Deck 16: Externalities

Question 1

Damage to the environment occurs because:

A) most businesses just don't care about the environment.
B) consumers want goods and services at the lowest prices no matter what other costs may be incurred.
C) pollution results from production of goods and services.
D) pollution reduces the social cost of production.

Answer 1

C

Question 2

The socially optimal amount of pollution occurs where the marginal social benefit of pollution is _____ the marginal social cost of pollution.

A) equal to
B) greater than
C) less than
D) There is no socially optimal amount of pollution.

Answer 2

A

Question 3

Which of the following is a negative externality?

A) high prices for necessities such as drinking water in the aftermath of a natural disaster
B) the risks to nonsmokers from second-hand smoke
C) the increased risk of a traffic accident to an individual who uses a cell phone while driving
D) unemployment in the steel industry caused by low prices of imported (external) steel

Answer 3

B

Question 4

If drivers decide to make phone calls without considering the costs imposed on others, the:

A) number of phone calls made while driving will be more than the socially optimal quantity.
B) number of phone calls made while driving will be fewer than the socially optimal quantity.
C) marginal social cost curve will lie below the marginal cost of production curve.
D) marginal social benefit curve will lie below the marginal social cost curve.

Question 5

A coal-powered electrical generator that discharges smoke into the air and causes uncompensated costs and discomfort to residents of a town has a(n):

A) quasi-public good.
B) external cost.
C) external benefit.
D) specific tax.

Question 6

Given the general agreement that pollution is undesirable and social welfare is increased by reducing pollution, the optimal level of pollution in a society is:

A) zero.
B) the level that reduces the marginal social costs of pollution to zero.
C) the level at which the marginal social cost is equal to the marginal social benefit.
D) the level that minimizes the average total cost of producing the product that generates the pollution.

Question 7

A negative externality:

A) is any cost above the economic cost.
B) equals the social cost plus the firm's private cost.
C) is an uncompensated cost imposed by an individual or firm on others.
D) equals the opportunity cost minus the social costs.

Question 8

If an activity generates external costs, the decision makers generating the activity will:

A) be faced with its full costs.
B) be faced with no costs.
C) not be faced with its full costs.
D) be faced with excessive costs.

Question 9

An industry with production that generates external costs produces a quantity of output that is:

A) socially optimal.
B) smaller than the socially optimal quantity.
C) larger than the socially optimal quantity.
D) socially optimal if a specific subsidy is given to buyers.

Question 10

Which of the following is an activity generating a negative externality?

A) You buy a new car, then discover it needs a new transmission.
B) Your next-door neighbor mows the lawn at 6 A.M.
C) The only two coffee shops in town conspire to raise prices.
D) After Jane bought health insurance, she began racing motorcycles on the weekends.

Question 11

All of the following are examples of an external cost EXCEPT:

A) the smoke nuisance of a factory.
B) zoning restrictions on your property.
C) land defilement from strip mining.
D) weeds on your next-door neighbor's lawn.

Question 12

An externality is said to exist when:

A) individuals impose costs or benefits on others but have no incentive to take these costs and benefits into account.
B) individuals impose costs or benefits on others, and the market provides incentives to take these costs and benefits into account.
C) individual actions are affected by external forces like the loss of U.S. jobs because of competition from abroad.
D) individual actions are affected by government policies (such as taxes) that are externally imposed on the market.

Question 13

Which of the following best describes a negative externality?

A) Your neighbor loves to bake bread and always brings you a loaf fresh and hot from the oven.
B) Your neighbor has an ornamental pond that breeds mosquitoes.
C) Your neighbor has invested in beautiful landscaping, increasing the value of all of the houses on the block.
D) Your neighbor has a pool and has given you an open invitation to come over and swim.

Question 14

The marginal social benefit of pollution:

A) is zero, since pollution is not beneficial.
B) can be measured as the additional gain to society from one additional unit of pollution.
C) is easy to estimate, since polluters are required to file this information in their tax returns.
D) is equal to the marginal social cost of pollution, since benefits to producers are equal to costs to consumers.

Question 15

Which of the following is NOT an activity that generates an externality?

A) Bob's Service Station dumps used oil in the river.
B) Bob renovates a run-down house in the neighborhood.
C) Bob occasionally drives while drunk.
D) Bob's Service Station donates a car to charity.

Question 16

Activities that generate external costs will likely be carried out at levels that _____ those that would be efficient.

A) are equal to
B) are less than
C) exceed
D) compete with

Question 17

Pollution has _____ and _____.

A) no benefits; only costs
B) benefits; costs
C) no opposition; only advocates
D) short-term effects; very little long-term effect

Question 18

Whenever human activity generates a concentration of a substance in the environment sufficient to cause harm to living things, it is called:

A) a free good.
B) an external shock.
C) a result of human greed.
D) pollution.

Question 19

A market economy will produce _____ without any government regulation.

A) too little pollution
B) too much pollution
C) the socially optimal amount of pollution
D) the amount of pollution that maximizes total surplus

Question 20

A plastics manufacturing plant dumps pollution into the Big River. This leads to higher costs and disruption for fishermen on the river, for which they are not compensated. In this situation:

A) too little of society's resources is being used to produce plastic.
B) too much of society's resources is being used to produce plastic.
C) the ideal amount of society's resources is being used to produce plastic.
D) there is an external benefit to society from plastic production.

Question 21

If the marginal social benefit received from pollution is equal to its marginal social cost:

A) society's well-being can be improved if the quantity of pollution increases.
B) society's well-being can be improved if the quantity of pollution decreases.
C) society has achieved its socially optimal level of pollution.
D) the market is producing too much pollution.

Question 22

As the quantity of pollution rises, its marginal social cost:

A) remains constant.
B) falls.
C) rises.
D) rises at first but eventually falls.

Question 23

The marginal benefit of pollution emissions _____ as the quantity of pollution emissions _____.

A) decreases; increases
B) increases; increases
C) decreases; decreases
D) remains unchanged; goes up or down

Question 24

If a good that involves external costs is priced to take these costs into account, then its price will:

A) fall, and output will go up.
B) rise, and output will fall.
C) not change, but output will fall.
D) rise, but output will stay the same.

Question 25

If the marginal social benefit received from pollution is greater than its marginal social cost in a market:

A) society's well-being can be improved if the quantity of pollution decreases.
B) firms in the market produce the socially optimal level of pollution.
C) firms in the market produce too much pollution.
D) firms in the market produce too little pollution.

Question 26

The marginal social benefit from pollution _____ as the quantity of pollution emissions _____.

A) remains constant; increases
B) decreases; increases
C) increases; increases
D) remains constant; decreases

Question 27

The efficient level of pollution is the quantity at which:

A) its total benefits exceed its total costs to society by the greatest possible amount.
B) its total benefits to society equal its total costs to society.
C) the marginal social benefit of an additional unit of pollution is greater than the marginal social cost of the additional unit.
D) the marginal social benefit of an additional unit of pollution is less than the marginal social cost of the additional unit.

Question 28

The socially optimal quantity of pollution is:

A) zero.
B) the quantity whose marginal social cost is equal to zero.
C) the quantity whose marginal social benefit is equal to zero.
D) the quantity whose marginal social cost is equal to the marginal social benefit.

Question 29

If the marginal social benefit received from pollution is less than its marginal social cost:

A) society's well-being can be improved if the quantity of pollution increases.
B) society's well-being can be improved if the quantity of pollution decreases.
C) society has achieved its socially optimal level of pollution.
D) the market is producing too little pollution.

Question 30

The marginal social benefit received from pollution is equal to its marginal social cost in the market for highly polished glass. In this situation:

A) society's well-being can be improved if the quantity of pollution decreases.
B) firms in the market produce too much pollution.
C) firms in the market produce too little pollution.
D) firms in the market produce the socially optimal level of pollution.

Question 31

The marginal social cost of pollution rises as the quantity of pollution emissions:

A) remains constant.
B) falls.
C) rises.
D) rises but subsequently gradually falls.

Question 32

If external costs exist, the competitive free market:

A) allocates resources inefficiently.
B) allocates resources efficiently.
C) automatically corrects an overallocation of resources.
D) automatically corrects an underallocation of resources.

Question 33

If at the current amount of pollution, its marginal social benefit is greater than its marginal social cost:

A) there is too little pollution.
B) there is too much pollution.
C) society is achieving the optimal amount of pollution.
D) the externality is minimized.

Question 34

The marginal social benefit received from pollution is less than its marginal social cost in the market for highly polished glass. In this situation:

A) firms in the market produce the socially optimal level of pollution.
B) society's well-being cannot be improved by changing the quantity of pollution.
C) firms in the market produce too much pollution.
D) firms in the market produce too little pollution.

Question 35

The efficient quantity of pollution emissions occurs where:

A) there is absolutely no damage done to a pristine environment.
B) government forces zero pollution to occur, no matter what the cost.
C) the marginal social benefits of pollution exceed the marginal social costs of pollution.
D) the marginal social benefit of pollution is equal to the marginal social cost of pollution.

Question 36

There are benefits resulting indirectly from pollution because:

A) we obtain goods and services we enjoy even though in the process we pollute.
B) firms pollute the environment only if it allows them to provide people with goods and services they desire at a higher cost.
C) businesses and consumers receive a perverse satisfaction from polluting.
D) it can often be beneficial to wildlife.

Question 37

A copper mining operation discharges waste products into a river and causes higher costs and discomfort to downstream users of the water for which they are not compensated. In this case:

A) too little of society's resources is being used to produce copper.
B) too much of society's resources is being used to produce copper.
C) the optimal amount of society's resources is being used to produce copper.
D) there is an external benefit to society from copper production.

Question 38

The marginal social cost of pollution emissions _____ as the quantity of pollution emissions _____.

A) decreases; increases
B) increases; increases
C) increases; decreases
D) remains constant; decreases

Question 39

The efficient rate of emissions occurs when:

A) there is absolutely no damage done to a pristine environment.
B) government forbids all pollution no matter what the cost.
C) the marginal social benefits of pollution exceed the marginal social costs of pollution.
D) the change in social benefits and the change in social costs due to an additional unit of emissions are equal.

Question 40

The additional cost imposed on society as a whole by an additional unit of pollution is:

A) the marginal social benefit of pollution.
B) the marginal social cost of pollution.
C) the optimal Pigouvian tax.
D) a technology spillover.

Question 41

The proposition that if transaction costs are low enough and property rights are well-defined, the private market can achieve an efficient outcome regardless of which of the affected parties hold the property rights is known as the:

A) Coase theorem.
B) property rights paradigm.
C) market rights theorem.
D) green environment paradigm.

Question 42

According to the Coase theorem, when negative externalities are present, a market will:

A) always reach an efficient solution.
B) reach an efficient solution if transaction costs are low and property rights are well-defined.
C) reach an efficient solution only if the government intervenes in the market.
D) reach an efficient solution only if the negative externalities are offset by positive externalities.

Question 43

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. The efficient quantity of pollution is _____ tons.

A) 0
B) 2
C) 4
D) 8

Question 44

Use the following to answer questions:
Figure: Pollution and Efficiency
(Figure: Pollution and Efficiency) Point _____ in the figure Pollution and Efficiency represents an efficient solution in this market, where sulfur emissions are a result of production.

A) A
B) B
C) E
D) F

Question 45

When farmers raise hogs, there are a number of external costs. In particular, hogs generate methane gas. If the marginal external cost is $100 per hog and the government imposes a tax of $200 per hog, then at the equilibrium price and quantity of hogs:

A) too few hogs will be raised.
B) the price will be less than the marginal social cost.
C) the price will be less than the marginal social benefit.
D) the price will be less than the marginal cost to hog farmers.

Question 46

The Coase theorem states that in the presence of externalities, a market economy will:

A) always reach an efficient solution.
B) never reach an efficient solution.
C) reach an efficient solution if transaction costs are sufficiently low and property rights are well-defined.
D) reach an efficient solution only in the case of government regulation.

Question 47

The proposition that if bargaining is costless, the market can achieve an efficient outcome is the:

A) Coase theorem.
B) property rights paradigm.
C) market rights theorem.
D) efficient environment paradigm.

Question 48

The idea that even in the presence of externalities an economy can reach an efficient solution as long as transaction costs of making a deal are low and property rights are well-defined is known as:

A) a Pigouvian tax.
B) a network externality.
C) a technology spillover.
D) the Coase theorem.

Question 49

According to the Coase theorem, the private market can achieve an efficient outcome:

A) as long as the enforcement of property rights costs less than the marginal benefit of emissions.
B) only if the property right to clean air is assigned to the polluter.
C) only if the property right to clean air is assigned to the party harmed by pollution.
D) if bargaining costs are low and property rights are well-defined.

Question 50

Use the following to answer questions:
Figure: Pollution and Efficiency
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emission is a result of production, too much pollution is found when the price is _____ and the quantity is _____.

A) $5; 15
B) $5; 40
C) $25; 20
D) $5; 30

Question 51

Use the following to answer questions:
Figure: Pollution and Efficiency
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emission is a result of production, an efficient solution is one in which:

A) MSB < MSC.
B) MSC < MSB.
C) total cost = total benefit.
D) MSC = MSB.

Question 52

Use the following to answer questions:
Figure: Pollution and Efficiency
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. If this market, whose sulfur emission is a result of production, produced _____ units of emissions, then _____.

A) 30; it would be efficient
B) 30; MSB > MSC
C) 45; total cost would equal total benefits
D) 45; MSC = 0

Question 53

When individuals take external costs and benefits into account:

A) there are no external costs.
B) they internalize the externality.
C) the government should intervene in the market.
D) the market will not reach an efficient solution.

Question 54

An externality is said to be internalized:

A) when individuals take external costs and benefits into account in their decision making.
B) when the Coase theorem is irrelevant or cannot be applied.
C) when individuals successfully petition the government to ban or restrict activities that generate negative externalities.
D) when individuals learn to adapt to negative externalities through introspection or internal acceptance of what are viewed as unchangeable facts of life.

Question 55

Use the following to answer questions:
Figure: Pollution and Efficiency
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. If this market, whose sulfur emissions are a result of production, produced _____ units of emissions, then _____.

A) 40; MSB = MSC
B) 30; MSB < MSC
C) 40; MSB < MSC
D) 30; MSC < MSB

Question 56

When farmers raise hogs, there are a number of external costs. In particular, hogs generate methane gas. Without government regulation, the equilibrium price and quantity of pigs raised means that:

A) too few hogs will be raised.
B) the price will be less than the marginal social cost.
C) the price will be less than the marginal benefit.
D) the price will be less than the marginal cost to hog farmers.

Question 57

A familiar example of a negative externality is loud music on a college campus. In principle, it should be possible to internalize this externality by permitting students to negotiate rights to play music during particular times. The most likely reason that this does NOT happen is that:

A) most students are unfamiliar with the Coase theorem.
B) the transaction costs associated with identifying and establishing communication with students would be high.
C) agreements arising from such negotiations could not be enforced.
D) most students don't view loud music as a negative externality.

Question 58

A familiar example of a negative externality is traffic congestion. In principle, it should be possible to internalize this externality by permitting drivers to negotiate rights to drive during particular times. The most likely reason that this does NOT happen is that:

A) most individuals are unfamiliar with the Coase theorem.
B) the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.
C) agreements arising from such negotiations could not be enforced, since the Constitution guarantees all individuals freedom of access to all public roads.
D) lawyers would find a way to prohibit such negotiations unless they were actively involved, and this would make transaction costs prohibitive.

Question 59

Use the following to answer questions:
Figure: Pollution and Efficiency
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emissions are a result of production, an efficient solution takes place at a price of _____ and a quantity of _____.

A) $5; 40
B) $15; 30
C) $25; 30
D) $15; 15

Question 60

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. At the efficient quantity of pollution the marginal social cost of pollution is _____ the marginal social benefit of pollution.

A) greater than
B) equal to
C) less than
D) unrelated to

Question 61

Your community requires the sewage treatment plant to process raw sewage so that it is safe to return the water to the environment. This is:

A) an emissions tax.
B) the Coase theorem.
C) a tradable emissions permit.
D) an environmental standard.

Question 62

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. Two tons of pollution is:

A) too much.
B) the efficient amount.
C) not enough.
D) the socially optimum amount.

Question 63

Laws that require vehicles to have catalytic converters or that restrict or prohibit leaf burning are:

A) Pigouvian taxes.
B) internalization of externalities.
C) transaction costs.
D) environmental standards.

Question 64

According to many economists, the government should:

A) reduce the level of carbon emissions as far as possible.
B) use its policies to achieve the least-cost reduction of carbon emissions.
C) set policy to achieve the efficient level of pollution by reducing the costs of pollution, which will always increase the benefits to society.
D) reduce carbon emissions whenever the marginal cost exceeds a predetermined level set by the courts.

Question 65

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. At the market-determined quantity of pollution, the marginal social benefit of pollution is:

A) $800.
B) $400.
C) $200.
D) $0.

Question 66

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. At the efficient quantity of pollution the marginal social benefit of pollution is:

A) $400.
B) $300.
C) $200.
D) $100.

Question 67

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced:

A) too much pollution is produced.
B) the efficient amount of pollution is produced.
C) not enough pollution is produced.
D) the socially optimum amount of pollution is produced.

Question 68

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 2 tons of pollution is produced, the outcome is _____ because _____.

A) efficient; MSB = MSC
B) efficient; MSB > MSC
C) inefficient; MSB > MSC
D) inefficient; MSB < MSC

Question 69

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced, the marginal social benefit is _____, and the marginal social cost is _____.

A) $0; $800
B) $300; $500
C) $400; $400
D) $800; $0

Question 70

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. At the market-determined quantity of pollution, the marginal social cost of pollution is:

A) $800.
B) $400.
C) $200.
D) $0.

Question 71

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. At the efficient quantity of pollution the marginal social cost of pollution is:

A) $0.
B) $100.
C) $200.
D) $400.

Question 72

Economists believe that there are more efficient ways to deal with pollution than with environmental standards because these standards do NOT:

A) reduce pollution enough.
B) allow reductions in pollution to be achieved at minimum cost.
C) internalize the externality.
D) provide for any means of enforcement.

Question 73

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 2 tons of pollution is produced, the marginal social benefit is _____, and the marginal social cost is _____.

A) $600; $200
B) $500; $300
C) $400; $400
D) $800; $0

Question 74

When the government attempts to reduce the noise from airplanes by restricting the noise level from a jet engine to less than 50 decibels, it is using a(n):

A) environmental standard.
B) emissions tax.
C) Pigouvian tax.
D) tradable emissions permit.

Question 75

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. The market-determined quantity of pollution is _____ tons.

A) 0
B) 2
C) 4
D) 8

Question 76

When government attempts to reduce climate change by establishing a minimum level of fuel efficiency on new cars, it is using a(n):

A) environmental standard.
B) emissions tax.
C) Pigouvian tax.
D) tradable emissions permit.

Question 77

Which of the following is an environmental standard?

A) tradable pollution permits
B) taxes on the level of pollution
C) legal limits on sulfur dioxide emissions
D) production subsidies

Question 78

Automobile emissions generate pollution, have costs, and cause discomfort to residents of a city. In this case:

A) too little of society's resources is being used to operate automobiles.
B) the externality can be internalized by imposing a specific tax on drivers.
C) there is an external benefit to society from operating automobiles.
D) the externality can be internalized by granting a specific subsidy to drivers.

Question 79

Use the following to answer questions:
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced, the outcome is _____ because _____.

A) efficient; MSB = MSC
B) efficient; MSB > MSC
C) inefficient; MSB > MSC
D) inefficient; MSB < MSC

Question 80

The principal government agency in the United States responsible for enforcing national environmental policies is the:

A) Department of Agriculture.
B) Department of the Interior.
C) Environmental Protection Agency.
D) Department of Justice.