Deck 10: Externalities

Question 1

Restored historic buildings convey a positive externality because people who walk or ride by them can enjoy their beauty and the sense of history they provide.

Answer 1

True

Question 2

Internalising a negative consumption externality will cause the market supply curve to shift to the left.

Answer 2

False

Question 3

Organisers of an outdoor concert in a park surrounded by residential neighbourhoods are likely to consider the noise and traffic cost to residential neighbourhoods when they assess the financial viability of the concert venture.

Answer 3

False

Question 4

In a market characterised by externalities, the market equilibrium fails to maximise the total benefit to society as a whole.

Question 5

Wind turbines that generate electricity near towns cannot be considered an externality because they don't generate greenhouse gases like thermal plants.

Question 6

The major problem facing private parties wishing to solve an externality problem is that transaction costs may prevent such a solution from occurring.

Question 7

Negative consumption externalities will have a socially optimal quantity that is smaller than the quantity determined by the private market.

Question 8

The Internet is a good example of a negative externality because it has aspects which may be inappropriate for some users.

Question 9

Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.

Question 10

The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.

Question 11

The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

Question 12

Externalities are generated by the consumption of goods.

Question 13

If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

Question 14

Education has negative externalities for society.

Question 15

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

Question 16

If the marginal consumer values timber less than the social cost of harvesting it , the timber market will be characterised by a negative production externality.

Question 17

The size and scope of technology spillovers is easy for governments to measure.

Question 18

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Question 19

Market outcomes cannot be improved by government policies.

Question 20

Government subsidies to scientific research is aimed at controlling the negative externalities associated with technological advances.

Question 21

A market for pollution permits can efficiently allocate the right to pollute through the forces of supply and demand.

Question 22

Pigovian taxes enhance efficiency but the cost of administering such taxes frequently exceeds the revenue they raise for the government.

Question 23

When correcting for an externality, command-and-control policies are always preferable to market-based policies.

Question 24

Some economists believe that technology spillovers are pervasive and industries with the largest spillovers should be encouraged.

Question 25

The initial allocation of tradeable pollution permits will affect the level of economic efficiency in a market with a pollution externality.

Question 26

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Question 27

Greenhouse gas emissions are a classic example of a negative production externality.

Question 28

Firms that can reduce pollution easily will be willing to sell their emissions permits.

Question 29

Taxation is often able to correct market externalities at a lower cost than regulations designed to achieve the same goal.

Question 30

In essence, the Pigovian tax places a price on the right to pollute.

Question 31

The most efficient way to achieve reductions in pollution is for each firm to reduce their pollution by the same amount.

Question 32

When weighing the costs and benefits of pollution, the costs always exceed the benefits because the benefit equals zero.

Question 33

Both pollution permits and Pigovian taxes are viewed as cost-effective ways to keep the environment clean.

Question 34

Because a driver's private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.

Question 35

Total pollution is increased when firms are allowed to trade in carbon credits.

Question 36

Social welfare can be enhanced by allowing firms to trade their carbon credits.

Question 37

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Question 38

Government can solve externality problems that are too costly for private parties to solve.

Question 39

Government policies to encourage technology spillovers may go to industries with the most political clout rather than industries with the largest spillovers.

Question 40

It is impossible to prohibit all polluting activity.

Question 41

When externalities exist, buyers and sellers:

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

Question 42

Private parties can negotiate a solution to an externality in all cases.

Question 43

When Jake takes into account how his actions affect Jill, and changes these, an externality is solved.

Question 44

The government attempts to resolve negative externalities caused by automobile exhaust by: (i) taxing gasoline to reduce the amount that people drive
(ii) building safer highways
(iii) setting emission standards for automobiles

A) (i), (ii) and (iii) are all used to reduce emissions
B) only (i) and (iii) are used to reduce emissions
C) only (ii) and (iii) are used to reduce emissions
D) only (i) and (ii) are used to reduce emissions

Question 45

Vaccinations are heavily subsidised in order to get the optimal number of people vaccinated.

Question 46

All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.

Question 47

Government intervention in the economy that aims to promote technology-enhancing industries is called technology policy.

Question 48

In the absence of externalities, the invisible hand of the market place:

A) increases the transaction cost of contracting between parties to an exchange
B) is unable to resolve inherent inefficiencies in the market system
C) induces people to act in a manner inconsistent with self-interest
D) leads to a market outcome that maximises total benefit to society

Question 49

Inventors in developing countries are usually unable to capture the full benefit of their innovations. They therefore tend to devote too few resources to research. Government can address this problem of under-investment in research by: (i) increasing restrictions on trade
(ii) establishing a patent system to provide inventors with exclusive control over their inventions for a period of time
(iii) subsidising the purchase of technology from other countries.

A) only (i) is used
B) only (ii) is used
C) only (iii) is used
D) (i), (ii) and (iii) are all used

Question 50

It is generally difficult or impossible for private markets to take externalities into account because:

A) decision makers in the market fail to take account of the spillover effects of their behaviour
B) buyers and sellers in private markets are only interested in social wellbeing
C) people are only interested in short-term gains
D) governments are responsible for externality problems

Question 51

A negative externality exists when:

A) a person engages in an activity that has a spillover that makes a bystander better off
B) the market has only one seller
C) a firm sells its product in an external foreign market
D) a person engages in an activity that has a spillover that makes a bystander worse off

Question 52

Internalising externalities is one reason that some firms involve themselves in only one type of business.

Question 53

By creating a 'child-free zone', a restaurant could attempt to account for the costs that children impose on others.

Question 54

Unfortunately, the petrol tax does not make people take into account the risk they impose on others by driving large vehicles.

Question 55

Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods. Policies to reduce this noise problem include:

A) charging passengers an airport departure tax
B) charging excise taxes on airline fuel
C) encouraging people to drive rather than fly
D) requiring aircraft to use 'whisper' technology to quieten their engines

Question 56

The production of paper is a chemical-intensive process that generates dioxin. Dioxin is a negative externality associated with the paper industry because:

A) the paper industry does not know that dioxin is a spillover
B) the paper industry often does not know what the regulations for dioxin are
C) self-interested paper producers have no incentive to incorporate the costs of dioxin pollution into their output decisions
D) corporations are only interested in short-term profits

Question 57

Contracts cannot solve the inefficiency that arises from externalities.

Question 58

While economists generally agree that markets are a good way to organise economic behaviour, there are some important exceptions. The exceptions include:

A) some markets produce negative externalities
B) some industries produce positive externalities
C) some markets are characterised by market failure
D) all of the above are true

Question 59

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) adversely affect the wellbeing of a bystander (or bystanders) who is (are) not party to a market exchange.
D) reveal his or her preference for foreign produced goods.

Question 60

Private owners of restored historical buildings are not likely to capture the full benefit of restoration so they tend to discard them too quickly. Many local governments respond to this problem by: (i) condemning historic buildings to make room for new development
(ii) regulating the destruction of historic buildings
(iii) providing tax breaks to owners of historic buildings who restore them.

A) (i), (ii) and (iii) are all used
B) only (i) and (iii) are used
C) only (ii) and (iii) are used
D) only (i) and (ii) are used

Question 61

The height of the demand curve for aluminum for any given quantity, shows the:

A) willingness to pay of the marginal supplier
B) willingness to pay of the marginal buyer
C) the gains from trade
D) opportunity cost

Question 62

To produce honey, beekeepers place hives of bees in orchards and crop fields. As bees gather nectar that they use to produce honey, they pollinate the orchards and fields increasing their yields of fruit and grain. This arrangement results in:

A) positive externalities that benefit both the beekeeper and the owner of the fields of fruit and grain
B) no significant additional benefit to anyone
C) a positive externality that benefits only the owner of the fields of fruit and grain
D) a positive externality that solely benefits the beekeeper

Question 63

Graph 10-1

Refer to Graph 10-1. Which price and quantity combination represents the social optimum?

A) P₁, Q₁
B) P₂, Q₁
C) P₁, Q₂
D) P₂, Q₂

Question 64

An additional electric automobile on a congested freeway creates:

A) no production or consumption externality because electric cars do not pollute
B) a positive production externality because electric cars reduce pollution
C) a positive consumption externality because existing cars will increase their speed after the car enters the freeway
D) a negative consumption externality because its presence reduces the speed of traffic for cars already on the freeway

Question 65

When a production externality has a beneficial effect on a bystander at the market equilibrium:

A) society is unlikely to benefit from production subsidies
B) the social cost of production is less than the private cost
C) the private benefit from consumption is less than the social cost of production
D) none of the above is true

Question 66

At any given quantity, the willingness to pay in the market for automobile fuel is reflected in the:

A) value to the consumer of the last unit of automobile fuel bought
B) height of the supply curve at each quantity
C) value to the producer of the last unit of automobile fuel sold
D) total quantity of automobile fuel exchanged in the market

Question 67

Graph 10-2
This graph depicts the market for pork. Use this information to answer the following question(s).
In Graph 10-2, producer and consumer surplus at the point of market efficiency is represented by area(s):

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

Question 68

Graph 10-2
This graph depicts the market for pork. Use this information to answer the following question(s).
In Graph 10-2, what price and quantity combination efficiently allocates resources in such a way that the total value to consumers who buy and use pork minus the total costs to the producers who make and sell pork is maximised?

A) P₁, Q₁
B) P₂, quantity of zero
C) price of zero, Q₂
D) P₀, Q₂

Question 69

Graph 10-1

Refer to Graph 10-1. This graph reflects the presence of a:

A) negative production externality
B) positive production externality
C) negative consumption externality
D) positive consumption externality

Question 70

The impact of one person's actions on the wellbeing of a bystander is called:

A) competitive advantage
B) deadweight loss
C) market equilibrium
D) an externality

Question 71

Suppose that large scale pork production has the potential to create groundwater 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 localised 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 72

If a particular market is associated with an externality, the social optimum should include the wellbeing of:

A) buyers, sellers and bystanders
B) bystanders and buyers
C) bystanders and sellers
D) buyers and sellers only

Question 73

An externality will:

A) usually be characterised as a form of market failure
B) cause markets to allocate resources efficiently
C) strengthen the role of the 'invisible hand' in the marketplace
D) always require the producer to compensate society

Question 74

Graph 10-1

Refer to Graph 10-1. In the figure shown the marginal:

A) benefit of the positive production externality is measured by P₃ - P₁
B) cost of the negative production externality is measured by P₃ - P₂
C) cost of the negative production externality is measured by P₃ - P₁
D) cost of the negative production externality cannot be measured

Question 75

Suppose that water pollution creates a negative production externality on a local fishing firm. This means:

A) the fishing firm will catch as less fish than before at the same cost
B) it will be socially optimal for the water pollution to be eliminated
C) it will be socially optimal to do nothing about the water pollution
D) the fishing firm will catch more fish than before at the same cost

Question 76

Hikers frequently claim that livestock grazing in wilderness recreation areas reduce the satisfaction of their recreational hiking experience. An explanation would be that:

A) hikers don't eat beef
B) cattle farmers are insensitive to the recreational use of public lands
C) grazing cows create negative externalities that make hiking less pleasant
D) cattle should not be allowed to graze on public property

Question 77

The height of the supply curve at any given quantity of coal shows the:

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

Question 78

At any given quantity, the height of the supply curve for elephant ivory shows the:

A) willingness to pay of the marginal supplier
B) willingness to pay of the marginal buyer
C) value to the consumer of the last unit of elephant ivory bought
D) cost of the marginal seller

Question 79

Suppose people plant flowering trees near their homes to encourage rare native birds to feed. If people believe that an increase in native bird populations is valuable, people who plant these trees:

A) generate a negative consumption externality for their neighbours
B) generate a positive production externality for their neighbours
C) generate a positive consumption externality for their neighbours
D) generate a negative production externality for their neighbours

Question 80

Graph 10-2
This graph depicts the market for pork. Use this information to answer the following question(s).
In Graph 10-2, consumer surplus would be maximised at what price and quantity combination?

A) P₁, Q₁
B) P₂, quantity of zero
C) price of zero, Q₂
D) P₀, Q₂