Deck 10: Externalities- When the Price Is Not Right

Question 1

An external cost is:

A) a cost paid by the consumer or the producer.
B) a cost paid by people other than the consumer or the producer trading in the market.
C) the cost to everyone.
D) the cost of reaching an agreement.

Answer 1

B

Question 2

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to ________ antibiotics, leading to an ________ market outcome.

A) overuse; inefficient
B) underuse; inefficient
C) overuse; efficient
D) make efficient use of; equilibrium

Answer 2

A

Question 3

Which statement illustrates the concept of external cost?

A) Margaret purchases all her food and clothing in the big city outside her residence.
B) A small business owner frequently buys raw materials by using her bank's line of credit.
C) Raymond cannot open his windows at times because he lives downwind from a mushroom farm.
D) Felicia, an economics major, asks the most insightful questions in class.

Answer 3

C

Question 4

An external cost:

A) causes markets to allocate resources efficiently.
B) affects producers but not consumers.
C) is a cost paid by people other than the producer or consumer trading in the market.
D) leads to economic efficiency only when private costs are greater than external costs.

Question 5

Antibiotics may be ________ since people consider only the ________.

A) underused; private and not the social costs of consumption
B) overused; private and not the social costs of consumption
C) underused; external and not the private costs of consumption
D) overused; external and not the private costs of consumption

Question 6

A chemical bathroom cleaner has an ingredient X that allows the cleaner to lather well and remove stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that gets washed down the drain escapes into the environment and releases allergens that cause respiratory problems for people. What is the social cost of a bottle of this cleaner?

A) $5.50 less the external cost of such a bottle of bathroom cleaner
B) the cost paid by other people as a result of the use of such a bottle of bathroom cleaner
C) $5.50 plus the external cost of such a bottle of bathroom cleaner
D) $3.60

Question 7

An external cost is a cost paid by:

A) the consumers trading in the market.
B) the producers trading in the market.
C) the government regulating the market.
D) people other than the consumer and the producer trading in the market.

Question 8

The social cost is:

A) a cost paid by the consumer or the producer.
B) a cost paid by people other than the consumer or the producer trading in the market.
C) the cost to everyone.
D) the cost of reaching an agreement.

Question 9

When patients or farmers choose whether to use more antibiotics, they compare:

A) their private benefits with the social cost.
B) their private benefits with the market price.
C) the social benefits with the social cost.
D) the social benefits with the market price.

Question 10

What negative externality does antibiotic use create?

A) With greater use of antibiotics, bacteria become increasingly resistant to them, thus increasing the likelihood of people dying from drug-resistant bacteria.
B) When drug companies increase the price of antibiotics, some people can no longer afford to buy antibiotics, putting them at increased risk of death.
C) The taxes on companies that produce antibiotics are passed on to consumers in the form of higher prices.
D) Because drug companies use very few workers in their production process, there is a larger than necessary demand for unemployment insurance and other social programs.

Question 11

Use the following to answer questions: Table: Costs of Antibiotics $$\begin{array} { c c c c c } \hline \begin{array} { c } \text { Quantity of } \\\text { Antibiotics }\end{array} & \begin{array} { c } \text { Marginal Benefit } \\\text { to Buyers }\end{array} & \begin{array} { c } \text { Marginal Cost } \\\text { to Sellers }\end{array} & \begin{array} { c } \text { External } \\\text { Cost }\end{array} & \begin{array} { c } \text { Marginal Social } \\\text { Cost }\end{array} \\\hline 1 & \$ 25 & \$ 5 & \$ 10 & ? \\2 & \$ 20 & \$ 10 & \$ 10 & ? \\3 & \$ 15 & \$ 15 & \$ 10 & ? \\4 & \$ 10 & \$ 20 & \$ 10 & ? \\5 & \$ 5 & \$ 25 & \$ 10 & ? \\\hline\end{array}$$

-(Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the fifth unit is:

A) $15.
B) $5.
C) $35.
D) $30.

Question 12

Since the price of antibiotics does not include all the costs of using antibiotics, the price is too:

A) high, and so antibiotics are overused.
B) high, and so antibiotics are underused.
C) low, and so antibiotics are overused.
D) low, and so antibiotics are underused.

Question 13

The social cost of driving an SUV is equal to:

A) only the cost of the pollution emitted by the vehicle.
B) both the cost of the vehicle's pollution and its operation (gas, etc.).
C) the cost of producing the vehicle.
D) both the cost of producing and driving the vehicle.

Question 14

The price of antibiotics sends the wrong signal because it includes the:

A) social cost but not the private cost.
B) private cost but not the external cost.
C) external cost but not the private cost.
D) external cost but not the social cost.

Question 15

A private cost is:

A) a cost paid by the consumer or the producer trading in the market.
B) a cost paid by people other than the consumer or the producer trading in the market.
C) the cost to everyone trading in all markets.
D) the cost of reaching an agreement.

Question 16

Which equation is TRUE?

A) private cost + average cost = social cost
B) social cost = private cost + external cost
C) external cost = private cost
D) private cost + social cost = external cost

Question 17

Which is an example of an external cost?

A) secondhand smoke
B) increased gas prices for drivers of SUVs
C) the cost you pay your plumber to install a new hot water heater
D) your high electric bill that results from leaving your lights on all night

Question 18

If the social cost of an activity equals the private cost, what kind of externality exists?

A) an external cost
B) an external benefit
C) There is no externality.
D) This cannot be determined by the information given.

Question 19

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

A) low, and the product will be overproduced.
B) high, and the product will be underproduced.
C) high, and the product will be overproduced.
D) low, and the product will be underproduced.

Question 20

Which equation correctly identifies social cost?

A) market price + external cost = social cost
B) external cost - market price = social cost
C) market price + cost of production = social cost
D) negative externality + positive externality = social cost

Question 21

An efficient equilibrium occurs whenever:

A) social surplus is maximized.
B) quantity demanded equals quantity supplied.
C) there is a negative externality in the market.
D) there is a positive externality in the market.

Question 22

An efficient equilibrium occurs when:

A) private costs equals private benefits.
B) social costs equals private benefits.
C) private costs equals social benefits.
D) social costs equals social benefits.

Question 23

Many remedies to resolving externalities involve "internalizing the externality." Which BEST approximates that goal?

A) placing a large dome over a polluting factory
B) punching people who smell nice
C) giving candy to disruptive children
D) buying yourself flowers to counteract the bad smell from a neighboring pig farm

Question 24

(Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market could be eliminated if the government:

A) outlawed the production of the good.
B) added a $10 tax per unit.
C) equated marginal benefit with external cost.
D) subsidized consumption by $5 per unit.

Question 25

In the presence of significant externalities, a market equilibrium maximizes:

A) social surplus.
B) nothing.
C) consumer surplus plus producer surplus plus everybody else's surplus.
D) consumer surplus plus producer surplus.

Question 26

Use the following to answer questions: Figure: Market with External Cost
(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________.

A) Q₁; ce
B) Q₀; ce
C) Q₀; gh
D) Q₁; de

Question 27

When external costs are present in a market:

A) market prices are still able to send the correct signals.
B) market prices send incorrect signals.
C) social surplus is maximized.
D) consumer surplus is not maximized.

Question 28

Antibiotic use carries an external ______ of building bacterial resistance against drugs.

A) benefit
B) cost
C) price
D) revenue

Question 29

Social surplus is consumer surplus:

A) minus producer surplus.
B) plus producer surplus.
C) plus producer surplus minus everyone else's surplus.
D) plus producer surplus plus everyone else's surplus.

Question 30

Which statement is correct under a market with externalities?

A) Social surplus is maximized as long as consumer surplus is maximized.
B) Social surplus is maximized as long as producer surplus is maximized.
C) Social surplus is maximized as long as both consumer surplus and producer surplus are maximized.
D) None of these statements is correct.

Question 31

Which of the following statements is TRUE?
I. If an activity creates an external cost of $15, the government should subsidize the activity by $15.
II. Social surplus is maximized when the private marginal benefit equals the social cost.
III. External costs result in markets producing too much output.
IV. Someone pays external costs other than the producer or consumer.

A) I and III only
B) II, III, and IV only
C) III only
D) II and IV only

Question 32

Externalities are:

A) always good.
B) always bad.
C) sometimes good and sometimes bad.
D) neither good nor bad.

Question 33

If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will:

A) emit a lower level of sulfur dioxide than is socially efficient.
B) emit a higher level of sulfur dioxide than is socially efficient.
C) emit an acceptable level of sulfur dioxide
D) not emit any sulfur dioxide in an attempt to avoid paying the entire cost.

Question 34

When the government intervenes in markets with external costs, it does so in order to:

A) protect the interests of bystanders.
B) ensure all the costs are born by producers.
C) ensure all the costs are born by consumers.
D) increase the welfare losses of producers.

Question 35

Use the following to answer questions: Table: Costs of Antibiotics $$\begin{array} { c c c c c } \hline \begin{array} { c } \text { Quantity of } \\\text { Antibiotics }\end{array} & \begin{array} { c } \text { Marginal Benefit } \\\text { to Buyers }\end{array} & \begin{array} { c } \text { Marginal Cost } \\\text { to Sellers }\end{array} & \begin{array} { c } \text { External } \\\text { Cost }\end{array} & \begin{array} { c } \text { Marginal Social } \\\text { Cost }\end{array} \\\hline 1 & \$ 25 & \$ 5 & \$ 10 & ? \\2 & \$ 20 & \$ 10 & \$ 10 & ? \\3 & \$ 15 & \$ 15 & \$ 10 & ? \\4 & \$ 10 & \$ 20 & \$ 10 & ? \\5 & \$ 5 & \$ 25 & \$ 10 & ? \\\hline\end{array}$$

-(Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is ________ and the efficient equilibrium quantity is ________.

A) 5; 1
B) 3; 4
C) 3; 2
D) 2; 5

Question 36

Markets are often inefficient when external costs are present because:

A) externalities cannot be corrected without government regulation.
B) social costs exceed private costs at the private market solution.
C) private costs exceed social costs at the private market solution.
D) production externalities lead to consumption externalities.

Question 37

Ideally, a market should maximize:

A) consumer surplus.
B) producer surplus.
C) consumer surplus plus producer surplus.
D) social surplus.

Question 38

Use the following to answer questions: Figure: Market with External Cost
(Figure: Market with External Cost) Suppose the figure displays the demand and supply curves for dry cleaning, a service that creates pollution. The external cost of dry cleaning is:

A) P₂.
B) P₁ - P₀.
C) P₀.
D) P₂ - P₀.

Question 39

Which of these statements is TRUE in the case of externalities?
I. In the case of externalities, prices do not reflect the true cost or benefit of the product.
II. In the case of externalities, prices sometimes send the wrong signals about a market.
III. Externalities discourage new producers from entering the industry since the price always remains about the efficient price.

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question 40

If an external cost is present in a market, economic efficiency may be enhanced by:

A) increased competition.
B) weakening property rights.
C) better informed market participants.
D) government intervention.

Question 41

If a market solution provides greater marginal social costs than marginal social benefits, then:

A) a positive externality is present.
B) a negative externality is present.
C) no net externality is present.
D) any externality has already been internalized.

Question 42

If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be:

A) higher than the marginal cost to antibiotic sellers.
B) less than the marginal cost to antibiotic sellers.
C) higher than the marginal benefit to the antibiotic buyers.
D) less than the marginal benefit to the antibiotic buyers.

Question 43

Use the following to answer questions: Figure: External Cost 1
(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the efficient price and quantity of paper?

A) P = $4; Q = 30
B) P = $5; Q = 30
C) P = $6; Q = 50
D) P = $4; Q = 50

Question 44

If the government forced external cost internalization with a tax on all firms that emit pollution, then:

A) the market would be socially inefficient because taxes create deadweight losses.
B) the market price of these goods would fall.
C) production would actually increase.
D) deadweight loss to society would decrease.

Question 45

Use the following to answer questions: Figure: Efficient Market Outcome
(Figure: Efficient Market Outcome) Refer to the figure. Which point represents the efficient equilibrium?

A) A
B) B
C) C
D) None of the answers is correct.

Question 46

In the presence of external costs, the social cost curve lies ______ the supply curve.

A) above
B) below
C) with
D) sometimes above and sometimes below

Question 47

A free market with externalities ______ social surplus.

A) maximizes
B) does not maximize
C) sometimes maximizes
D) precludes

Question 48

If a market solution generates marginal social benefits equal to marginal social costs, then:

A) a positive externality is present.
B) a negative externality is present.
C) no net externality is present.
D) social surplus has been maximized.

Question 49

Use the following to answer questions: Figure: Market for Bathroom Cleaner
(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the efficient quantity in this market?

A) 100
B) 85
C) 15
D) 9

Question 50

In a market with external costs, the market price is:

A) higher than the efficient price.
B) lower than the efficient price.
C) equal to the efficient price.
D) regulated by the government.

Question 51

If antibiotic users are required to bear all the costs of antibiotic use, the supply curve would:

A) shift left and would be above the social cost curve.
B) shift left and would be the same as the social cost curve.
C) shift left but would still be under the social cost curve.
D) remain unchanged.

Question 52

In the case of an external cost, the social value curve lies ______ the demand curve.

A) above
B) below
C) with
D) sometimes above and sometimes below

Question 53

Use the following to answer questions: Figure: External Cost 1
(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?

A) P = $4; Q = 30
B) P = $5; Q = 30
C) P = $6; Q = 50
D) P = $4; Q = 50

Question 54

The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be:

A) less than the private cost.
B) greater than the private cost.
C) less than the total cost.
D) greater than the total cost.

Question 55

Use the following to answer questions: Figure: Efficient Market Outcome
(Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

A) P₁ and Q₁.
B) P₁ and Q₂.
C) P₂ and Q₁.
D) P₃ and Q₂.

Question 56

Use the following to answer questions: Figure: Market for Bathroom Cleaner
(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the external cost of the bathroom cleaner?

A) $6
B) $9
C) $12
D) $3

Question 57

External costs caused by the use of antibiotics are the costs to people who are:

A) buying antibiotics.
B) selling antibiotics.
C) either buying or selling antibiotics.
D) neither buying nor selling antibiotics.

Question 58

Use the following to answer questions: Figure: Market for Bathroom Cleaner
(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market?

A) $90
B) $180
C) $45
D) $255

Question 59

If a market solution provides greater marginal social benefits than marginal social costs, then:

A) a positive externality is present.
B) a negative externality is present.
C) no net externality is present.
D) any externality has already been internalized.

Question 60

A free market void of externalities ______ social surplus.

A) maximizes
B) does not maximize
C) sometimes maximizes
D) precludes

Question 61

You are considering planting a garden of beautiful flowers in your front yard. It would cost you $45 in time and materials to plant it. You would get $40 worth of benefits from the garden and your neighbor, who walks by your front yard every day, would get $10 worth of benefits from it. Which statement is TRUE?

A) Your private benefits exceed your private costs, so you would plant the garden.
B) The efficient equilibrium is to not plant the garden, but you would do so anyway since the social benefits exceed your private costs.
C) The efficient equilibrium is to plant the garden, but you would not do so since your private costs exceed your private benefits.
D) The external benefits are not significant enough to affect the efficiency of this equilibrium.

Question 62

Use the following to answer questions: Figure: Dishwashing Detergent
(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, the market equilibrium quantity is ______ units, and the efficient quantity is ______.

A) 6; 9
B) 12; 6
C) 9; 6
D) 12; 9

Question 63

Use the following to answer questions: Figure: Dishwashing Detergent
(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. According to this figure, which statement is TRUE?

A) The maximum willingness to pay for the 6^th unit equals the private cost.
B) The social cost of the 9^th unit is $9 while the value to consumers is $9, eliminating the gains from trade.
C) The maximum willingness to pay for the 12^th unit equals $18, or the private cost plus the social cost.
D) The social cost of the 9^th unit is $15 while the value to consumers is $9, creating a deadweight loss equal to $6.

Question 64

A(n) ______ is a tax on a good with external costs.

A) specific tax
B) ad valorem tax
C) Orwellian tax
D) Pigouvian tax

Question 65

In the case of an external cost, marginal private cost:

A) is equal to marginal social cost for all quantity levels.
B) is less than marginal social cost for all quantity levels.
C) is greater than marginal social cost for all quantity levels.
D) and marginal social cost cannot be compared at any quantity.

Question 66

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the:

A) social value exceeds the private value at the private market solution.
B) private cost exceeds the social benefit at the private market solution.
C) private benefit equals the social benefit at the private market solution.
D) None of the answers is correct. Private markets DO achieve a socially optimal equilibrium when external benefits are present.

Question 67

Which is an example involving an external benefit?

A) the pollution of a stream
B) a person littering a public highway
C) air pollution
D) a nice garden in front of someone's house

Question 68

Figure: External Cost 2 Refer to the figure. What is the deadweight loss in this figure at the market equilibrium?

A) $25.00
B) $4.00
C) $8.33
D) $11.25

Question 69

A Pigouvian tax:

A) is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
B) subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.
C) is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss.
D) is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss.

Question 70

In How Economics Saved Christmas, economist Art Carden retold the Dr. Seuss story of the Grinch who hated Christmas and stole the decorations, food, and presents from neighboring Whoville. Complete this passage from Carden's poem:
He reached for his textbooks; he knew what to do
He'd fight them with ideas from A.C. Pigou
This idea has merit, he thought in the frost
A ____ that was equal to _____ cost

A) subsidy; social
B) subsidy; private
C) tax; total
D) tax; external

Question 71

Use the following to answer questions: Figure: Dishwashing Detergent
(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, what is the external cost of using dishwashing detergent?

A) $6
B) $9
C) $12
D) $18

Question 72

Use the following to answer questions: Figure: Palm Oil
(Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical rainforests to grow the plants that excrete the oil. With this externality, what is the deadweight loss (if any) of producing palm oil?

A) $100,000,000
B) $200,000,000
C) $400,000,000
D) There is no deadweight loss.

Question 73

When there are significant external costs associated with its production, the market produces ______ of that good.

A) too little
B) too much
C) just the right amount
D) an unknown amount

Question 74

Use the following to answer questions: Figure: Palm Oil
(Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical rainforests to grow the plants that excrete the oil. According to this diagram, what is the external cost (per ton) of producing palm oil?

A) $4
B) $5
C) $6
D) $8

Question 75

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, a $1 per tin tax on sardines would:

A) create a deadweight loss, as all taxes do, and correct the odorous externality.
B) decrease deadweight loss but fail to correct the odorous externality.
C) create a deadweight loss and fail to correct the odorous externality.
D) decrease deadweight loss by correcting the odorous externality.

Question 76

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:

A) taxing sardine tins at a rate of $1 per tin.
B) subsidizing sardine tins at a rate of $1 per tin.
C) capping total sardine consumption at 1000 tins per day.
D) banning sardines.

Question 77

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, it follows that the market produces:

A) too few tins of sardines relative to the social optimum.
B) too many tins of sardines relative to the social optimum.
C) the socially optimal level of sardines.
D) too many or too few tins of sardines, but it is impossible to say which.

Question 78

An external benefit in a market will cause the market to produce:

A) more than the same market would produce in the presence of a negative externality.
B) more than is socially desirable.
C) less than is socially desirable.
D) the socially optimal equilibrium amount.

Question 79

Use the following to answer questions: Figure: Dishwashing Detergent
(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, SC represents the:

A) private cost of production plus the social cost of production.
B) social cost of production: the private cost plus the external cost.
C) social cost of production: the external cost less the private cost.
D) private cost of production.

Question 80

On the Price Is Right, Bob Barker (and now Drew Carey) encourages people to "Help control the pet population. Have your pets spayed or neutered." An overly large pet population leads to many stray animals that are not only depressing but are also prone to spread disease. Concerning pet ownership, Barker and Carey are attempting to do what?

A) internalize some of its costs
B) internalize some of its benefits
C) employ Pigouvian taxes
D) use the Coase theorem