of the resource is than the private marginal cost.

Accepted Answer

When consumption of a common resource occurs, there is a negative externality imposed on society as a whole, which leads to the marginal social cost being higher than the private marginal cost. This leads to overconsumption and inefficiency in resource allocation. Therefore, the answer is C, with a high marginal social cost and greater private marginal cost.

Question 10

One way the government of Alaska could prevent an inefficiently large production of crab fishing would be to:

Accepted Answer

By selling exclusive licenses for the right to fish, the government can control the number of fishermen in the industry and prevent overfishing. This would also ensure that only qualified fishermen who are dedicated to the industry are allowed to fish, thus preventing inefficient or careless production of crab fishing. Subsidizing fishermen or offering tax breaks might encourage more individuals to enter the industry, further increasing the amount of fishermen without controlling the production. Allowing competition from foreign fishermen would also not be a viable option as it could potentially harm the local industry and violate regulations on sustainable fishing.

Question 11

In London, any motorist entering a particular area in the city center during certain specified times must pay a congestion fee equal to £8, with fines for noncompliance rising to as high as £120.The congestion fee is:

Accepted Answer

The congestion fee in London is a Pigouvian tax because it is aimed at regulating the use of the common resource of city streets, and it is also an attempt to internalize the costs due to traffic delays and congestion that are created by drivers in the specified area. By charging a fee for entering the area during certain times, motorists are encouraged to consider alternative modes of transportation or to alter their driving behavior, leading to a reduction in congestion and its associated costs.

Question 12

Suppose the Alaskan king crab harvest is unregulated and any person with a boat can go offshore, lower a crab pot, and harvest king crab.This common resource will likely be ________ because the marginal social cost of harvesting crabs _.

Accepted Answer

The common resource will likely be overharvested because the marginal social cost of harvesting crabs exceeds the market price of crab, leading to overuse and depletion of the resource.

Question 13

Figure: Correcting for Market Failure  (Figure: Correcting for Market Failure) Assume that there is an external cost involved in the market illustrated in the figure Correcting for Market Failure.Economists argue that in an unregulated private market, is produced.In the figure, the supply curve (S1) reflects
________ cost.

Accepted Answer

The answer of Figure: Correcting for Market Failure  (Figure:...

Question 14

An individual will continue to use a common resource until his or her:

Accepted Answer

The answer of An individual will continue to use a...

Question 15

The government can intervene to achieve the socially optimal quantity of a common resource by:

Accepted Answer

All the options provided are effective ways for the government to intervene to achieve socially optimal quantity of a common resource.

Assigning property rights involves giving control of the resource to private individuals or firms, who can then use it in a way that maximizes their own income while taking into account the cost of using up the resource.

Imposing a tax on usage increases the cost of using the resource, which reduces demand and incentivizes users to find alternative solutions or use the resource more efficiently.

Granting a limited number of tradable permits to use the good creates a market for the permits and incentivizes users to find efficient ways to use the permits or buy more on the market if they need more.

Therefore, a combination of these interventions can help achieve the socially optimal quantity of a common resource.

Question 16

If policy makers provide only enough tradable permits to provide efficient use of a common resource, only those who will use the resource.

Accepted Answer

Providing only enough tradable permits to ensure efficient use of a common resource means that those who value the resource most and can use it most efficiently will gain the most, as they are willing to pay for the permits.

Question 17

For a common resource, the marginal benefit at the quantity provided by a private market is ________ the marginal social cost.

Accepted Answer

A private market will only consider individual benefits and costs, while a common resource has externalities that affect society as a whole. Therefore, the marginal social cost (taking into account the externalities) will generally exceed the marginal benefit provided by a private market.

Question 18

Suppose the Alaskan king crab harvest is unregulated and any person with a crab boat and some diesel fuel can go offshore, lower a crab pot, and harvest king crab.As a result, this common resource is overused.Which of the following policy choices might create an outcome in which the king crab harvest is socially optimal?

Accepted Answer

A solution for overused common resources is to limit access to the resource through licensing or permits. By auctioning a limited number of licenses, the state of Alaska can limit the number of crab boats and create a market for the right to harvest king crab. This can lead to a more socially optimal outcome as the price to obtain a license takes into account the value of the resource and creates an incentive for fishermen to use the resource efficiently. Subsidizing the purchase of crab boats or removing taxes on diesel fuel would only increase the number of boats and the amount of king crab harvested, exacerbating the problem of overuse. Removing trade barriers would not directly impact the overuse of the resource.

Question 19

If the market supply and demand curves for a common resource include all costs, then:

Accepted Answer

When the market supply and demand curves for a common resource include all costs, the common resource will be used at the socially optimal level. This means that the amount of the common resource used by the market will be the amount that provides the greatest overall benefit to society. This is because all costs, including any external costs to society, are taken into account in the market price. Therefore, there is no underuse or overuse of the common resource, and there is no external cost to society.

Question 20

Figure: Marginal Social Cost and Supply   (Figure: Marginal Social Cost and Supply) In the figure Marginal Social Cost and Supply, the marginal social cost curve lies above the supply curve:

Accepted Answer

The marginal social cost curve lies above the supply curve because the marginal social cost includes the cost of depleting this common resource. As the quantity of the common resource increases, the cost of depleting it also increases, leading to an increase in the marginal social cost. Therefore, the socially efficient quantity of this common resource is where the marginal social cost intersects with the demand curve, and not at the point where the supply curve intersects with the demand curve.

Quiz 17: Public Goods and Common Resources