Deck 13: Externalities and Public Goods

Question 1

Externalities are the impacts

A) that affect only the consumers in the private market.
B) that affect only the producers in the private market.
C) on the government.
D) on third parties.

Answer 1

D

Question 2

Another term for externality is

A) pollution.
B) spillover.
C) public good.
D) market failure.

Answer 2

B

Question 3

The live band that plays nearby makes it difficult for patrons of a restaurant to hold a conversation. This is an example of

A) a negative externality.
B) a positive externality.
C) the Coase theorem.
D) environmental mugging.

Answer 3

A

Question 4

Which item is NOT an example of a negative externality?

A) air pollution
B) landscaping
C) litter
D) pesticide runoff

Question 5

If the Firecat charcoal factory is able to release black smoke into the air, it will then tend to

A) produce more than it would if it had to contain the smoke.
B) produce at a point at which the quantity demanded equals the socially optimal quantity supplied.
C) add the social cost of the smoke to the price of the charcoal.
D) underproduce because the social costs are added to the private costs.

Question 6

A college student can create a negative externality by

A) leaving a coffee cup in a classroom.
B) getting a flu shot.
C) sleeping late.
D) selling a used textbook.

Question 7

Alex pays Dale to fix his roof. Alex's neighbor Chris works at night and cannot sleep during the day because of the noise from the roof repairs. This situation is an example of

A) a common property resource.
B) market success.
C) an externality.
D) a public good.

Question 8

If a market exchange imposes costs on a party not involved in the transaction, the cost is called a

A) positive externality.
B) negative externality.
C) public good.
D) tragedy of the commons.

Question 9

If a negative externality exists in a market, the marginal

A) private cost exceeds the marginal social cost.
B) social cost exceeds the marginal private cost.
C) private benefit exceeds the marginal social benefit.
D) social benefit exceeds the marginal private benefit.

Question 10

If a positive externality exists in a market, the marginal

A) private cost exceeds the marginal social cost.
B) social cost exceeds the marginal private cost.
C) private benefit exceeds the marginal social benefit.
D) social benefit exceeds the marginal private benefit.

Question 11

A community college creates _____ for a community.

A) positive externalities
B) negative externalities
C) a tragedy of the commons
D) a common property resource market failure

Question 12

Positive externalities arise when

A) the production of a good generates benefits that spill over to third parties.
B) a monopoly is regulated.
C) tax rates are reduced.
D) a monopoly is shut down.

Question 13

Eliminating a smoking ban in public restaurants creates a

A) positive externality.
B) negative externality.
C) tragedy of the commons.
D) common property resource market failure.

Question 14

In which situation does a free rider problem occur?

A) Someone benefits from a good but does not have to pay for it.
B) Pollution is generated by the production of a good.
C) Policymakers ignore opportunity costs when making decisions.
D) A firm does not advertise its own product because its customers recommend it to their friends.

Question 15

All of these are used when positive externalities exist EXCEPT

A) taxes.
B) coupons.
C) vouchers.
D) subsidies.

Question 16

Which of these might be considered a positive externality?

A) better fishing resulting from increased lake temperatures generated by a nearby power plant
B) individuals who did not receive a flu shot yet did not catch the flu because those around them did receive the shot
C) the pollination of an orange grove due to bees kept by a nearby beekeeper
D) All of these may be viewed as positive externalities.

Question 17

(Figure: Determining Externalities) Based on the graph, total surplus (consumer plus producer surplus) at point i is

A) $75,000.
B) $80,000.
C) $100,000.
D) $125,000.

Question 18

(Figure: Determining Externalities) Assuming that a pollution cost of $10,000 per thousand units is implemented, based on the graph, at point e the net total social (consumer plus producer) surplus is now

A) $75,000.
B) $80,000.
C) $100,000.
D) $125,000.

Question 19

(Figure: Determining Externalities) Based on the graph, the socially optimal level of production is at point

A) b
B) e
C) f
D) g

Question 20

(Figure: Determining Externalities) Based on the graph, when operating at the socially optimal production point, the total consumer surplus plus producer surplus is equal to

A) $75,000.
B) $80,000.
C) $100,000.
D) $125,000.

Question 21

(Figure: Nail Polish Externalities) Based on the figure, S_p (MPC) represents the private supply curve of a particular type of nail polish, the manufacture of which is associated with the release of toxic chemicals into the atmosphere. S_s (MSC) includes the cost of that toxicity borne by others. What is the socially optimal quantity of this nail polish?

A) Q₁
B) Q₂
C) 0
D) It is unknown.

Question 22

(Figure: Nail Polish Externalities) Based on the figure, S_p (MPC) represents the private supply curve of a particular type of nail polish, the manufacture of which is associated with the release of toxic chemicals into the atmosphere. S_S (MSC) includes the cost of that toxicity borne by others. What area represents the total external cost of this nail polish?

A) abdc
B) abef
C) defc
D) The total external cost is unknown.

Question 23

(Figure: Nail Polish Externalities) Based on the figure, S_p (MPC) represents the private supply curve of a particular type of nail polish, the manufacture of which is associated with the release of toxic chemicals into the atmosphere. S_S (MSC) includes the cost of that toxicity borne by others. What is the socially optimal price of this nail polish?

A) P₁
B) P₂
C) d
D) 0

Question 24

When negative externalities exist, an unregulated market will produce _____ of the good, and the price will be _____ when compared to the socially optimal production.

A) the same amount; the same
B) too much; the same
C) too much; too low
D) too little; too high

Question 25

It has been suggested that a way to save endangered species is to give hunting rights to people who live in the vicinity of that species. The idea behind this suggestion is that

A) human rights are different from animal rights.
B) by giving people rights to profit from the animals, they have an incentive to ensure their survival.
C) the animals will be killed anyway, so the social benefit is extracted from them before they become extinct.
D) market solutions are morally superior to government solutions.

Question 26

Costs that spill over to third parties are called

A) opportunity costs.
B) variable costs.
C) public costs.
D) negative externalities.

Question 27

Immunizations for children against infectious diseases

A) is an example of a private good.
B) generates an external cost.
C) creates an external benefit.
D) is an example of a public good.

Question 28

Where negative externalities are present

A) the private market produces too much of a good.
B) the private market produces too little of a good.
C) the private market produces the efficient quantity of a good.
D) subsidies to firms are given by the government to increase production.

Question 29

_____ theorem states that if transaction costs are minimal (near zero), a bargain struck between beneficiaries and victims of externalities will be efficient from a resource allocation perspective.

A) Robert Cooter's
B) Elinor Ostrom's
C) Ronald Coase's
D) George Stigler's

Question 30

Which statement does NOT explain the Coase theorem?

A) It holds if transaction costs approach zero.
B) It explains that benefits or income will be different for polluters and victims, depending on how property rights are assigned.
C) It states that efficient results always occur regardless of who is given the property rights.
D) It states that efficient results will occur if both parties share the property rights equally.

Question 31

The Coase theorem states that under certain conditions, the efficient allocation of resources among parties can be attained through

A) regulation.
B) government intervention.
C) bargaining.
D) taxation.

Question 32

The Coase theorem claims that in the case of tobacco

A) if victims are given the right to be free of a smoke-filled environment, then tobacco manufacturers will sell tobacco through underground markets.
B) efficiency will occur only if smokers are given the right to smoke wherever they wish.
C) efficiency will occur only if victims are given the right to be free of a smoke-filled environment.
D) it does not matter who is given the property rights to the air, as long as the parties involved are allowed to bargain.

Question 33

Which statement is TRUE regarding the Coase theorem?

A) The final distribution of income is independent of the initial distribution of property rights.
B) The Coase theorem applies only to negative externalities.
C) If transaction costs are negligible, the outcome is efficient, regardless of the distribution of property rights.
D) There are few real-world applications of the Coase theorem.

Question 34

According to Ronald Coase, which of these is NOT necessary to achieve a socially optimal level of pollution?

A) well-defined property rights
B) good information
C) low production costs
D) low transaction costs

Question 35

Ronald Coase believed that

A) government regulation was the best method to solve the tragedy of the commons.
B) informal organizations, if certain rules were set in place, were a solution to the tragedy of the commons.
C) assigning property rights and using markets to reach a solution was less costly than any other method of solving the tragedy of the commons.
D) the tragedy of the commons could not be solved, which was why it was called a tragedy.

Question 36

One of the implications of the Coase theorem is that

A) victims have no right to be free of negative externalities.
B) victims should always consider the impact of positive externalities.
C) producers have no right to produce negative externalities.
D) producers have no right to produce positive externalities.

Question 37

If Edna lives next door to a nightclub and the loud music disturbs her sleep, the Coase theorem suggests that an efficient agreement can be reached if

A) either one of the parties has a well-defined property right.
B) both parties have equal property rights.
C) the nightclub volunteers to soundproof its walls.
D) Edna builds a high fence so that she does not have to see the club.

Question 38

If positive externalities exist for a good

A) the private market produces too much of the good.
B) the private market produces too little of the good.
C) the private market produces the efficient quantity of the good.
D) taxes on firms are imposed to decrease production of the good.

Question 39

Market failures can arise when

A) externalities exist.
B) there is a change in quantity demanded.
C) wages increase.
D) there is an increase in demand.

Question 40

If negative externalities are taken into account in the market, then output will _____, and price will _____.

A) fall; fall
B) rise; rise
C) fall; rise
D) fall; stay the same

Question 41

Suppose the external (pollution) costs of a good are $5 million, while the consumer and producer surplus from consuming the good are $2.5 million. Production of this good should be

A) zero.
B) cut in half.
C) controlled by the private market.
D) unregulated by the government.

Question 42

The socially optimal level of a product that produces pollution

A) is the minimum of the average cost curve.
B) includes only the private costs of the production of the product; pollution is dealt with separately.
C) is the level at which there is elimination of all pollution.
D) incorporates both the private and the social costs of production.

Question 43

If the external costs exceed the consumer and producer surplus from consuming a good, then the

A) production level should fall to zero.
B) production level should fall to the minimum of the average variable cost curve.
C) production level should fall to the minimum of the average cost curve.
D) positive externalities will lead to less of this product being produced than is socially optimal.

Question 44

If a market for a product has no environmental impacts, then the market supply accounts for _____ of the marginal costs to society of producing this product.

A) some
B) most
C) all
D) none

Question 45

Producer surplus is

A) the difference between how much a consumer would be willing to pay to consume a good and the amount actually paid to purchase the good.
B) the difference between the actual price of a good and the amount a producer is willing to accept given its costs.
C) equal to accounting profit.
D) equal to economic profit.

Question 46

The area under the demand curve but above the equilibrium price is called

A) consumer surplus.
B) producer surplus.
C) accounting profit.
D) economic profit.

Question 47

When positive externalities are present, the social demand curve lies to the _____ of the private demand curve, and the private market _____ the good.

A) right; overproduces
B) left; underproduces
C) left; overproduces
D) right; underproduces

Question 48

Which of these is an example of consumers creating a negative externality?

A) Air traffic from a nearby airport reduces property values.
B) A fast-food restaurant fails to provide medical benefits to employees.
C) A tanker ship leaks oil into a harbor.
D) Litter is found in an area around a fast-food restaurant.

Question 49

_____ are examples of market failure caused by spillovers or unintended by-products of a market transaction.

A) Common property resources
B) Public goods
C) Externalities
D) Common market resources

Question 50

(Figure: Determining Consumer and Producer Surplus) Based on the graph, area _____ represents consumer surplus.

A) a
B) b
C) c
D) d

Question 51

(Figure: Determining Consumer and Producer Surplus) Based on the graph, area _____ represents producer surplus.

A) a
B) b
C) c
D) d

Question 52

(Figure: Determining Consumer and Producer Surplus) Based on the graph, consumer surplus is equal to

A) $50,000.
B) $75,000.
C) $100,000.
D) $150.000.

Question 53

(Figure: Determining Consumer and Producer Surplus) Based on the graph, producer surplus is equal to

A) $50,000.
B) $75,000.
C) $100,000.
D) $150,000.

Question 54

Which of these is a positive externality?

A) New car prices decrease when steel tariffs are removed.
B) Production costs are reduced when waste disposal laws are not enforced.
C) Assistance is given to disaster victims.
D) A star basketball player's presence on television increases revenue at sports bars.

Question 55

If a metal stamping plant produces negative externalities, who tends to benefit?

A) the firm but not its employees
B) the firm but not its customers
C) the firm and its customers
D) the firm and its close neighbors

Question 56

If an entrepreneur opens an adult day care center that produces positive externalities, the equilibrium quantity of day care that is produced will be

A) greater than socially optimal.
B) lower than socially optimal.
C) socially optimal.
D) zero.

Question 57

The situation that occurs when a market does NOT provide the socially optimal amount of a good is called

A) market failure.
B) social dislocation.
C) the "economic miss."
D) a recession.

Question 58

Reasons for market failure include

A) common property resources.
B) public goods.
C) products or services that create externalities.
D) All of these are reasons for market failure.

Question 59

Market failure occurs when

A) quantity supplied does not equal quantity demanded.
B) a drought destroys agricultural crops.
C) the market does not provide the socially optimal amount of a good.
D) the market does not provide a profit to perfect competitors in the long run.

Question 60

(Table: Property Values) A local university is located in a residential neighborhood. Property rights are clearly defined for both the residents of the neighborhood and the university. The university would like to build a five-level parking garage on its property, but the neighbors argue that it will create too many nuisances and thus hurt their property values. The table contains data on the parking fee revenue the university expects to earn, as well as the expected impact on average neighborhood property values. According to the Coase theorem, the optimum level of floors in the parking garage should be
$\begin{array}{|c|c|c|}\hline \text { Number of Levels } & \text { Parking Fee Revenue } & \begin{array}{c}\text { Average Property } \\\text { Value in the } \\\text { Neighborhood }\end{array} \\\hline 0 & \$ 0.00 & \$ 310,000.00 \\\hline 1 & \$ 50,000.00 & \$ 305,000.00 \\\hline 2 & \$ 90,000.00 & \$ 295,000.00 \\\hline 3 & \$ 120,000.00 & \$ 280,000.00 \\\hline 4 & \$ 140,000.00 & \$ 260,000.00 \\\hline 5 & \$ 150,000.00 & \$ 235,000.00 \\\hline\end{array}$

A) one.
B) two.
C) three.
D) four.

Question 61

(Figure: Toxic Waste) From the graph, the private market outcome would be _____ tons of toxic waste produced at _____ per ton.

A) 30; $120
B) 70; $80
C) 30; $40
D) 0; $150

Question 62

(Figure: Toxic Waste) From the graph, the private market outcome would lead to consumer surplus of _____ and producer surplus of _____.

A) $1,225; $3,675
B) $4,900; $2,450
C) $2,450; $2,450
D) $4,900; $4,900

Question 63

(Figure: Toxic Waste) From the graph, external cost per ton of toxic waste would be

A) $60.
B) $70.
C) $80.
D) $90.

Question 64

(Figure: Toxic Waste) From the graph, the socially optimal outcome would lead to total surplus (consumer plus producer) of _____ and external costs of _____, so the optimal amount of toxic waste produced should be _____ tons.

A) $2,450; $2,400; 30
B) $2,700; $1,200; 70
C) $4,900; $1,200; 50
D) $900; $2,400; 0

Question 65

_____ is when once a good or service is provided, it is not feasible to exclude others from enjoying that good or service.

A) Rivalry
B) Nonrivalry
C) Excludability
D) Nonexcludability

Question 66

All of these are considered private goods EXCEPT

A) streetlights.
B) an ice cream cone.
C) a car.
D) a house.

Question 67

A physical DVD disc is a(n) _____ good, while a streaming video that can be used by multiple paying users is _____.

A) rival; nonrival
B) nonrival; rival
C) excludable; nonexcludable
D) nonexcludable; excludable

Question 68

An over-the-air radio station that plays music for free is a(n) _____ good, while a streaming radio service that charges a subscription fee is a(n) _____ good.

A) rival; nonrival
B) nonrival; rival
C) excludable; nonexcludable
D) nonexcludable; excludable

Question 69

A news website that can be accessed by many paid subscribers simultaneously is MOST likely

A) rival and excludable.
B) nonrival and excludable.
C) rival and nonexcludable.
D) nonrival and nonexcludable.

Question 70

Spraying for mosquito control in a local community is an example of a public good because it is

A) rival and exhibits nonexcludability.
B) nonrival and exhibits excludability.
C) nonrival and exhibits nonexcludability.
D) rival and exhibits excludability.

Question 71

Because of the nonexclusive characteristic of public goods, the _____ problem develops and the _____ must provide public goods.

A) free rider; private market
B) free rider; government or special interest groups
C) externality; government or special interest groups
D) externality; private market

Question 72

If air pollution comes from multiple sources and causes many people to suffer, then an efficient agreement among the parties is difficult to achieve because

A) production costs would be high.
B) pollution costs are high.
C) transaction costs are high.
D) social costs are high.

Question 73

Pollution can be reduced with lower

A) output.
B) producer prices.
C) marginal costs.
D) consumer prices.

Question 74

Which of these would contribute MOST to the destruction of the Amazon rain forest?

A) farm subsidies in the United States
B) demand for exotic wood products
C) low labor costs in tropical locations
D) low demand for complementary products

Question 75

Mike constructed a beautiful backyard landscape. He also built a tall wooden fence around his yard. With the fence in place, the good that the landscape brings to the neighborhood becomes a

A) private good because Mike can exclude people from enjoying the landscape.
B) public good because there is still nonrivalry in seeing the landscape.
C) private good because Mike pays for the landscaping out of his own pocket.
D) public good because the landscape is part of nature.

Question 76

Amtrak exhibits _____, and a can of Budweiser is a _____ product.

A) excludability; rival
B) nonexcludability; rival
C) excludability; nonrival
D) nonexcludability; nonrival

Question 77

Public goods often face the

A) free rider problem.
B) principle of rival consumption.
C) law of overproduction.
D) law of increasing marginal utility.

Question 78

The free rider problem is that

A) people tend to overuse public transportation if it is offered free of charge.
B) if people cannot be prevented from consuming a certain good, they have little incentive to pay for it.
C) there is a tendency for people to consume too much of a good if they are charged a fixed price.
D) consumers will consume free items before consuming items that have a price.

Question 79

_____ would be MOST likely to have a free rider problem.

A) Satellite TV
B) Public TV
C) A professional sporting event
D) A rock concert

Question 80

To derive the market demand for public goods, individual demand must be

A) added horizontally.
B) added vertically.
C) subtracted from individual supply.
D) estimated by forecasters.