Deck 10: Externalities

Question 1

If an externality is present in a market,what may enhance economic efficiency

A)increased competition
B)if private individuals do not attempt bargaining on their own to resolve the problems caused by externalities
C)better informed market participants
D)government intervention

Answer 1

government intervention

Question 2

What can cause market failure?

A)foreign competition
B)externalities
C)excess supply or demand
D)scarcity

Answer 2

externalities

Question 3

If there are no externalities,what does the invisible hand lead a market to maximize

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

Answer 3

total benefit to society from that market

Question 4

In a market economy,what guides economic activity

A)the government
B)businesses
C)central planners
D)prices

Question 5

Because decisions in a market economy are guided by individual self-interest,what exists in an economy

A)a strong need for government intervention in the market
B)less efficiency in market economies than in command economies
C)the ability to achieve desirable economic well-being for society as a whole
D)more need for a strong legal system to control individual greed

Question 6

When externalities exist,what do buyers and sellers do and how do their actions affect market equilibrium

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

Question 7

What is an externality

A)the impact of society's decisions on the well-being of society
B)the impact of a person's actions on that person's well-being
C)the impact of a person's actions on the well-being of a bystander
D)the impact of society's decisions on the well-being of an individual in that society

Question 8

What do externalities cause markets to do

A)fail to allocate resources efficiently
B)cause price to be different than the equilibrium price
C)benefit producers at the expense of consumers
D)cause markets to operate more equitably

Question 9

Why is dioxin emission that results from the production of paper a good example of a negative externality

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 only form of an externality.

Question 10

Which of the following would NOT likely be considered a negative externality

A)Smelter Ltd.creates steel and pollution in Anytown, Canada.
B)Your friend buys a new puppy that barks every night.
C)You have an adverse reaction to a medication your doctor prescribed for you.
D)Your neighbour purchases the most powerful speakers money can buy for his patio.

Question 11

When does an externality exist

A)when the government imposes a tariff and forces the market to adjust to a new equilibrium
B)when markets are not able to reach equilibrium
C)when a firm sells its product in a foreign market at the world price
D)when a person engages in an activity that influences the well-being of a bystander and yet neither one pays nor receives payment for that effect

Question 12

What is one advantage market economies have over other types of economies

A)Market economies provide an equal distribution of goods and services to consumers.
B)Market economies establish government economic control.
C)Market economies solve the problem of scarcity.
D)Market economies are more efficient.

Question 13

When negative externalities are present in a market,what will result

A)Producers will be affected, but not consumers.
B)Overproduction will occur.
C)Demand will be too high.
D)The market will still maximize total benefits.

Question 14

Which example illustrates the concept of a negative externality?

A) a college professor loses a vigorous game of racquetball using the racquet he recently purchased
B) a flood wipes out a farmer’s entire corn crop
C) a college student plays his new sound system in the residence at 2:00 a.m
D) a janitor eats fast-food during his lunch break

Question 15

In the absence of externalities,what can be said about the invisible hand of the marketplace

A)It leads to a market outcome that maximizes total benefit to society.
B)It is unable to resolve inherent disagreements between parties in the market system.
C)It induces people to act in a manner inconsistent with self-interest.
D)It increases the transaction costs so reaching an efficient outcome is especially difficult.

Question 16

When externalities are present in a market,what is the result

A)The established equilibrium maximizes the total benefit to society as a whole.
B)Market participants lose some market benefits to bystanders.
C)Both equity and efficiency are maximized.
D)The market fails to allocate resources efficiently.

Question 17

What does the term market failure refer to?

A)a situation in which the market, on its own, fails to allocate resources efficiently
B)an unsuccessful advertising campaign that reduces demand
C)a situation in which competition among firms is insufficient
D)a firm that is forced out of business because of losses

Question 18

When do negative externalities occur

A)when one person's actions cause another person to lose money in a stock market transaction
B)when one person's actions cause his or her employer to lose business
C)when one person's actions reveal his or her preference for foreign-produced goods
D)when one person's actions adversely affect the well-being of a bystander

Question 19

What is the effect of a negative externality

A)It has an adverse impact on a bystander.
B)It causes the product in a market to be underproduced.
C)It has an adverse impact on market participants.
D)When it is present in a market, the good or service is undesirable for society.

Question 20

Why do private markets fail to account for externalities

A)The effect of externalities are difficult to measure in private markets.
B)Sellers include costs associated with externalities in the price of their products.
C)Decision makers in the market fail to take into account the external effects of their behaviour.
D)The government can easily correct any adverse effect on the market that externalities may cause.

Question 21

What does the height of the supply curve show

A)the maximum cost a seller will pay to produce a product
B)the price a buyer can expect to pay for a certain quantity of a product
C)the maximum amount buyers are willing to pay for a product
D)the cost to the producer of the last unit sold

Question 22

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 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 costs from a large-scale facility.

Question 23

Which statement about a well-maintained yard best conveys the general nature of externalities

A)A maintained yard conveys a positive externality because it increases the home's market value.
B)A maintained yard conveys a negative externality because it increases the property tax liability of the owner.
C)A maintained yard conveys a negative externality because it makes other property owners in the neighbourhood feel like their homes are less valuable.
D)A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighbourhood.

Question 24

Dog owners do not bear the full cost of the noise their barking dogs create and,therefore,tend to take too few precautions to prevent their dogs from barking.How do local governments address this problem

A)by making it illegal to "disturb the peace"
B)by having a well-funded animal control department
C)by subsidizing local animal shelters
D)by asking owners to bargain with their neighbours to resolve the externality

Question 25

What does the height of the demand curve show

A)how much each seller in the market is ultimately willing to supply
B)the willingness of the marginal buyer to pay
C)the maximum price all buyers will pay for a product
D)the lowest price buyers will pay for a product

Question 26

What does the demand curve for a product reflect

A)the value of the product to consumers
B)the cost of the product's externality on society
C)the quantity consumers are able to purchase
D)the price the product will sell for in the market

Question 27

Hikers frequently claim that livestock grazing in Wilderness Recreation Areas reduces the satisfaction of their recreational hiking experience.What is the economic explanation for this conflict

A)Hikers do not value livestock as much as ranchers.
B)Grazing cows create negative externalities that make hiking less pleasant.
C)Ranchers are insensitive to the recreational use of public lands.
D)Grazing cows is a profit-generating activity, but hiking is not.

Question 28

What does research into new technologies lead to

A)It provides positive externalities because it creates knowledge others can use.
B)It results in negative externalities because government funding for research leads to cuts in government spending in other areas.
C)It results in negative externalities because too many resources are used for the small benefits received by society.
D)It provides positive externalities because it increases profits for the company that receives government funding for research.

Question 29

When externalities are present in a market,how is the well-being of market participants and market bystanders affected by government policies

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

Question 30

If education produces positive externalities,what would we expect

A)government to tax education
B)government to subsidize education
C)people to realize the benefits and therefore cause demand for education to increase
D)universities to relax admission requirements

Question 31

When the government intervenes in markets with externalities,why does it do so

A)to increase production when negative externalities are present
B)to protect the interests of bystanders
C)to make certain all benefits are received by market participants
D)to better coordinate the actions of buyers and sellers

Question 32

How do local governments address the problem of barking dogs

A)by imposing leash laws
B)by requiring owners to purchase "bark collars" for their pets
C)by imposing disturbing the peace laws
D)by funding animal control departments

Question 33

Which impact does positive externality have

A)It causes the product to be overproduced.
B)It provides an additional benefit to market participants.
C)It benefits consumers because it results in a lower equilibrium price.
D)It is a benefit to a market bystander.

Question 34

Why are too few resources generally devoted to research in new technologies in developing countries

A)New technologies cannot be patented.
B)Government research grants are not easily obtainable.
C)Negative externalities are created from some research.
D)Inventors cannot capture the full benefits of their inventions.

Question 35

What is an example of a positive externality

A)A college student buys a new car when she graduates.
B)The mayor of a small town plants flowers in the public park.
C)Local high school teachers have pizza delivered every Friday for lunch.
D)An avid fisherman buys new fishing gear for his weekend fishing trip.

Question 36

If a sawmill creates too much noise for local residents,what will result

A)It will be up to the residents to either adapt or move.
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 can raise economic well-being by installing sound barriers around homes closest to the sawmill.

Question 37

How have policymakers chosen to solve the problem of too much car exhaust pollution

A)by setting emission standards and limiting driving by commuters
B)by setting emission standards and taxing gasoline
C)by taxing car producers and limiting driving by commuters
D)by taxing gasoline and taxing car producers

Question 38

If a paper manufacturer does NOT bear the entire cost of the dioxin it emits,what will it do

A)It will emit lower levels of dioxin than is socially efficient.
B)It will emit higher levels of dioxin than is socially efficient.
C)It will emit an acceptable level of dioxin.
D)It will not emit any dioxin in an attempt to avoid paying a fine.

Question 39

When a beekeeper places his hives of bees in an orchard so that the bees can gather nectar to produce honey,the bees pollinate the orchard,which increases the yield of fruit.What is the economic explanation of this activity

A)It creates a positive externality because orchard owners can charge the beekeeper a fee for the use of his orchard.
B)It creates a negative externality because the bees are a hazard to the orchard owner.
C)It creates a positive externality because both parties can benefit from this activity.
D)It creates a negative externality because one party may benefit from it but the other party may suffer a loss.

Question 40

What does the supply curve for a product reflect

A)the cost to suppliers of an externality
B)the quantity buyers will ultimately purchase of the product
C)the cost to sellers of producing the product
D)the seller's profit from producing the product

Question 41

A negative externality causes a private market to produce which of the following quantities

A)less than is socially desirable
B)more than is socially desirable
C)more than market equilibrium
D)less than market equilibrium

Question 42

Figure 10-1
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.

Refer to Figure 10-1.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)P₁, Q₀
D)P₁, Q₀.

Question 43

Air pollution creates a negative externality.Which of the following results

A)Welfare will be enhanced when some air pollution is eliminated.
B)Social welfare is optimal when all air pollution is eliminated.
C)Governments can regulate the market to eliminate all pollution.
D)The free market result maximizes social welfare.

Question 44

Figure 10-1
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.

Refer to Figure 10-1.Why is the social cost curve above the supply curve

A)It takes into account the external costs imposed on society by the concert organizers.
B)Municipalities always impose noise restrictions on concerts in parks surrounded by residential neighbourhoods.
C)Concert tickets are likely to be resold at a higher price, making it more costly to attend the concert.
D)Residents in the surrounding neighbourhoods get to listen to the concert for free.

Question 45

Figure 10-2

Refer to Figure 10-2.At Q₃,how does a consumer value the cost of the product

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 46

Figure 10-2

Refer to Figure 10-2.If this market currently produces Q₃,how would total economic well-being be increased

A)if production decreased to 0
B)if production decreased to Q₁
C)if production decreased to Q₂
D)if production increased to Q₄

Question 47

Figure 10-1
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.

Refer to Figure 10-1.What is the total surplus derived from the most efficient outcome

A)a + b
B)a + b + c + d
C)a + b + c + d + e + f
D)a + b + c + e + g

Question 48

When a negative externality exists in a market,how does the cost to producers compare with the cost to society

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

Question 49

Figure 10-2

Refer to Figure 10-2.What is this market experiencing

A)government intervention
B)a positive externality
C)a negative externality
D)a technology spillover

Question 50

What will arise 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)Government will regulate the externalities in the market..
D)The market will not be able to reach any equilibrium situation.

Question 51

Figure 10-1
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.

Refer to Figure 10-1.What does the difference between the social cost curve and the supply curve reflect

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

Question 52

Figure 10-2

Refer to Figure 10-2.If this market is currently producing at Q₁,how could total economic well-being be increased

A)if output stayed at Q₁
B)if output increased to Q₂
C)if output increased to Q₃
D)if output increased to Q₄

Question 53

Figure 10-2

Refer to Figure 10-2.What is the market equilibrium quantity

A)Q₁
B)Q₂
C)Q₃
D)Q₄

Question 54

Figure 10-1
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.

Refer to Figure 10-1.Assume that the concert organizers must purchase a concert permit (the cost for the permit is included in private cost) before organizing the concert.What criterion should the city use in determining whether or not to issue a permit

A)The majority vote of the residents in surrounding neighbourhoods should determine whether a permit is issued.
B)As long as the value to consumers of concerts exceeds the cost of concerts (including the external costs), the permit should be issued.
C)As long as concert organizers are willing to return the park to its original condition after the concert, the permit should be issued.
D)The permit should not be issued as long as there are identifiable external costs imposed on residents in surrounding neighbourhoods.

Question 55

Figure 10-1
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.

Refer to Figure 10-1.At the private market outcome,what will the equilibrium price be

A)P₀
B)P₁
C)P₂
D)either P₁ or P₂

Question 56

When the social cost curve is above a product's supply curve,what do we know

A)Government has intervened in the market.
B)A negative externality exists in the market.
C)A positive externality exists in the market.
D)The market reached equilibrium on its own.

Question 57

What does the height of the supply curve at any given quantity of coal show

A)the value to the consumer of the last unit of coal bought
B)the consumer's willingness to pay for coal at each quantity
C)the cost to the producer of the last unit of coal sold
D)the total quantity of coal exchanged in the market

Question 58

Why are markets often inefficient when negative externalities are present

A)Private costs exceed social costs at the private market solution.
B)Externalities can never be corrected without government regulation.
C)Social costs exceed private costs at the private market solution.
D)Production externalities lead to consumption externalities.

Question 59

Under what condition does a negative production externality occur

A)The equilibrium quantity of output is equal to the socially optimal quantity.
B)The equilibrium quantity of output is greater than the socially optimal quantity.
C)The cost to the consumer exceeds the cost to society.
D)The cost to the producer exceeds the cost to society.

Question 60

What is social cost

A)a measure of the cost of a negative externality
B)a measure of the loss in profit to the seller as the result of a negative externality
C)a measure of the cost reduction when the negative externality is eliminated
D)a measure of the cost incurred by the government from market intervention

Question 61

Which action should government take in order to internalize externalities

A)Government should tax goods with negative externalities and subsidize goods with positive externalities.
B)Government should tax goods with either positive or negative 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 62

Figure 10-2

Refer to Figure 10-2.If this market is currently producing at Q₄,how could total economic well-being be increased

A)if output decreased to zero
B)if output decreased to Q₂
C)if output stayed at Q₄
D)if output increased

Question 63

Figure 10-2

Refer to Figure 10-2.What is the optimum amount of this product from society's standpoint

A)Q₁
B)Q₂
C)Q₃
D)Q₄

Question 64

When dealing with externalities,how can the market equilibrium be moved closer to the social equilibrium

A)by taxing negative externalities and subsidizing positive externalities
B)by taxing both positive and negative externalities
C)by subsidizing both positive and negative externalities
D)by taxing users of goods that have externalities

Question 65

How can the government internalize a positive externality

A)by taxing production, which would decrease supply
B)by taxing production, which would increase supply
C)by subsidizing production, which would decrease supply
D)by subsidizing production, which would increase supply

Question 66

Suppose that a steel factory emits a certain amount of air pollution.If this market is NOT required to internalize this externality,what will happen

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 would not be the socially optimal quantity.
D)Producers will produce less steel than they otherwise would have if the externality were internalized.

Question 67

Figure 10-2

Refer to Figure 10-2.If all external costs were internalized,what would be the market's equilibrium output

A)Q₁
B)Q₂
C)Q₃
D)Q₄

Question 68

Figure 10-2

Refer to Figure 10-2.What is the socially optimal outcome for this market

A)it would optimize total well-being at Q₂.
B)it would benefit from a tax on the product.
C)it would benefit from a subsidy placed on the product.
D)it would optimize total well-being at Q₃.

Question 69

A fertilizer plant emits a very foul odour during the production process.If the government forces the plant to internalize this negative externality,what would result

A)The supply curve for fertilizer would shift to the right (down).
B)The supply curve for fertilizer would shift to the left (up).
C)The demand curve for fertilizer would shift to the right (down).
D)The demand curve for fertilizer would shift to the left (up).

Question 70

What does internalizing an externality refer to

A)making buyers and sellers take into account the external effects of their actions
B)making certain that all transactions benefit only buyers and sellers
C)making certain government does not disrupt the internal workings of the market
D)making buyers pay the full price for the products they purchase

Question 71

Figure 10-2

Refer to Figure 10-2.How could externalities in this market be internalized

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

Question 72

Suppose that at present there are no laws to restrict pollution produced by the widget industry.The market price of a widget is $20.If the government imposes a tax equal in value to the cost of the pollution,under which circumstances would firms continue to produce widgets

A)if the cost imposed by the pollution is less than $20 per widget produced
B)if the private cost of producing a widget equals the cost of the pollution generated per widget
C)if $20 minus the private cost of producing a widget is greater than the cost of the pollution generated per widget
D)if $20 minus the private cost of producing a widget is less than the cost of the pollution generated per widget

Question 73

What happens if we internalize a negative externality

A)Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced.
B)Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced.
C)Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced.
D)Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.

Question 74

What would be an optimal tax on pollution

A)one for which producers choose not to produce any pollution
B)one for which producers internalize the cost of the pollution
C)one for which a benevolent social planner is able to maximize production
D)one for which the value to consumers at market equilibrium exceeds the cost of production (including tax)

Question 75

Figure 10-2

Refer to Figure 10-2.If this market currently produces Q₂,how could total economic well-being be maximized

A)if production decreased to Q₁
B)if output stayed at Q₂
C)if production increased to Q₃
D)if output decreased to zero

Question 76

Figure 10-3

Refer to Figure 10-3.Which price and quantity combination represents the social optimum

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

Question 77

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

A)It will give sellers an economic incentive to account for the external effects of their actions.
B)It will have an offsetting effect that reduces the producers' private production costs.
C)It will increase the amount of the commodity exchanged in market equilibrium.
D)It will dictate to the producer how much is an acceptable level of the negative externality

Question 78

What will internalizing a negative externality cause the supply curve of an industry to do

A)shift to the right
B)shift to the left
C)expand
D)remain unchanged

Question 79

When dealing with externalities,how can we correct market failure

A)In the case of positive externalities, the market can correct it, but in the case of negative externalities, government regulation is necessary.
B)In the case of negative externalities, the market can correct it, but in the case of positive externalities, government regulation is necessary
C)In the case of both positive and negative externalities, government regulation is often necessary to induce market participants to internalize the externality.
D)In the case of both positive and negative externalities, market can correct all market failures.

Question 80

Figure 10-3

Refer to Figure 10-3.How is the negative externality measured

A)P₂ - P₁
B)P₃ - P₂
C)P₃ - P₀
D)P₃ - P₁