1. Tristan and Isolde are waiting for the bus at an open-air bust stop where there are no "no smoking" signs or indicators that smoking is not permitted. Isolde wants to smoke a cigarette while she waits, the benefits of which she values at $1. Tristan doesn't like smoke and the second-hand smoke imposes a cost on him of $2.50. Suppose the necessary conditions for the Coase Theorem hold. Also, assume no one else is waiting and that neither person wants to risk missing the bus by moving away from the stop.
Which of the following would we most likely expect?
A. Tristan pays Isolde $2 not to smoke the cigarette.
B. Tristan pays Isolde $0.75 not to smoke the cigarette
C. Isolde pays Tristan $2 to allow her to smoke the cigarette.
D. Isolde pays Tristan $0.75 to allow her to smoke the cigarette.
2. Tristan and Isolde are waiting for the bus at an open-air bust stop where there are no "no smoking" signs or indicators that smoking is not permitted. Isolde wants to smoke a cigarette while she waits, the benefits of which she values at $1. Tristan doesn't like smoke and the second-hand smoke imposes a cost on him of $2.50. Suppose the necessary conditions for the Coase Theorem hold. Also, assume no one else is waiting and that neither person wants to risk missing the bus by moving away from the stop.
True or False: the ecomoically efficient outcome is for Isolde not to smoke the cigarette.
A. True
B. False
3. True or False: Upon imposing the efficient Pigouvian tax, a negative externality is said to be internalized.
A. True
B. False
4. Of the following, three mean the same thing and one means something different. Which option does not mean the same thing as the other three in the context of the basic market model we reviewed in class (and that you learned about in principles of microeconomics)?
A. maximizing total surplus
B. maximizing net benefits
C. maximizing consumer well-being
D. obtaining economic efficiency
5. True or False: An economist can objectively argue that one distribution of a given amount of net benefits among individuals in a society is better than another.
A. True
B. False
6. Which of the following is false?
A. For a negative externality, MEC > 0.
B. For a negative externality, MSC > MCp.
C. For a positive externality, marginal external benefits are positive.
D. For a positive externality, marginal social cost is greater than MCp