Deck 18: Externalities, Open-Access, and Public Goods

Question 1

You are having a party and one of your guests lights up a cigar without asking.Explain why this creates an externality.

Answer 1

Smoking in an enclosed room forces other guests to inhale smoke which they would not have chosen to inhale if the decision was completely up to them.This external burden can range from headaches,being uncomfortable,and lung cancer.Of course,you could limit the externality by kicking the guest out.

Question 2

A student that asks interesting questions during the lecture generates

A) positive externalities.
B) no externalities.
C) negative externalities.
D) an excludable good.

Answer 2

positive externalities.

Question 3

If a production process creates pollution,a competitive market produces excessive pollution because

A) the firms do not include the social cost of the pollution in their profit-maximizing decisions.
B) the firms place too high a price on society's cost of inflation.
C) people are not injured by the pollution.
D) zero pollution is optimal.

Answer 3

the firms do not include the social cost of the pollution in their profit-maximizing decisions.

Question 4

Students who talk loudly with each other in class

A) create an externality because other students cannot follow the lecture as well.
B) disturb nobody.
C) benefit the other students in class because they engage in conversation.
D) only create an externality if they talk about something unrelated to class.

Question 5

The price of pie increases.Some people who purchased pie before the price increase no longer purchase pie.This is

A) a positive externality.
B) a negative externality.
C) a positive externality for some consumers and a negative externality for others.
D) not an externality.

Question 6

If a production process creates pollution,a competitive market produces excessive pollution because

A) private marginal cost of pollution exceeds its social marginal cost.
B) social marginal cost of pollution exceeds its private marginal cost.
C) the marginal benefit of pollution to the firm is zero.
D) zero pollution is optimal.

Question 7

If a production process generates pollution,then a competitive market will

A) produce more of the good than is socially optimal.
B) produce less of the good than is socially optimal.
C) produce the socially optimal quantity of that good.
D) produce zero output.

Question 8

Your new neighbor does not mow his lawn or prune the trees in his front yard.As a result,your house value decreases.Your neighbor generated

A) a negative externality.
B) a positive externality.
C) no externality.
D) a non-rival good.

Question 9

If children go to school and become productive members of society,

A) a negative externality is created by the schools.
B) a positive externality is created by the schools.
C) no externality is created by the schools.
D) an externality is created that may be positive or negative.

Question 10

What is one reason drunk driving is held in such disrepute?

A) Drunk driving imposes high potential costs on non-drunk drivers.
B) Drunk driving destroys cars and telephone poles, causing disruption in essential services.
C) Only drunk drivers cause automobile fatalities.
D) Drunk drivers impose high potential costs on other drunk drivers.

Question 11

Which of the following statements about private and social costs is TRUE?

A) Social costs include externalities.
B) Private cost do not include externalities.
C) Social costs are never smaller than private costs.
D) All of the above.

Question 12

Changing the price of a good will usually result in a negative externality.

Question 13

In general,an externality is created when

A) people are affected (other than by price) by a transaction which they were not part of.
B) firms produce a product of low quality and consumers don't like it.
C) firms have to pay for polluting the environment.
D) the government subsidizes education.

Question 14

If a production process generates pollution,then a competitive market will produce more of the good than is socially optimal because

A) firms take all costs into consideration.
B) firms incur all costs of production but ignore some of them.
C) firms ignore the costs of production that they do not incur.
D) firms set price equal to social marginal cost.

Question 15

Consider a housing development built near an existing airport.After the houses are occupied,homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited.Is the airport a negative externality?

A) No, the airport was there first.
B) No, if the original property values reflect the costs imposed by the airport.
C) No, airports are government entities and therefore don't impose costs on individuals.
D) Yes, the airport's noise should be curtailed for the well-being of the homeowners.

Question 16

Negative externalities are created when

A) an increase in the price of butterfat drives up the price of ice cream.
B) a driver leaves his car in a parking space after the meter expires and receives a ticket.
C) a driver drives recklessly on a busy highway.
D) a driver pulls over to help a stranded motorist fix a flat tire.

Question 17

In the presence of no externalities,

A) social marginal cost exceeds private marginal cost.
B) social marginal cost is less than private marginal cost.
C) social marginal cost equals private marginal cost.
D) social marginal cost and private marginal cost cannot be compared.

Question 18

If a production process creates positive externalities,a competitive market produces too few positive externalities because the producer

A) does not pay all the costs of the externalities.
B) does not receive compensation for the externalities.
C) Both A and B.
D) None of the above.

Question 19

The productivity of the employees of a bakery is reduced because of the excessive noise coming from a next door car repair shop.This is an example of

A) synergy.
B) a positive externality.
C) a negative externality.
D) happy coexistence.

Question 20

Positive externalities are created when

A) other consumers reduce their demand for coffee and price thereby declines.
B) farmers spray pesticide in their fields and it washes into the local river after the first rainstorm.
C) your neighbor plants beautiful trees and flowers in her yard.
D) you purchase the "Mona Lisa" and lock it in a vault.

Question 21

The above figure shows the market for steel ingots.At the social optimum level of output,the total welfare is

A) $1,875.
B) $1,575.
C) $2,500.
D) $3,000.

Question 22

The above figure shows the market for steel ingots.If the market is competitive,then the deadweight loss to society is

A) a.
B) b.
C) c.
D) zero.

Question 23

To maximize welfare in a competitive market that has a negative externality in production,government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.

Question 24

A zero pollution level is NOT achievable because

A) corporations would lobby against it.
B) it implies no production and no consumption.
C) it implies an output level larger than that from a competitive market equilibrium.
D) consumption would be larger than production.

Question 25

In a market with positive externalities,

A) the efficient level of production is less than what competition will obtain.
B) the efficient level of production is equal to what competition will obtain.
C) the efficient level of production is more than what competition will obtain.
D) there cannot be an efficient level of production.

Question 26

The above figure shows the market for steel ingots.If the market is competitive,then the competitive market level of output is

A) 100 units.
B) 150 units.
C) 50 units.
D) 300 units.

Question 27

The above figure shows the market for steel ingots.If the market is competitive,then the private producer surplus is

A) $2,500.
B) $5,000.
C) $2,000.
D) $3,000.

Question 28

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC^p = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC^e = Q.What is the socially optimal level of output?

A) 20
B) 25
C) 30
D) 45

Question 29

Assume a country agrees to a free-trade act with another country.In the process,some individuals are displaced from their jobs,thus the free-trade act results in a negative externality.

A) False
B) True
C) Only if those who were displaced are not compensated with another job or income transfer.
D) Only if those who were displaced were compensated with another job or income transfer.

Question 30

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC^p = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC^e = Q.What is the total external harm at the competitive market level of output?

A) 1350.5
B) 2025
C) 672.5
D) 1012.5

Question 31

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC^p = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC^e = Q.What is the competitive market level of output?

A) 20
B) 25
C) 30
D) 45

Question 32

In the presence of a negative externality generated by producing a good,a competitive market will produce more of that good than is socially optimal.

Question 33

In a competitive market,a negative externality creates a deadweight loss because

A) the cost of the externality is double counted.
B) a harm is generated.
C) price equals social marginal cost.
D) price equals private marginal cost.

Question 34

If a market is subject to a positive externality,

A) the demand curve reflecting social benefit will be to the right of the demand curve representing private benefit.
B) there is only one demand curve.
C) the demand curve reflecting social benefit will be to the left of the demand curve representing private benefit.
D) private benefit will exceed social benefit.

Question 35

The above figure shows the market for steel ingots.An externality can be seen because

A) the social marginal cost exceeds the private marginal cost.
B) the private marginal cost exceeds the social marginal cost.
C) the optimal quantity of steel is zero.
D) not enough steel gets produced by the competitive market.

Question 36

The above figure shows the market for steel ingots.If the market is competitive,then

A) the socially optimal quantity of steel is zero.
B) the socially optimal quantity of steel of 50 units is produced.
C) the socially optimal quantity of steel of 100 units is produced.
D) more than the socially optimal quantity of 50 units of steel is produced.

Question 37

The above figure shows the market for steel ingots.At the social optimum level of output,the social producer surplus is

A) $1,875.
B) $1,575.
C) $2,500.
D) $3,000.

Question 38

The above figure shows the market for steel ingots.The optimal quantity of pollution

A) is 0 units.
B) is 50 units.
C) is 100 units.
D) cannot be determined from the information provided.

Question 39

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC^p = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC^e = Q.What specific tax would result in a competitive market producing the socially optimal quantity of paper?

Question 40

The above figure shows the market for steel ingots.The socially optimal quantity of steel is

A) 0 units.
B) 50 units.
C) 100 units.
D) the amount produced if the market were competitive.

Question 41

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC^p = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC^e = Q.Is social welfare greater under monopoly or under competition?

Question 42

In the presence of a negative externality in production,a monopoly will produce

A) more than the social optimum.
B) less than the social optimum.
C) the social optimum.
D) All of the above are possible.

Question 43

Which of the following is an example of internalizing an externality?

A) a paper mill that spends money removing the pollution it generated
B) a neighbor leaving lots of trash in his front yard
C) a student receives $15 for each bright question asked during lecture
D) Both A and C.

Question 44

The above figure shows the market for steel ingots.If the market is competitive,then to achieve the socially optimal level of pollution,the government can

A) institute a standard and allow firm to produce at most 50 ingots per period.
B) institute a standard and allow firm to produce at most 25 ingots per period.
C) institute a standard and allow firm to produce at most 100 ingots per period.
D) institute a standard and allow firm to produce at most 10 ingots per period.

Question 45

A monopoly might produce less than the socially optimal amount of pollution because

A) it likes to be a good citizen.
B) it sets price above marginal cost.
C) it earns economic profit.
D) it internalizes the external costs.

Question 46

If the social marginal cost of a good is very high relative to the private marginal cost,then a monopoly will most likely

A) produce more than the social optimum.
B) produce less than the social optimum.
C) produce the social optimum.
D) produce zero pollution.

Question 47

Which of the following policies addresses the problem posed by positive externalities?

A) a subsidy to the agent that generates the positive externality
B) a tax on the agent that generates the positive externality
C) limit the activity that generates the positive externality
D) a subsidy to the agents that benefit from the positive externality

Question 48

Suppose that the market for steel is shown in the above figure.What specific tax would result in a competitive market producing the socially optimal quantity of steel?

Question 49

If both a monopoly and a competitive market with the same marginal cost would produce a quantity that is greater than the social optimum in a market because of externalities,then

A) welfare is greater under monopoly.
B) welfare is greater under competition.
C) welfare is the same for both market structures.
D) the social optimum must be zero.

Question 50

Because a monopoly ignores external costs,it is possible that it will

A) produce the socially optimal quantity of a good.
B) produce more than the socially optimal quantity of a good.
C) produce less than the socially optimal quantity of a good.
D) All of the above.

Question 51

The above figure shows the market for steel ingots.If the market is competitive,then to achieve the socially optimal level of pollution,the government can

A) outlaw the production of steel.
B) institute a specific tax of $25.
C) institute a specific tax of $50.
D) institute a specific tax equal to area b.

Question 52

In the presence of a negative externality,a specific tax can achieve the social optimum because

A) output is reduced to zero as a result.
B) it internalizes the external cost.
C) it directly charges the producer for polluting.
D) the price of the good rises by the full amount of the tax.

Question 53

Explain why the optimal amount of pollution is often not zero.

Question 54

A specific tax in a monopoly market equal to the marginal harm of pollution

A) will increase welfare.
B) will decrease welfare.
C) will leave welfare unchanged.
D) All of the above are possible.

Question 55

In terms of cost-benefit analysis,explain why a competitive market with an externality produces too much pollution.

Question 56

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC^p = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC^e = Q.What specific tax would result in a competitive market producing the socially optimal quantity of paper?

Question 57

The above figure shows the market for steel ingots.If the market is competitive,and the government institutes a $100 specific tax on steel,then

A) less than the socially optimal quantity of steel is produced.
B) the socially optimal quantity of steel of 50 units is produced.
C) the socially optimal quantity of steel of 100 units is produced.
D) more than the socially optimal quantity of steel is produced.

Question 58

Suppose that the market for steel is shown in the above figure.What specific tax would result in a competitive market producing the socially optimal quantity of steel?

Question 59

To maximize welfare in a competitive market that has a negative externality in production,government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.

Question 60

Production of a good produces pollution that is very damaging with each additional unit.A monopoly facing a very elastic demand curve will most likely produce

A) less than the social optimum of the good.
B) more than the social optimum of the good.
C) the social optimum of the good.
D) no externality.

Question 61

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If the firm owns the river and there is just one neighbor affected by the pollution,how much pollution is likely to occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units

Question 62

Suppose that the market for steel is shown in the above figure.Is social welfare greater under monopoly or under competition?

Question 63

The exclusive privilege to use an asset is called a(n)

A) property right.
B) exclusive use agreement.
C) property privilege.
D) right to work privilege.

Question 64

Because a monopoly will produce less of a good than a competitive market will,welfare is always greater under monopoly than under competition in the presence of a negative externality.

Question 65

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the firm's neighbor.The marginal cost of production is zero for the firm.If there is just one neighbor who owns the river,how much pollution is likely to occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units.

Question 66

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's Theorem,the optimal level of trash in the park can be achieved if

A) Al is fined by the government.
B) Al has the right to leave trash and Bert cannot do anything about it.
C) Al has the right to leave trash and Bert can pay him to limit his dumping.
D) Bert moves.

Question 67

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.According to Coase's Theorem,which of the following scenarios is most likely to lead to the socially optimal level of pollution?

A) The firm owns the river and there are a thousand surrounding neighbors.
B) The firm owns the river and there is just one nearby neighbor.
C) The river is jointly owned by one thousand surrounding neighbors.
D) The firm owns the river, and therefore produces the social optimum no matter what.

Question 68

Explain how a specific tax equal to the marginal harm of pollution can increase or decrease total welfare in a monopoly market.

Question 69

The above figure shows the marginal benefit from pollution for two firms.If each firm receives a marketable permit to produce 25 units of pollution,which one of the following is most likely to happen?

A) Firm B will sell some pollution rights to firm A.
B) Firm A will sell some pollution rights to firm B.
C) Firm A will produce all 50 units of pollution.
D) Both firms will produce 25 units of pollution.

Question 70

The result that,under certain circumstances,no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called

A) a Nash Equilibrium.
B) Coase Theorem.
C) Bargaining Theorem.
D) English Bargaining.

Question 71

When negative externalities from production exist,the deadweight loss from a competitive market may be larger than with a monopoly.

Question 72

Suppose twenty neighbors share a park.One of the neighbors,Al,leaves trash in the park.This bothers the other neighbors.According to Coase's Theorem,assigning the property rights to the park to Al

A) will achieve the socially optimal quantity of trash.
B) will result in zero trash being dumped in the park.
C) might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly.
D) is unfair.

Question 73

The existence of externalities is due mainly to the fact that

A) monopolies tend to produce too little of a good anyway.
B) the optimal level of pollution is zero.
C) pollution is not a serious problem.
D) property rights are poorly defined.

Question 74

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If property rights are not defined,how much pollution will occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units

Question 75

A tax on a previously untaxed monopoly-produced good will necessarily lower total welfare if

A) the demand curve is relatively inelastic.
B) the demand curve is relatively elastic.
C) less than the socially optimum is produced before the tax.
D) more than the socially optimum is produced before the tax.

Question 76

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's Theorem,one necessary condition to alleviate the externality is that

A) Al is fined by the government.
B) Al has the right to leave trash and Bert cannot do anything about it.
C) Bert has the right to a clean park and Al cannot leave trash.
D) Either Al or Bert owns the park.

Question 77

If a product provides a positive externality,a duopoly

A) will provide more social welfare than a monopoly.
B) will provide less social welfare than a monopoly.
C) will provide the same social welfare as a monopoly.
D) introduces an interesting and untested twist to the externality story.

Question 78

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's Theorem,the optimal level of trash in the park can be achieved if

A) someone is assigned property rights to the park.
B) government limits the use of the park.
C) nobody catches Al leaving the trash.
D) Bert moves.

Question 79

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If the firm owns the river and there are thousands of surrounding neighbors,how much pollution is likely to occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units

Question 80

Monopolizing the sale of liquor

A) can lead to an increase in total welfare.
B) will decrease total welfare.
C) results in a deadweight loss.
D) is anti-competitive and thus lowers total welfare.