Deck 10: Externalities.

Question 1

A cost imposed on someone who is neither the consumer nor the producer is called a

A) corrective tax.
B) command and control policy.
C) positive externality.
D) negative externality.

Answer 1

D

Question 2

Since restored historic buildings convey a positive externality,local governments may choose to

A) regulate the demolition of them.
B) provide tax breaks to owners who restore them.
C) increase property taxes in historic areas.
D) Both a and b are correct.

Answer 2

D

Question 3

In the absence of externalities,the "invisible hand" leads a market to maximize

A) producer profit from that market.
B) total benefit to society from that market.
C) both equality and efficiency in that market.
D) output of goods or services in that market.

Answer 3

B

Question 4

An externality is

A) the costs that parties incur in the process of agreeing and following through on a bargain.
B) the uncompensated impact of one person's actions on the well-being of a bystander.
C) the proposition that private parties can bargain without cost over the allocation of resources.
D) a market equilibrium tax.

Question 5

When externalities are present in a market,the well-being of market participants

A) and market bystanders are both directly affected.
B) and market bystanders are both indirectly affected.
C) is directly affected, and market bystanders are indirectly affected.
D) is indirectly affected, and market bystanders are directly affected.

Question 6

When externalities exist,buyers and sellers

A) neglect the external effects of their actions, but the market equilibrium is still efficient.
B) do not neglect the external effects of their actions, and the market equilibrium is efficient.
C) neglect the external effects of their actions, and the market equilibrium is not efficient.
D) do not neglect the external effects of their actions, and the market equilibrium is not efficient.

Question 7

The term market failure refers to

A) a market that fails to allocate resources efficiently.
B) an unsuccessful advertising campaign which reduces demand.
C) ruthless competition among firms.
D) a firm that is forced out of business because of losses.s

Question 8

Market failure can be caused by

A) too much competition.
B) externalities.
C) low consumer demand.
D) scarcity.

Question 9

Dioxin emission that results from the production of paper is a good example of a negative externality because

A) self-interested paper firms are generally unaware of environmental regulations.
B) there are fines for producing too much dioxin.
C) self-interested paper producers will not consider the full cost of the dioxin pollution they create.
D) toxic emissions are the best example of an externality.

Question 10

An externality exists whenever

A) the economy cannot benefit from government intervention.
B) markets are not able to reach equilibrium.
C) a firm sells its product in a foreign market.
D) Bobbi engages in an activity that influences the well-being of Rosa and yet Bobbi neither pays nor receives payment for that influence.

Question 11

The impact of one person's actions on the well-being of a bystander is called

A) an economic dilemma.
B) deadweight loss.
C) a multi-party problem.
D) an externality.

Question 12

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

A) A well-maintained yard conveys a positive externality because it increases the home's market value.
B) A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner.
C) A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
D) A well-maintained yard cannot provide any type of externality.

Question 13

All externalities

A) cause markets to fail to allocate resources efficiently.
B) cause equilibrium prices to be too high.
C) benefit producers at the expense of consumers.
D) cause equilibrium prices to be too low.

Question 14

If an aluminum manufacturer does not bear the entire cost of the smoke it emits,it will

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

Question 15

Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking.Local governments address this problem by

A) making it illegal to "disturb the peace."
B) having a well-funded animal control department.
C) subsidizing local animal shelters.
D) encouraging people to adopt cats.

Question 16

An externality is the impact of

A) society's decisions on the well-being of society.
B) a person's actions on that person's well-being.
C) one person's actions on the well-being of a bystander.
D) society's decisions on the poorest person in the society.

Question 17

An externality

A) results in an equilibrium that does not maximize the total benefits to society.
B) causes demand to exceed supply.
C) strengthens the role of the "invisible hand" in the marketplace.
D) affects buyers but not sellers.

Question 18

An externality arises when a person engages in an activity that influences the well-being of

A) buyers in the market for that activity and yet neither pays nor receives any compensation for that effect.
B) sellers in the market for that activity and yet neither pays nor receives any compensation for that effect.
C) bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect.
D) Both (a) and (b) are correct.

Question 19

An externality is an example of

A) a corrective tax.
B) a tradable pollution permit.
C) a market failure.
D) Both a and b are correct.

Question 20

In a market economy,government intervention

A) will always improve market outcomes.
B) reduces efficiency in the presence of externalities.
C) may improve market outcomes in the presence of externalities.
D) is necessary to control individual greed.

Question 21

Which of the following is not correct?

A) Markets allocate scarce resources with the forces of supply and demand.
B) The equilibrium of supply and demand is typically an efficient allocation of resources.
C) Governments can sometimes improve market outcomes.
D) Externalities cannot be positive.

Question 22

Since air pollution creates a negative externality,

A) social welfare will be enhanced when some, but not all air pollution is eliminated.
B) social welfare is optimal when all air pollution is eliminated.
C) governments should encourage private firms to consider only private costs.
D) the free market result maximizes social welfare.

Question 23

Which of the following statements is not correct?

A) Government policies may improve the market's allocation of resources when negative externalities are present.
B) Government policies may improve the market's allocation of resources when positive externalities are present.
C) A positive externality is an example of a market failure.
D) Without government intervention, the market will tend to undersupply products that produce negative externalities.

Question 24

Private markets fail to account for externalities because

A) externalities don't occur in private markets.
B) sellers include costs associated with externalities in the price of their product.
C) decisionmakers in the market fail to include the costs of their behavior to third parties.
D) the government cannot easily estimate the optimal quantity of pollution.

Question 25

Externalities tend to cause markets to be

A) inefficient.
B) unequal.
C) unnecessary.
D) overwhelmed.

Question 26

Altering incentives so that people take account of the external effects of their actions

A) is called internalizing the externality.
B) can be done by imposing a corrective tax.
C) is the role of government in markets with externalities.
D) all of the above.

Question 27

The difference between social cost and private cost is a measure of the

A) loss in profit to the seller as the result of a negative externality.
B) cost of an externality.
C) cost reduction when the negative externality is eliminated.
D) cost incurred by the government when it intervenes in the market.

Question 28

When an externality is present,the market equilibrium is

A) efficient, and the equilibrium maximizes the total benefit to society as a whole.
B) efficient, but the equilibrium does not maximize the total benefit to society as a whole.
C) inefficient, but the equilibrium maximizes the total benefit to society as a whole.
D) inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Question 29

A positive externality arises when a person engages in an activity that has

A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Question 30

If an externality 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 31

A negative externality arises when a person engages in an activity that has

A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Question 32

At any given quantity,the willingness to pay in the market for gasoline is reflected in the

A) height of the demand curve at that quantity.
B) height of the supply curve at that quantity.
C) value to the producer of the last unit of gasoline sold.
D) total quantity of gasoline exchanged in the market.

Question 33

The supply curve for a product reflects the

A) willingness to pay of the marginal buyer.
B) quantity buyers will ultimately purchase of the product.
C) cost to sellers of producing the product.
D) seller's profit from producing the product.

Question 34

When the government intervenes in markets with externalities,it does so in order to

A) increase production when negative externalities are present.
B) protect the interests of bystanders.
C) make certain all benefits are received by market participants.
D) reduce production when positive externalities are present.

Question 35

Which of the following is an example of an externality?

A) cigarette smoke that permeates an entire restaurant
B) a flu shot that prevents a student from transmitting the virus to her roommate
C) a beautiful flower garden outside of the local post office
D) All of the above are correct.

Question 36

Research into new technologies provides a

A) negative externality, and too few resources are devoted to research as a result.
B) negative externality, and too many resources are devoted to research as a result.
C) positive externality, and too few resources are devoted to research as a result.
D) positive externality, and too many resources are devoted to research as a result.

Question 37

When a market is characterized by an externality,the government

A) can correct the market failure only in the case of positive externalities.
B) can correct the market failure only in the case of negative externalities.
C) can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality.
D) cannot correct for externalities due to the existence of patents.

Question 38

Which of the following represents a way that a government can help the private market to internalize an externality?

A) taxing goods that have negative externalities
B) subsidizing goods that have positive externalities
C) The government cannot improve upon the outcomes of private markets.
D) Both a and b are correct.

Question 39

If a sawmill creates too much noise for local residents,

A) noise restrictions will force residents to move out of the area.
B) a sense of social responsibility will cause owners of the mill to reduce noise levels.
C) the government can raise economic well-being through noise-control regulations.
D) the government should avoid intervening because the market will allocate resources efficiently.

Question 40

All remedies for externalities share the goal of

A) moving the allocation of resources toward the market equilibrium.
B) moving the allocation of resources toward the socially optimal equilibrium.
C) increasing the allocation of resources.
D) decreasing the allocation of resources.

Question 41

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.The socially optimal price and quantity are

A) $1.90 and 38 units, respectively.
B) $1.80 and 35 units, respectively.
C) $1.60 and 42 units, respectively.
D) $1.35 and 58 units, respectively.

Question 42

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.The industry creates

A) positive externalities.
B) negative externalities.
C) no externalities.
D) no equilibrium in the market.

Question 43

Figure 10-4

Refer to Figure 10-4.This market is characterized by

A) government intervention.
B) a positive externality.
C) a negative externality.
D) None of the above is correct.

Question 44

Figure 10-4

Refer to Figure 10-4.If this market is currently producing at Q₄,then total economic well-being would be maximized if output

A) decreased to Q1.
B) decreased to Q2.
C) decreased to Q3.
D) stayed at Q4.

Question 45

Which of the following statements is correct?

A) Government should tax goods with either positive or negative externalities.
B) Government should tax goods with negative externalities and subsidize goods with positive externalities.
C) Government should subsidize goods with either positive or negative externalities.
D) Government should tax goods with positive externalities and subsidize goods with negative externalities.

Question 46

Figure 10-2. The graph depicts the market for plastic.

Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.Without any government regulation,what price will the firm charge per unit of plastic?

A) $3
B) $3.50
C) $5
D) $8

Question 47

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
Refer to Figure 10-3.The difference between the social cost curve and the supply curve reflects the

A) profit margin of each concert.
B) cost of spillover effects from the concert (e.g., noise and traffic).
C) value of concerts to society as a whole.
D) amount by which the city should subsidize the concert organizers.

Question 48

Figure 10-4

Refer to Figure 10-4.If this market is currently producing at Q₂,then total economic well-being would increase if output

A) increased beyond Q4.
B) decreased to Q1.
C) increased to Q3.
D) stayed at Q2.

Question 49

Figure 10-2. The graph depicts the market for plastic.

Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.Without any government regulation,how much plastic will be produced?

A) 200
B) 500
C) 650
D) 900

Question 50

Figure 10-2. The graph depicts the market for plastic.

Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.What is the socially optimal quantity of plastic?

A) 200 units
B) 450 units
C) 500 units
D) 650 units

Question 51

Figure 10-4

Refer to Figure 10-4.Externalities in this market could be internalized if

A) there were a tax on the product.
B) there were a subsidy for the product.
C) production were stopped.
D) the Coase theorem failed.

Question 52

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
Refer to Figure 10-3.What price and quantity combination best represents the optimum price and number of concerts that should be organized?

A) P1, Q1
B) P2, Q0
C) P2, Q1
D) The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected by noise and congestion.

Question 53

Figure 10-4

Refer to Figure 10-4.The socially optimal quantity would be

A) Q1.
B) Q2.
C) Q3.
D) Q4.

Question 54

Figure 10-4

Refer to Figure 10-4.Without government intervention,the equilibrium quantity would be

A) Q1.
B) Q2.
C) Q3.
D) Q4.

Question 55

Figure 10-4

Refer to Figure 10-4.If all external costs were internalized,then the market's equilibrium output would be

A) Q1.
B) Q2.
C) Q3.
D) Q4.

Question 56

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
Refer to Figure 10-3.At the private market outcome,the equilibrium price will be

A) P0.
B) P1.
C) P2.
D) None of the above is correct.

Question 57

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.Without any government intervention,the equilibrium price and quantity are

A) $1.90 and 38 units, respectively.
B) $1.80 and 35 units, respectively.
C) $1.60 and 42 units, respectively.
D) $1.35 and 58 units, respectively.

Question 58

Figure 10-4

Refer to Figure 10-4.This market

A) has no need for government intervention.
B) would benefit from a tax on the product.
C) would benefit from a subsidy for the product.
D) would maximize total well-being at Q3.

Question 59

Figure 10-4

Refer to Figure 10-4.At Q₃

A) the marginal consumer values this product less than the social cost of producing it.
B) every consumer values this product less than the social cost of producing it.
C) the cost to society is equal to the value to society.
D) the marginal consumer values this product more than the private cost.

Question 60

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
Refer to Figure 10-3.The social cost curve is above the supply curve because

A) it takes into account the external costs imposed on society by the concert.
B) it takes into account the effect of local noise restrictions on concerts in parks surrounded by residential neighborhoods.
C) concert tickets are likely to cost more than the concert actually costs the organizers.
D) residents in the surrounding neighborhoods get to listen to the concert for free.

Question 61

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.

Refer to Table 10-1.How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

A) $2
B) $3
C) $9
D) $10

Question 62

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.

Refer to Table 10-1.What is the socially-optimal quantity of output in this market?

A) 1 unit
B) 2 units
C) 3 units
D) 4 units

Question 63

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.

Refer to Table 10-1.Which of the following statements is correct?

A) If the external benefit per unit of output were $0 instead of $2, then the socially efficient quantity of output would be 4 units.
B) A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to the socially optimal level of output.
C) Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed.
D) The market for flu shots is a market to which the concepts in this table apply very well.

Question 64

Suppose that large-scale pork production has the potential to create ground water pollution.Why might this type of pollution be considered an externality?

A) The groundwater pollution reduces the cost of large-scale pork production.
B) The economic impact of a large-scale pork production facility is localized in a small geographic area.
C) The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.
D) Consumers will not reap the benefits of lower production cost from large-scale pork production.

Question 65

A negative externality

A) is a cost to a bystander.
B) is a cost to the buyer.
C) is a cost to the seller.
D) exists with all market transactions.

Question 66

Suppose that a steel factory emits a certain amount of air pollution,which constitutes a negative externality.If the market does not internalize the externality,

A) the supply curve would adequately reflect the marginal social cost of production.
B) consumers will be required to pay a higher price for steel than they would have if the externality were internalized.
C) the market equilibrium quantity will not be the socially optimal quantity.
D) producers will produce less steel than they otherwise would if the externality were internalized.

Question 67

Figure 10-6

Refer to Figure 10-6.Which price represents the equilibrium price of the product in this market?

A) P
B) P'
C) Either P or P'. It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price.
D) Some price between P and P'. The equilibrium price depends on the negotiating skills of the interested parties.

Question 68

Negative externalities lead markets to produce

A) greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.
B) smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels.
C) greater than efficient output levels and positive externalities lead markets to produce efficient output levels.
D) efficient output levels and positive externalities lead markets to produce greater than efficient output levels.

Question 69

Figure 10-5

Refer to Figure 10-5.Which price and quantity combination represents the social optimum?

A) P0 and Q1.
B) P2 and Q1.
C) P1 and Q0.
D) P2 and Q0.

Question 70

When a negative externality exists in a market,the cost to producers

A) is greater than the cost to society.
B) will be the same as the cost to society.
C) will be less than the cost to society.
D) will differ from the cost to society, regardless of whether an externality is present.

Question 71

A negative externality

A) is an adverse impact on a bystander.
B) causes the product in a market to be under-produced.
C) is an adverse impact on market participants.
D) is present in markets where the good or service does not have any impact on bystanders.

Question 72

Figure 10-5

Refer to Figure 10-5.Which of the following statements is correct?

A) The marginal benefit of the positive externality is measured by P3 - P1.
B) The marginal cost of the negative externality is measured by P3 - P2.
C) The marginal cost of the negative externality is measured by P3 - P1.
D) The marginal cost of the negative externality is measured by P3 - P0.

Question 73

Which of the following illustrates the concept of a negative externality?

A) A college professor plays a vigorous game of racquet ball with the racquet he recently purchased.
B) A flood wipes out a farmer's corn crop.
C) A college student plays loud music on his new stereo system at 2:00 a.m.
D) A janitor eats a hamburger during his lunch break.

Question 74

Figure 10-6

Refer to Figure 10-6.Which quantity represents the socially-optimal quantity of output in this market?

A) Q
B) Q'
C) Either Q or Q'. It is necessary to know whether the externality is positive or negative to determine the socially-optimal quantity.
D) Some quantity between Q and Q'. The socially-optimal quantity depends on the negotiating skills of the interested parties.

Question 75

When producers operate in a market characterized by negative externalities,a tax that forces them to internalize the externality will

A) give sellers the incentive to account for the external effects of their actions.
B) increase demand.
C) increase the amount of the commodity exchanged in market equilibrium.
D) restrict the producers' ability to take the costs of the externality into account when deciding how much to supply.

Question 76

Markets are often inefficient when negative externalities are present because

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

Question 77

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.

Refer to Table 10-1.What is the equilibrium quantity of output in the market?

A) 2 units
B) 3 units
C) 4 units
D) 5 units

Question 78

When the social cost curve is above a product's supply curve,

A) the government has intervened in the market.
B) a negative externality exists in the market.
C) a positive externality exists in the market.
D) the distribution of resources is unfair.

Question 79

Negative externalities occur when one person's actions

A) cause another person to lose money in a stock market transaction.
B) cause his or her employer to lose business.
C) reveal his or her preference for foreign-produced goods.
D) adversely affect the well-being of a bystander who is not a party to the action.

Question 80

When negative externalities are present in a market

A) private costs will be greater than social costs.
B) social costs will be greater than private costs.
C) only government regulation will solve the problem.
D) the market will not be able to reach any equilibrium.