The following nine questions relate to the graph below and the story that follows. Mr. Loud Mouth buys tickets to a baseball game. He is more interested in beer and raucous behavior than baseball so he makes life difficult for Mr. Ardent Fan who is seated next to him. The marginal benefit curve on the graph shows the extra benefit Loud gets from each successive beer. Thus the area under the curve is the total perceived benefit he gets from beer. If he tried to protect people like Ardent from being annoyed he would have to stop drinking or hire someone to monitor his behavior and keep it in check. The more he drinks, the more expensive the monitor. This cost is listed as "Cost of monitoring beer drinker ." Two other costs are relevant to this problem. First, Ardent Fan could absorb the irritation by staying in the next seat. This cost function is called "Cost of sitting next to beer drinker." Finally, Mr. Fan could move back to a less desirable, but unoccupied seat. This function is called: "Cost of moving away." The more beer Loud drinks the further Ardent must move away.

1			<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0078021693/236468/chap17_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (14.0K)</a> If the rules allow Loud Mouth to do as he pleases and Mr. Mouth and Mr. Fan can negotiate without cost, how many drinks will Loud consume?
			A)	DR
			B)	DU
			C)	DN
			D)	DK
2			If the rules prohibit disturbing behavior and are enforced only upon request of an offended party and Loud and Ardent can negotiate freely, how much will Loud drink?
			A)	DR
			B)	DU
			C)	DN
			D)	DK
3			The moral of the story of questions 16-1 and 16-2 is
			A)	always make the perpetrator of the problem responsible for the solution.
			B)	there is no efficient outcome of an externality problem.
			C)	if negotiation costs are zero, it makes no difference who is responsible because efficiency will be reached.
			D)	if negotiation costs are zero, efficiency is best served if the person held responsible for the problem is the one with the highest cost of solving the problem.
4			If Ardent and Loud are so upset with each other that no deals can be made and there are no rules against disturbance, then ______ beer will be consumed.
			A)	DR
			B)	DU
			C)	DN
			D)	DK
5			What will be the disturbance cost of Loud's action in question 16-4 above?
			A)	DFK
			B)	DGK
			C)	DHK
			D)	DEK
6			If Ardent and Loud are so upset with each other that no deals can be made and disturbances are stopped upon complaint, how much beer will Loud drink?
			A)	DR
			B)	DU
			C)	DN
			D)	DK
7			The moral of the story in questions 16-4 to 16-6 is that
			A)	when negotiation costs are prohibitive the best alternative is to make the person responsible who has the highest cost of solving the problem.
			B)	when negotiation costs are prohibitive the best alternative is to make the person responsible who has the lowest cost of solving the problem.
			C)	a law outlawing beer at games would serve society best.
			D)	no rules or regulations are necessary. Let the parties battle to some solution or live in conflict. The medicine of rules is worse than the externality disease.
8			If ball park owners held an auction between Loud and Ardent, how high would Loud bid and who would win the bid for the right to make the beer drinking rules?
			A)	DEK, Ardent would win the bid.
			B)	DEK, Loud would win the bid.
			C)	DEHK, Loud would win the bid.
			D)	EHK, Ardent would win.
9			In the case of Loud and Ardent, the ball park owners could achieve the efficient result if they added a tax to the cost of beer. The correct amount of tax would be
			A)	OA per beer.
			B)	BR per beer.
			C)	CU per beer.
			D)	EN per beer.
10			In recent months increasing numbers of people in business have begun seeking a career change into academia. The reason often given is that they are tired of working 80 hours a week away from home and would rather have a different lifestyle. Given this information, which of the following statements is clearly false?
			A)	These people would probably favor a requirement that would make long workweeks an exception rather than the rule.
			B)	There are positional externalities to long workweeks in a firm.
			C)	The cost of career climbing is starting to exceed the benefits for these workers.
			D)	These workers are not willing to give up good ratings and promotions in business for family time, so they seek an environment where family time and work esteem are not mutually exclusive.
			E)	None of the above are clearly false.
11			As Ronald Coase pointed out in a famous paper, externalities are reciprocal. This means that
			A)	everyone absorbs and causes externalities so they cancel for the most part.
			B)	transactions costs are zero in most situations in life where externalities exist.
			C)	people pay taxes to alleviate externalities and then receive the benefits of the tax dollars when the externality is eliminated.
			D)	if an externality is prohibited or fined, some people are helped but those creating the externality are hurt.
12			Coase suggested that the efficient way to deal with externalities is to
			A)	hold the perpetrator responsible.
			B)	develop social rules and rights that force the person with the least cost solution to solve the problem.
			C)	tax everyone and have the government solve the problem as efficiently as possible.
			D)	create rules that forbid externalities from being created in the first place.
13			Economics and law have combined to find the most efficient legal outcomes. As in the safe harbor case, Judges are inclined to find outcomes that
			A)	will penalize those who take risks.
			B)	will favor those who have property rights well established.
			C)	will prevent the problem from happening again.
			D)	would have been found privately if transactions costs had been zero.
14			The tragedy of the commons would not exist if
			A)	people would properly assess the average cost of their behavior in public forums.
			B)	private property was eliminated in cases where the public interest is involved.
			C)	there was a way to discern and charge for the effects people have on others in public places.
			D)	everyone was honest and trustworthy.
15			The terrorist attacks of September, 2001 illustrate how impossible it is to negotiate on a case by case basis what would be an efficient set of laws to prevent future attacks. Yet the degree of security expense we must absorb should, as much as possible, still be based on the principle that
			A)	the average cost of security should not be more than the average benefit received from the security.
			B)	the total cost of security should not exceed the total benefit of the security.
			C)	the marginal cost of the security should not exceed the marginal benefit of the security.
			D)	all three of these propose since they are saying, in effect, the same thing.
16			No law exists which prohibits smoking in apartment buildings even though the externalities of smoking are great. This is most likely true because
			A)	few people are bothered enough by smoke to make a law against smoking necessary.
			B)	such a law would be unenforceable .
			C)	it is relatively easy to protect oneself from secondary smoke in a building.
			D)	the transactions cost of roommates negotiating an agreement on air rights in an apartment are fairly low.
17			Which of the following is an example of a positive externality?
			A)	Your neighbor's fireworks party on July 4.
			B)	Your neighbor's rock music at midnight when you are trying to sleep.
			C)	Your favorite ice cream that your neighbor just brought you for desert.
			D)	Both a and c are positive externalities.
18			You buy a new car and that makes your neighbor feel poorer until he gets a new car. This is an example of a
			A)	positive externality.
			B)	tragedy of the commons
			C)	positional externality
			D)	violation of home as a safe harbor
19			Some argue that private charities should be the ones who provide for the poor in our society. An easily defensible counter argument to this appeal is that
			A)	private charities cannot be sufficiently trained to meet the needs of the poor.
			B)	there are positive externalities to helping the poor and thus it will be impossible for charities to sufficiently fund these benefits.
			C)	the poor do not want help from charities.
			D)	negotiation costs between the poor and their neighbors are low and so individual solutions can be made to poverty than do not involve charitable organizations.
20			If the government made a law prohibiting elaborate jewelry for any occasion
			A)	society as a whole would be worse off because all those with jewels would be worse off and no one would be better off.
			B)	society would be worse off because all those who admired the elaborate jewelry would be denied that positive externality.
			C)	society would be better off because jewelry has positional externalities that create jewelry expenditure races making no one better off and everyone poorer.
			D)	people would secretly wear it so the law would be unenforceable.
21			If the main impact of the Coase theorem is to be summarized it might be as follows.
			A)	The government should be more active in solving externalities.
			B)	The informal interactions of private individuals and groups can solve many externality problems.
			C)	The tragedy of the commons and other negative externality problems are far greater than the positive and positional externality problems
			D)	People are not inclined to register their preferences where externalities are the issue.