1.

If the private cost of producing beef is lower than the social cost, then
a. The production of beef should be subsidized by the government
b. The price of beef is too low
c. A positive externality exists
d. A negative externality exists
e. Beef is a healthy good so it should be produced more

A negative externality exists. As discussed in the book, negative externalities impose costs on
third parties which they arent compensated.

2. All of the following are ways to cope with negative externalities except
a. Pollution taxes
b. Obligatory controls
c. Private negotiations according to the Coase theorem
d. All of the above
e. None of the above

All are ways to cope with negative externalities.

3. All of the following are examples of obligatory controls except

a. The requirement that all cars in the Philippines use unleaded fuel only
b. Trading in pollution rights between factories
c. Restrictions on the transportation of hazardous waste
d. All cars before getting a permit must pass the automobile emissions testing requirements
e. The No Smoking signs on all public buildings in Metro Manila

Letter b is not an obligatory control because the government did not impose behaviors to be
required or forbidden. The deal must make the owners of the two companies better off because
they are both agreeing to the exchange. No government intervention was needed because this
trade is only between the two companies without sacrificing the total amount of pollution to be
used.

4. Which of the following statements are INCORRECT

a. Third-parties who reap benefits without paying are called free riders
b. The social cost of an activity is equal to the private cost plus the negative externality cost
c. The Coase theorem applies in cases where many parties are involved in a property
rights dispute
d. Choices A and B
e. Choices B and C

The Coase theorem applies when the number of parties involved in a dispute is small.

5. An externality is
 a. A benefit realized by the purchaser of a good or service
b. A cost paid for by the producer of a good or service
c. A benefit or cost experienced by someone who is not a producer or consumer of a
good or service
d. Anything that is external or not relevant to the production of a good or service
e. Refers to the breakdown in the market economy

6. General knowledge is/are

a. Excludable
b. Rival
c. Both A & B
d. None of the above
e. Cannot be determined

Knowledge is a public good thus it is neither excludable nor rival. People are not prevented from
using knowledge and one persons enjoyment of this public good does not reduce another
persons enjoyment of it.

7. Knowledge of the patent of the recipe of the KFC chicken and gravy is/are
a. Excludable
b. Rival
c. Both A & B
d. None of the above
e. Cannot be determined

Technical knowledge can be patented as compared to theories wherein no person can patent
them.

8. Fish in a private pond is/are

a. Excludable
b. Rival
c. Both A & B
d. None of the above
e. Cannot be determined

Fish in a private pond is a private good thus it is rival and excludable. Only one can eat fish.
Since it is private, non-payers can be excluded from fishing

9. Fish in the ocean is/are

a. Excludable
b. Rival
c. Bothe A & B
d. None of the above
 e. Cannot be determined

Fish in the ocean is a common resource. Only one can eat a fish but the ocean is not privately
owned so non-payers cannot be excluded.

10. A free-rider problem exists for any good the is NOT

a. Rival
b. Private good
c. Free
d. Excludable
e. None of the above

A free rider is a person who receives the benefit of a good but avoids paying for it.

11. Market failure associated with the free-rider problem is a result of

a. A project wherein cost exceeds benefits
b. Losses that is reflected to the providers of the product
c. Benefits that is reflected to those who dont pay
d. A problem associated to the government policies
e. Incapability of producing public goods

Same as #10

12. Suppose Andrea owns a port and Nicole owns a lighthouse near the port. Andreas ships
are the only ones that are benefitted by Nicoles lighthouse. Which of the following statements
is/are NOT true
a. Nicoles lighthouse is considered as a common resource
b. Nicole can strip the benefits reaped by Andreas ports from the lighthouse by turning off
the power/lights
c. Andrea is considered a free-rider
d. Nicoles lighthouse may be considered as a private good
e. Nicoles lighthouse is both excludable and rival

Nicoles lighthouse is not considered as a common resource because it is excludable but not
rival.

13. One way to eliminate the Tragedy of Commons is to

a. Increase access to the commons
b. Limit access to the commons
c. Provide more public land for recreation
d. Increase law enforcement in public areas
e. Create laws that will forbid consumption
The Tragedy of the Commons is a story with a general lesson: when one person uses a
common resource, he diminishes other peoples enjoyment of it. The government can solve the
problem by reducing use of the common resource through regulation or taxes

14. Which of the following statements is NOT true

a. A firework display is not excludable because it is virtually impossible to prevent someone
from seeing the show
b. A free-rider is someone who receives the benefit of a good but avoids paying for it
c. In some cases the government can make everyone better of by raising taxes to pay for
certain goods that the market fails to provide
d. Some goods can switch between public goods and private goods depending on the
circumstances
e. Clean air and clean water are both public goods

Clean air and clean water are not rival but excludable.

15. Lump sum taxes

a. Create no excess burden
b. Most efficient tax possible
c. Lack equity
d. All of the above
e. None of the above

16. Taxes on specific goods such as gasoline and alcoholic beverages are called
a. Lump-sum taxes
b. Proportional tax
c. Sales taxes
d. Excise taxes
e. Social insurance taxes

17. Marginal tax is equal to

a. Extra taxes paid on an additional dollar of income
b. Total taxes paid divided by the total income
c. The increase in taxes if her average tax rate were to rise by 1 percent
d. Tax obligation divided by average tax rate
e. The tax rate paid over a persons working lifetime

18. Which of the following statements is NOT true

a. Deadweight losses arise because some individuals change their behavior due to tax
b. Tax loopholes often arise from the ambiguities or omissions set in the tax laws
c. Tax evasion is legal, but tax avoidance is illegal
d. Some states do not tax income at all
 e. It is fair for people to pay taxes based on the benefits they receive from the government
according to the benefits principle

Statement is wrong. It should be: tax avoidance is legal, but tax evasion is illegal

19. Arvin has an income of Php 82,000. Suppose that the government taxes him 20% for the
first Php 50,000 of his income and an additional Php 8,000, what is his marginal tax rate?
a. 0.1
b. 0.15
c. 0.2
d. 0.25
e. 0.3

Php 82000 - Php 50000 = Php 32000

Php (8000/32000) = .25

20. Which tax system requires all taxpayers to pay the same percentage of their income in
taxes?
a. Regressive
b. Horizontal equity
c. Vertical equity
d. Proportional
e. Progressive

21. According to vertical equity, taxpayers with a greater ability to pay taxes should
a. Contribute a larger amount
b. Contribute the same amount as those with others for equality
c. Contribute a decreasing proportion of each increment in income to taxes
d. Be less subject to administrative burdens of a tax
e. Pay taxes on only the income spent

22. If a poor family has 5 children studying in a public school and a rich family with 3 children
studying in a private school, the benefit principle would suggest that
a. Public schools should be financed by property taxes
b. The poor family should pay more tax to pay for public education than the rich
family
c. The poor family should pay less tax to pay for public education than the rich family
d. The poor family should not pay any tax anymore due to a low income
e. None of the above

According to the benefits principle, people should pay taxes based on the benefits they receive
from government services. Since a public school is a government service, the poor family
should contribute more tax.
23. An efficient tax system is one that imposes small
a. Marginal rates and transfers of money
b. Administrative burdens and deadweight losses
c. Deadweight losses and transfers of money
d. Marginal rates and administrative burdens
e. Deadweight losses and marginal rates

24. When government receipts exceed total government spending during a fiscal year, the
difference
a. Is the national debt
b. Becomes federal tax refunds
c. Will be distributed to the poor
d. Is a budget deficit
e. Is a budget surplus