Deck 10: Externalities and Public Goods

Question 1

An externality is defined as:

A)the effect of an activity undertaken outside a building rather than inside a building.
B)an effect of market activity that impacts the opposite side of the market from the side whose decision caused the effect.
C)a side-effect of an activity that affects bystanders whose interests are not taken into account.
D)the impact of an activity on buyers and sellers in the market where the activity takes place.

Answer 1

C

Question 2

A side effect of an activity that affects bystanders whose interests are not taken into account is known as:

A)an indirect impact.
B)an outside impact.
C)a comparative effect.
D)an externality.

Answer 2

D

Question 3

During the production of a good, pollution is emitted that affects people who are neither producers nor buyers of the good. The term for the impact of the pollution on these people is:

A)externality.
B)exploitation.
C)intrusion.
D)outside impact.

Answer 3

A

Question 4

Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is:

A)an alternative action.
B)a nonmarket repercussion.
C)exploitative supply.
D)an externality.

Question 5

When an activity has a side effect that harms bystanders, the side effect is referred to as:

A)an unintended harm.
B)an extra-activity effect.
C)a negative externality.
D)benefit negation.

Question 6

A negative externality is:

A)a side effect of an activity when the side effect harms bystanders.
B)a reduction in demand that occurs when agents outside a market influence market participants.
C)a change from a positive relationship between two variables to an inverse relationship.
D)an unintended consequence of an action that harms the decision maker.

Question 7

When a market transaction has a beneficial effect on bystanders who were not involved in the transaction, this effect is called:

A)an inverse externality.
B)a positive consequence.
C)nonmarket gains.
D)a positive externality.

Question 8

Which of the following illustrates a positive externality?

A)Martin's company experiences an increase in profits due to his cost-cutting initiatives.
B)Artem loses sleep when an airport is built near his home, and planes fly overhead.
C)The value of Maria's house rises when the city builds a park nearby, enhancing her view.
D)Ella can buy a shirt at half price because someone else returned it.

Question 9

Which of the following is an example of a negative externality?

A)When Fazio parks his big truck at the grocery store, people in the cars on each side of his parking space have a hard time opening their car doors.
B)Bae's company has a decrease in profits when the demand for its product falls.
C)Raul loses weight because he wants to feel better, but the weight loss means that he needs new clothes.
D)Rita gains weight while she is on vacation because she eats more than normal.

Question 10

Why are externalities considered a cause of market failure?

A)Because decision makers become overly concerned about the impact of their actions on bystanders.
B)Because they lead to suboptimal outcomes.
C)Because they make markets so competitive that profits disappear.
D)Because they always cause a net loss in welfare.

Question 11

Externalities tend to occur because decision makers consider _____ and do NOT consider _____.

A)their own needs as most important; the fact that others also have needs
B)their own income as limitless; their income as limited
C)the welfare of others; their own welfare
D)their own costs and benefits; the effects of their actions on others

Question 12

An externality is NOT:

A)an unintended impact on bystanders.
B)positive or negative.
C)a price change.
D)a side effect.

Question 13

A price change will NOT cause:

A)a change in quantity demanded.
B)a change in the purchasing power of money.
C)the quantity supplied to adjust.
D)an externality.

Question 14

Why is a price change NOT an externality?

A)A price change does not change total costs or benefits.
B)A price change affects bystanders, not market participants.
C)A change in price changes benefits rather than redistributes them.
D)A price change redistributes costs but not benefits.

Question 15

Which of the following statements supports the idea that price changes are not externalities?

A)A price change redistributes costs and benefits but does not generate new costs or benefits.
B)Prices are a side effect of decisions making.
C)A drop in price is a clear signal that the market was negatively impacting buyers.
D)A change in price adversely affects all suppliers in the market.

Question 16

Which of the following describes a situation with a negative externality?

A)When 10% more people get a flu shot, the incidence of the flu drops by 20%.
B)When the price of gasoline rises by 10%, the quantity sold drops by 8%.
C)The buyer of a skateboard falls when using it and is injured.
D)After a commercial poultry farm opens, neighbors on all sides complain of its smell.

Question 17

Which of the following is a positive externality?

A)After measles vaccinations increase by 20%, the number of cases of measles falls by 35%.
B)After a large stadium is built in a neighborhood, homeowner property values in the neighborhood fall because of noise and traffic.
C)After the price of dental care decreases, more people can afford regular dental check-ups.
D)Researchers develop a new drug that effectively treats a devastating disease that previously had no cure.

Question 18

What is the difference between a positive externality and a negative externality?

A)Whether bystanders have a direct or inverse relationship to the decision maker.
B)Whether the price rises or falls.
C)Whether the perspective is the buyer's or the seller's.
D)Whether the welfare of bystanders rises or falls.

Question 19

Your personal best interest is based on the _____, and society's best interest is based on _____.

A)costs and benefits you face personally; the costs and benefits of everyone else except you
B)interest rate on your savings; the average savings rate across all accounts
C)costs and benefits you face personally; the costs and benefits experienced by bystanders
D)costs and benefits you face personally; the costs and benefits of everyone

Question 20

When your actions affect bystanders, then your _____ is in conflict with _____.

A)private interest; society's interest
B)external cost; society's marginal cost
C)externality; society's externality
D)interest in society; society's interest in that person

Question 21

Marginal private cost is the:

A)the marginal cost that is kept secret and not reported to the public.
B)the marginal cost faced in the nongovernmental sector.
C)the cost paid by the seller in producing one additional unit of output.
D)the additional cost faced by private bystanders when a seller produces and sells an extra unit of output.

Question 22

The cost paid by the seller in producing one additional unit of output is known as the _____ cost.

A)marginal external
B)marginal private
C)external
D)marginal social

Question 23

A cost imposed on bystanders is _____ cost.

A)a private
B)a marginal private
C)a marginal public
D)an external

Question 24

An external cost is:

A)a cost imposed on bystanders.
B)a cost paid for inputs by a producer to an entity outside the company.
C)an adjustment in costs when the output is sold outside the normal circle of customers.
D)the total of all costs minus those borne by bystanders.

Question 25

The extra external cost imposed on bystanders from one extra unit is _____ cost.

A)a marginal public
B)a marginal private
C)a marginal external
D)an extra public

Question 26

The marginal external cost is the:

A)extra cost borne by the producer of a good when the good is regulated by the public sector.
B)cost paid by the seller in producing one additional unit of output.
C)external cost imposed on bystanders by one additional unit of output.
D)additional margins of loss borne by sellers when sales are less than expected.

Question 27

All marginal costs, no matter who pays them, are marginal _____ costs.

A)social
B)external
C)private
D)public

Question 28

Marginal private cost plus marginal external cost equals _____ cost.

A)marginal public
B)marginal social
C)summative marginal
D)community marginal

Question 29

Marginal social cost equals marginal _____ cost plus marginal _____ cost.

A)consumer; production
B)government; private
C)private; external
D)public; internal

Question 30

The marginal social cost is:

A)the extra cost imposed on bystanders when an extra unit is produced and consumed.
B)the extra cost faced by a producer when an extra unit is produced and sold to a member of society.
C)the difference between the marginal external cost and the marginal private cost.
D)the sum of marginal private costs and marginal external costs.

Question 31

Mario is willing to sell an extra unit of his product as long as price is:

A)at least as high as the marginal private cost.
B)at least as high as the marginal social cost.
C)higher than the average cost.
D)not below the external cost.

Question 32

Sellers must cover _____ costs, but a market does not require them to cover _____ costs.

A)variable; fixed
B)average; fixed
C)marginal private; marginal external
D)marginal total; marginal private

Question 33

Costs that arise from a market transaction but that are borne by people not involved in the transaction are called _____ costs.

A)outside
B)public
C)reversal
D)external

Question 34

Margarite opened a successful restaurant two years ago on a block of connecting row houses. All of the other businesses on the block are well-established accounting and law offices. Those businesses have complained that the garbage bins in back of the restaurant are attracting mice, rats, and stray cats and dogs and that they are spending more and more on exterminators. In economic terms, what is happening?

A)The other businesses on the block are dealing with a marginal social cost because Margarite considers only her marginal external cost as she makes decisions.
B)The other businesses on the block are dealing with an externality because Margarite considers only her marginal private costs as she makes decisions.
C)Margarite is creating an externality that is imposing marginal private costs on the other businesses on her block.
D)Margarite is creating marginal private costs that are adding internal costs to the other businesses on the block.

Question 35

(Figure: MSC and MPC Curves) Use the graph to answer the question.
The graph shows marginal social cost and marginal private cost curves. What is the marginal external cost?

A)$2
B)$4
C)$6
D)$12

Question 36

(Figure: MSC and Supply Curves) Use the graph to answer the question.
The graph shows the marginal social cost and supply curves in a market. What is the marginal external cost imposed on society?

A)$2
B)$4
C)$8
D)$12

Question 37

The supply curve of a firm is also its _____ cost curve.

A)average
B)social
C)marginal private
D)marginal external

Question 38

(Figure: MSC and Supply Curves) Use the graph to answer the question.
The graph shows the marginal social cost curve and supply curve for Jed's company. What is Jed's marginal private cost when he produces eight units?

A)$2
B)$8
C)$6
D)$4

Question 39

From a community perspective, the marginal cost that matters is the marginal _____ cost.

A)private
B)external
C)public
D)social

Question 40

(Figure: MSC and Supply Curves) Use the graph answer the question.
The graph shows the marginal social cost and supply curves in a market. When eight units are produced, the relevant marginal cost facing the community is:

A)$2.
B)$4.
C)$12.
D)$8.

Question 41

(Figure: MSC and Supply Curves) Use the graph to answer the question.
The graph shows the marginal social cost and supply curves in the market for shampoo. When four units are produced, the marginal external cost is:

A)$2.
B)$4.
C)$6.
D)$8.

Question 42

(Figure: MSC and Supply Curves) Use the graph to answer the question.
The graph shows the marginal social cost curve and supply curve for Lin's business. When Lin produces eight units, what is the relevant marginal cost facing the community?

A)$4
B)$8
C)$12
D)$20

Question 43

(Figure: MSC and Supply Curves) Use the graph to answer the question.
The graph shows the marginal social cost curve and supply curve for Sasha's candy shop. When four units are sold, what is the relevant marginal cost for the community where Sasha produces and sells her candy?

A)$4
B)$8
C)$12
D)$20

Question 44

The benefit enjoyed by a buyer as a result of purchasing one additional unit of a good is the marginal _____ benefit.

A)external
B)social
C)personal
D)private

Question 45

The marginal private benefit is the:

A)extra benefit enjoyed by the buyer of one extra unit of a good or service.
B)addition to the satisfaction a buyer receives from the total quantity of a product consumed.
C)extra benefit that goes to bystanders for each additional unit of a good consumed by others.
D)total extra benefit society gains from the consumption of an extra unit of a good.

Question 46

An external benefit is:

A)a benefit enjoyed by the buyer of a good.
B)the total benefit to society of a good being consumed.
C)the benefit that the buyer receives from consuming a good outside of a market.
D)a benefit accruing to bystanders.

Question 47

A marginal external benefit is the:

A)extra benefit enjoyed by society as the result of consuming one extra unit.
B)additional gain to sellers when they profit from an extra unit of output.
C)extra benefit accruing to bystanders as a result of one extra unit of output.
D)additional gain that goes to buyers when they consume one additional unit of a good.

Question 48

The extra external benefit accruing to bystanders from one extra unit is the marginal _____ benefit.

A)public
B)private
C)social
D)external

Question 49

Marginal social benefit is the term for:

A)the extra external benefit accruing to bystanders from one extra unit.
B)all marginal benefits, no matter who gets them.
C)all marginal benefits that go to the public sector.
D)the extra external benefit gained by consumers of an extra unit.

Question 50

All marginal benefits, no matter who gets them, are referred to as the marginal _____ benefit.

A)external
B)public
C)private
D)social

Question 51

The marginal private benefit plus the marginal external benefit equals the ____ benefit.

A)total public
B)total externality
C)marginal social
D)marginal public

Question 52

(Figure: MSB and Demand Curves) Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the shampoo market. What is the marginal external benefit?

A)$2
B)$4
C)$6
D)$8

Question 53

(Figure: MSB and Demand Curves) Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the market for pairs of socks. What is the marginal social benefit when four pairs are bought?

A)$2
B)$4
C)$6
D)$8

Question 54

(Figure: MSB and Demand Curves) Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the hair brush market. What is the marginal private benefit when four brushes are bought?

A)$2
B)$4
C)$6
D)$8

Question 55

(Figure: MSB and Demand Curves 2) Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the dog food market. What is the marginal private benefit when four bags of dog food are bought?

A)$4
B)$8
C)$12
D)$20

Question 56

(Figure: MSB and Demand Curves 2) Use the graph to answer the question.
The graph shows the marginal social benefit and demand curves in the hamburger market. What is the marginal external benefit when eight units are bought?

A)$2
B)$4
C)$6
D)$8

Question 57

The marginal private benefit curve is also the:

A)supply curve.
B)marginal external benefit curve minus the marginal social benefit curve.
C)demand curve.
D)marginal personal benefit curve.

Question 58

How is the marginal social benefit curve positioned on a graph when there are positive externalities?

A)It is above the demand curve and has a negative slope.
B)It is below the demand curve and has a negative slope.
C)It intersects the demand curve and has a positive slope.
D)It intersects the demand curve and has a negative slope.

Question 59

The outcome that is most efficient for society as a whole - including the interests of buyers, sellers, and bystanders - is the _____ outcome.

A)externally optimal
B)social benefit maximizing
C)public optimal
D)socially optimal

Question 60

The socially optimal outcome is the outcome that:

A)is most efficient for society as a whole, including for buyers, sellers, and bystanders.
B)benefits the largest number of people.
C)has the most externalities.
D)has the most benefits for society as a whole, regardless of the costs involved.

Question 61

The Rational Rule for Society is that society should produce another unit of a good if:

A)the total social benefit exceeds the total social cost.
B)the marginal social benefit exceeds the marginal social cost.
C)the marginal private benefit exceeds the marginal private cost.
D)gains to the producer exceed losses to the producer.

Question 62

The idea that society should produce another unit of a product if the marginal social benefit exceeds the marginal social cost is known as the:

A)Optimizing Social Rule.
B)Public Welfare Guide.
C)Marginal Gain Rule.
D)Rational Rule for Society.

Question 63

The Rational Rule for Society says that more of a good should be produced:

A)if the marginal social cost is greater than the marginal social benefit.
B)as long as the total social benefit exceeds the total social cost to everyone.
C)if the rational external benefit exceeds the rational external cost.
D)as long as its marginal social benefit is at least as large as the marginal social cost.

Question 64

The socially optimal outcome occurs where the _____ benefit equals the _____ cost.

A)marginal external; marginal external
B)total external; total external
C)marginal social; marginal social
D)total social; total social

Question 65

When externalities are present, the socially optimal outcome occurs where the _____ benefit equals the _____ cost.

A)marginal external; marginal external
B)marginal social; marginal social
C)total social; total social
D)total external; total external

Question 66

Which of the following is NOT part of the three-step recipe used to analyze externalities? (Note: the steps are not necessarily in order.)

A)Predict the equilibrium.
B)Assess society's preferences.
C)Find the socially optimal outcome.
D)Assess what externalities are involved.

Question 67

Which of the following is NOT part of the three-step recipe used to analyze externalities? (Note: the steps are not necessarily in order.)

A)Assess what externalities are involved.
B)Find the socially optimal outcome.
C)Identify costs and benefits in the public sector.
D)Predict the equilibrium.

Question 68

What step is omitted from the three-step recipe used to analyze externalities in Table 1?
$$\begin{array} { | l | } \hline \text { Table 1: Steps in the Three-Step Recipe to Analyze Externalities } \\\hline \text { Assess the externalities. } \\\hline \text { Find the socially optimal outcome. } \\\hline\end{array}$$

A)Predict the degree of market power.
B)Determine the level of exploitation.
C)Predict the equilibrium outcome.
D)Determine the role of the public sector.

Question 69

Which step is omitted from the three-step recipe used to analyze externalities in Table 2? (Note: The steps are not necessarily in order.)
$$\begin{array} { | l | } \hline \text { Table 2: Steps in the Three-Step Recipe to Analyze Externalities } \\\hline \text { Assess the externalities. } \\\hline \text { Predict the equilibrium outcome. } \\\hline\end{array}$$

A)Predict the degree of market power.
B)Find the socially optimal outcome.
C)Determine the level of exploitation.
D)Determine the current role of the public sector.

Question 70

What step is omitted from the three-step recipe to analyze externalities in Table 3? (Note: Steps are not necessarily in order.)
$$\begin{array} { | l | } \hline \text { Table 3: Steps in the Three-Step Recipe to Analyze Externalities } \\\hline \text { Predict the equilibrium outcome. } \\\hline \text { Find the socially optimal outcome. } \\\hline\end{array}$$

A)Predict the degree of market power.
B)Determine the level of exploitation.
C)Determine the role of the public sector.
D)Assess what externalities are involved.

Question 71

(Figure: Market) Use the graph to answer the question.
The graph shows the marginal social cost, demand, and supply curves in the jigsaw puzzle market. If market forces prevail, this market will produce and sell _____ units of output at a price of _____.

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

Question 72

(Figure: Market) Use the graph to answer the question.
The graph shows the marginal social cost, demand, and supply curves in the jigsaw puzzle market. What are the socially optimal quantity and price in this market?

A)6; $6
B)8; $4
C)6; $10
D)4; $8

Question 73

(Figure: Market 2) Use the graph to answer the question.
The graph shows the marginal social cost, demand, and supply curves in the shower gel market. In this market, the socially optimal output is _____, and the market-determined output is _____.

A)six; four
B)four; six
C)six; eight
D)ten; six

Question 74

(Figure: Market 3) Use the graph to answer the question.
The graph shows the marginal social cost, demand, and supply curves in the toothpaste market. If market forces prevail, this market will produce and sell _____ tubes of toothpaste at a price of _____.

A)eight; $5
B)eight; $4
C)12; $3
D)12; $4

Question 75

(Figure: Market 3) Use the graph to answer the question.
The graph shows the marginal social cost, demand, and supply curves in the toothpaste market. What is the socially optimal quantity and price in this market?

A)eight; $4
B)12; $3
C)four; $6
D)three; $12

Question 76

(Figure: Market 3) Use the graph to answer the question.
The graph shpws the marginal social cost, demand, and supply curves in the salad dressing market. In this market, the socially optimal output is _____, and the market-determined output is _____.

A)12; three
B)four; eight
C)eight; two
D)eight; 12

Question 77

By contrast with a market that produces the socially optimal output, a market with negative externalities will:

A)produce no output.
B)produce the correct output.
C)overproduce.
D)underproduce.

Question 78

A market with negative externalities will tend to _____ compared to a market producing the socially optimal output.

A)underproduce and sell at a higher price
B)overproduce and sell at a higher price
C)underproduce and sell at a lower price
D)overproduce and sell at a lower price

Question 79

The socially optimal amount of an externality is:

A)zero.
B)one-half of the amount of the externality that the market would produce.
C)based on cost-benefit analysis.
D)the amount that market forces would produce.

Question 80

When the lawn care services market is characterized by positive externalities:

A)too many lawn care services are produced.
B)too few lawn care services are produced.
C)output is too high, and price is too low.
D)output is too low, and price is too high.