Changes

=== Exam Bias Concerning Regulation and Efficiency===

=== Exam Bias Concerning Regulation and Efficiency===

There are only two or three questions (out of nearly 100) on the CLEP exam that have biased answers.  They concern regulation and efficiency.  You can expect to see one or two CLEP questions where the correct answer is to support government regulation against pollution.  The best way to think about pollution is in terms of its "negative externality," but the CLEP exam writers cast the issue in terms of an efficient use of resources.  Under this view, pollution is inefficient because it results in inefficient harm to the environment.  Under the CLEP view, government laws against pollution supposedly increase efficiency by preventing harm to the "resource" of the environment.  These regulations that prohibit pollution cause less output but supposedly ensure a more efficient use of environmental resources.   

There are only two or three questions (out of nearly 100) on the CLEP exam that have biased answers.  They concern regulation and efficiency.  You can expect to see one or two CLEP questions where the correct answer is to support government regulation against pollution.  The best way to think about pollution is in terms of its "negative externality," but the CLEP exam writers cast the issue in terms of an efficient use of resources.  Under this view, pollution is inefficient because it results in inefficient harm to the environment.  Laws against pollution supposedly increase efficiency by preventing harm to the "resource" of the environment.  These regulations that prohibit pollution cause less output but supposedly ensure a more efficient use of environmental resources.   

While most of us support a cleaner environment, efficiency is not improved by the government interfering in the free market and reducing output.  As the Coase theorem states, government interference and more transaction costs do not improve efficiency.  That said, you can pick up one or two easy points on the CLEP exam ''by assuming that environmental regulation increase efficiency by protecting the "resource" of the environment for its better use''.

While most of us support a cleaner environment, efficiency is usually associated with ''greater'' output, not ''less'' output.  Government regulations almost never ''improve'' efficiency; the free market does that best without government interference.  That said, you can pick up one or two easy points on the CLEP exam '''''by assuming that environmental regulation increases efficiency by protecting the "resource" of the environment for its better uses'''''.

Outside the topic of government regulation, there are no biased answers.  Do not choose one answer instead of another for reasons of bias except in one or two rare cases.

 

'''''Outside the topic of government regulation, there are no biased answers.  Do not choose one answer instead of another for reasons of bias except in one or two rare cases.'''''

===Other Questions Concerning Government===

===Other Questions Concerning Government===

Note that when companies are allowed to pollute without paying for it, their marginal cost (MC) is artificially lower than it should be.  The companies are avoiding the cost of their own pollution.  A lower MC means they will produce more goods than if their MC were higher.  The term “marginal social cost” is used by economists to represent the true cost of their activities, including the cost of their pollution.  In theory, perhaps there are free market responses to the polluter, such as people asserting property rights in the rivers being damaged.  Historically, it has taken government regulation to reduce the negative externality.

In areas unrelated to pollution, government establishes price floors, supports and ceilings.  Do we all recall the differences?  Price “ceilings” (or controls) are the easiest: the government says that the good cannot be sold for a higher price.  Just as you cannot reach above your ceiling, the price is prohibited from rising above the ceiling that the government sets for it.  It would be requiring gas to be sold for no more than $1.50, for example.  The quantity supplied will decrease (move down the supply curve), while the quantity demanded will increase (move up the demand curve).  Shortages result.

 

In other areas unrelated to pollution, government establishes price floors, supports and ceilings.  Do we all recall the differences?  Price “ceilings” (or controls) are the easiest: the government says that the good cannot be sold for a higher price.  Just as you cannot reach above your ceiling, the price is prohibited from rising above the ceiling that the government sets for it.  It would be requiring gas to be sold for no more than $1.50, for example.  The quantity supplied will decrease (move down the supply curve), while the quantity demanded will increase (move up the demand curve).  Shortages result.

What is a price floor?  Just the opposite of a ceiling.  We cannot reach below the floor, and a price floor prevents the price from falling below a certain level.  It would be a government law that prohibited milk from selling for less than $2 a gallon, for example.  It would be intended to help the suppliers, such as dairy farmers.  What happens when government imposes a price floor?  There is a surplus of the good, as supply exceeds demand.

What is a price floor?  Just the opposite of a ceiling.  We cannot reach below the floor, and a price floor prevents the price from falling below a certain level.  It would be a government law that prohibited milk from selling for less than $2 a gallon, for example.  It would be intended to help the suppliers, such as dairy farmers.  What happens when government imposes a price floor?  There is a surplus of the good, as supply exceeds demand.

=== General Preparation Advice ===

=== General Preparation Advice ===

As always, be sure you fully understand the question before you answer it, and use common sense and logic.  In fact, many of the questions can be answered correctly by carefully applying common sense and logic, even independent of economic principles.

As always, be sure you fully understand the question before you answer it, and use common sense and logic.  In fact, many of the questions can be answered correctly with basic reasoning skills.

 

To prepare for passing the CLEP exam, strive to know at least 80% of the issues covered in the table above extremely well.  Go over the above list and see where you need to improve most.  Then focus on those areas.  But also be sure you understand the easy areas in order to pick up the easy points too.

== Maximizing Marginal Utility in Studying for Exam ==

== Maximizing Marginal Utility in Studying for Exam ==