Deck 10: Externalities: When the Price Is Not Right

Question 1

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.

Answer 1

A

Question 2

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.

Answer 2

B

Question 3

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.

Answer 3

C

Question 4

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

Question 5

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 6

Reference: Ref 10-1 (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 7

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 8

Reference: Ref 10-1 (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 9

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 10

Which of the following 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.

Question 11

Reference: Ref 10-2 (Figure: Market with External Cost) Suppose that 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 12

Figure: Market with External Cost Reference: Ref 10-2 (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 13

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 14

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 15

Which of the following answers 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 16

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 17

Reference: Ref 10-1 (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 18

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 19

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 20

Which of the following 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 21

Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to get vaccinated. Therefore, which of the following is correct?

A) It is socially optimal for Edgar to get the flu shot if the social benefits of the shot exceed $20.
B) The external benefits of the flu shot equal $5 ($20 - $15).
C) Even without a government subsidy, Edgar is certain to be vaccinated.
D) The deadweight loss is eliminated if Edgar is vaccinated and the external benefits are $4.

Question 22

Which of the following statements 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 23

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 24

Reference: Ref 10-3 (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 25

Ideally, a market should maximize:

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

Question 26

Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of 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 27

Figure: Efficient Market Outcome Reference: Ref 10-3 (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 28

Because there are external benefits from higher education:

A) private markets will over-supply college classes.
B) government intervention cannot improve the market for college classes.
C) the government should impose a tax on college students.
D) private markets will under-supply college classes.

Question 29

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 30

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 31

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 32

The Centers for Disease Control and Prevention (CDC) wants at least 90 percent of the population vaccinated against preventable diseases, since the chance of a disease outbreak decreases as vaccine coverage increases. We can conclude that:

A) the external benefits of vaccination likely decrease as more and more people are vaccinated.
B) the private benefits of vaccination increase with vaccine coverage.
C) vaccines create a negative externality once the vaccine covers 90 percent of the population.
D) vaccines create a positive externality once the vaccine covers 90 percent of the population.

Question 33

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 34

Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of 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 35

Which of the following 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 36

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 37

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 38

The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which of the following is correct?

A) The social benefit of Good X is $13.75, a justification for the government to give buyers a $3.00 subsidy.
B) The social benefit of Good X is $7.75, a justification for the government to give buyers a $3.00 subsidy.
C) The social benefit of Good X is $7.75, a justification for the government to tax sellers $13.75 per unit.
D) The social benefit of Good X is $13.75, a justification for the government to tax sellers $3.00 per unit.

Question 39

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 40

Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of 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 41

When external benefits are significant:

A) market output is too low.
B) market output is too high.
C) market output is at the efficient level.
D) social surplus is maximized.

Question 42

Which of the following correctly describes what a Pigouvian subsidy is?

A) Subsidies received by the producers are called Pigouvian subsidies.
B) Pigouvian subsidies are awarded to producers whose goods have external benefits.
C) Taxes on producers creating negative externalities are called Pigouvian subsidies.
D) Lower corporate tax rates are also known as Pigouvian subsidies.

Question 43

Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what would the efficient quantity in this market be?

A) 700
B) 500
C) 1,200
D) 200

Question 44

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

Question 45

Figure: ABC Company Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the dollar amount of the external benefit created per can of the cleaner?

A) $12
B) $6
C) $3
D) $15

Question 46

Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The external ________ of vaccination is ________.

A) cost; $15
B) cost; $10
C) benefit; $20
D) benefit; $5

Question 47

Which of the following statements is INCORRECT?

A) When external benefits exist in a market, Qmarket < Qefficient.
B) When external benefits exist in a market, social surplus is maximized when social benefits equal the marginal costs of production.
C) When external costs exist in a market, Qmarket > Qefficient.
D) Through taxation, government action can result in Qmarket = Qefficient.

Question 48

Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. If the users of the cleaner were given a subsidy to compensate them for the benefit they are creating for the ecological system, how much deadweight loss is removed from this market?

A) $2,400
B) $3,000
C) $3,600
D) $1,200

Question 49

Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The market's outcome generates a(n):

A) deadweight loss of approximately $750.
B) shortage of 1,800 vaccines.
C) equilibrium price of $20.
D) All of the answers are correct.

Question 50

Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

A) 1,200; greater
B) 1,800; less
C) 2,400; greater
D) 1,800; greater

Question 51

If the government wanted to maximize the number of people receiving a flu vaccination, it should:

A) impose a mandatory vaccination program.
B) provide research grants to those firms engaging in increasing the supply of vaccine.
C) give a subsidy to people who are vaccinated.
D) impose a tax on people who are unwilling to be vaccinated.

Question 52

Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. What is the dollar amount of the external benefit (per box) that is created by the use of this product?

A) $24
B) $12
C) $8
D) $16

Question 53

If only people who get a flu shot receive all the benefits of the vaccination, then the:

A) demand curve would shift downward.
B) supply curve would shift upward.
C) market outcome will be efficient.
D) deadweight loss will be higher than if the vaccinations benefited others as well.

Question 54

Fewer people get flu shots than is efficient because:

A) people usually perceive that the private cost of getting flu shots is higher than their private benefit.
B) people usually perceive that the private benefit of getting flu shots is higher than their private cost.
C) the cost of producing flu shots is too high in relation to profits.
D) there are always more people taking take flu shots than the amount of flu shots available.

Question 55

When external benefits are present in a market:

A) the market is more efficient than if the externalities were not present.
B) the market outcome is inefficient.
C) overall social surplus is maximized because others are gaining in addition to the market consumers.
D) the external benefit must be offset by an external cost.

Question 56

An external benefit is a benefit received by:

A) the consumers trading in the market.
B) the producers trading in the market.
C) both the consumers and producers trading in the market.
D) people other than the consumers or producers trading in the market.

Question 57

Which of the following statements about vaccines is correct?

A) Vaccines benefit only people who are vaccinated.
B) Everyone should be vaccinated in order to prevent the spreading of disease-causing viruses.
C) Vaccines benefit people who are vaccinated but cannot prevent disease on those people who are not vaccinated.
D) Vaccines not only benefit people who are vaccinated but also inhibit spreading disease-causing viruses.

Question 58

Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what is the dollar amount of deadweight loss that would be removed from this market?

A) $1,600
B) $2,800
C) $5,600
D) $800

Question 59

Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the efficient quantity in this market?

A) 1,600
B) 400
C) 2,000
D) 3,600

Question 60

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

A) a tax of $5 in Market X and a subsidy of $10 in Market Y.
B) subsidizing both markets.
C) taxing Market Y and subsidizing Market X.
D) taxing both markets.

Question 61

Private solutions to externalities are most likely to occur when there are:

A) well-defined property rights and low transaction costs.
B) communal property rights and large numbers of sellers.
C) private property rights and high transaction costs.
D) communal property rights and large numbers of buyers and sellers with equal bargaining power.

Question 62

Which of the following suggests that private markets can be effective in dealing with external costs and benefits?

A) external technology policy
B) the Coase theorem
C) the law of diminishing returns
D) the ―invisible hand‖

Question 63

All of the following would be government solutions to externality problems EXCEPT:

A) public sector charities.
B) taxes and subsidies.
C) command and control.
D) tradeable allowances

Question 64

The proposition that, private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the:

A) voluntary tax theorem.
B) Bee theorem.
C) Coase theorem.
D) transaction cost theorem.

Question 65

The external benefit of honey production is internalized when:

A) farmers receive tax breaks from the government.
B) beekeepers receive tax breaks from the government.
C) farmers pay beekeepers to pollinate their crops.
D) beekeepers pay farmers to pollinate farmers' crops.

Question 66

Transaction costs:

A) are incurred in the production process due to externalities.
B) are eliminated when the government intervenes in a market with externalities.
C) can keep private parties from solving externality problems.
D) increase when taxes are imposed to correct negative externalities.

Question 67

Which of the following statements is TRUE?

A) The Coase theorem suggests that the efficient equilibrium quantity of flu shots will maximize the sum of producer and consumer surplus.
B) It is easy to internalize the benefits of getting a flu shot because only two companies produce flu vaccines.
C) The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot.
D) To internalize the costs of getting a flu shot, people who receive the vaccine should pay other people to be vaccinated.

Question 68

Which of the following statements about taxes is incorrect?

A) Taxes in markets always cause deadweight losses.
B) If the good causes an external cost, taxes actually reduce deadweight loss.
C) Both taxes and tradeable allowances in a market that has external costs can lead to the efficient quantity.
D) Taxes on producers cause the supply curve for the product to shift to the left.

Question 69

Government solutions to externality problems include: I. Pigouvian taxes. II. tradeable allowances. III. command and control.

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

Question 70

The Coase theorem posits that externality problems can be solved without government intervention

A) when transaction costs are low and property rights are clearly defined.
B) when trading in tradeable allowances occurs.
C) if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the market.
D) only rarely, that in general markets cannot maximize social surplus.

Question 71

When significant externalities exist: I. the market equilibrium is no longer efficient. II. the market equilibrium is only efficient if the externality is an external benefit. III. social surplus is not maximized. IV. the government may increase efficiency by imposing a tax on the market.

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

Question 72

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

A) bees don't fly far and thus it is easy to identify which farmers are getting the benefits of their pollination activities.
B) the owners of the bee-hives can clearly be identified.
C) the market limits the beneficial activities of the bees to those farmers who have very small farms.
D) All of the answers are correct.

Question 73

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

A) the government does not involve itself in the process.
B) the market is sufficiently competitive.
C) the number of market participants is large.
D) transaction costs are low and property rights are clearly defined.

Question 74

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

A) only the owner of the orchard.
B) only the beekeeper.
C) the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner.
D) both the beekeeper and the orchard owner.

Question 75

Externalities are:

A) benefits received by people other than the producers and consumers exchanging in the market.
B) costs paid by people other than the producers and consumers exchanging in the market.
C) found either in the form of external benefits or external costs.
D) All of these statements are correct.

Question 76

The market for honey is:

A) inefficient since beekeepers do not receive compensation for their bees pollinating fruits and vegetables.
B) efficient since farmers pay beekeepers to pollinate their crops, which internalizes the externality.
C) a public goods market.
D) in disequilibrium since the market quantity of honey is less than the socially optimal quantity of honey.

Question 77

Market solutions to externality problems work when: I. property rights are easily identifiable. II. transaction costs are relatively low. III. the market quantity is above the efficient quantity.

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

Question 78

Nobel Prize-winning economist James Meade argued that the market for honey was inefficient because pollination is a(n):

A) external benefit of honey production.
B) external cost of honey production.
C) private benefit of honey production.
D) private cost of honey production.

Question 79

Two parties fail to solve an externality problem because reaching an agreement requires high-priced lawyers to negotiate and write up contracts. This illustrates the problem of:

A) Pigouvian legal fees.
B) transaction costs.
C) legal inefficiency.
D) punitive-cost agreements.

Question 80

Government solutions to externality problems include:

A) taxing the consumption of goods that cause externalities.
B) subsidies.
C) allowing firms to trade the rights to create pollutants.
D) All of the answers are correct.