Deck 7: Market Inefficiencies: Externalities and Public Goods

Question 1

Lila shares a house with two other people.She is a concert pianist and often practices at home.One roommate enjoys listening to her practice,but the other does not.For the roommate who enjoys listening to Lila play,this is an example of ________; for the other roommate,it is an example of ________.

A) the tragedy of the commons; the third-party problem
B) a positive externality; a negative externality
C) a positive externality; the free-rider problem
D) the free-rider problem; the tragedy of the commons
E) a negative externality; the tragedy of the commons

Answer 1

a positive externality; a negative externality

Question 2

For a market to work efficiently

A) the external costs must be paid.
B) all external costs must be eliminated.
C) all internal costs must be eliminated.
D) the social costs must be equal to the internal costs.
E) all pollution must be eliminated.

Answer 2

the external costs must be paid.

Question 3

The costs or benefits of a market activity that affect a third party are called

A) externalities.
B) public goods.
C) club goods.
D) internal costs.
E) common-resource goods.

Answer 3

externalities.

Question 4

Negative externalities have ________ for third parties.

A) internal costs
B) internal benefits
C) external costs
D) external benefits
E) social costs

Question 5

The cost of an activity paid for by the individual and the third party is defined as a(n)________ cost.

A) internal
B) social
C) external
D) third-party
E) public-good

Question 6

The pollution emitted by a car is an example of a(n)________ cost.

A) internal
B) social
C) external
D) production
E) public-good

Question 7

Refer to the accompanying table,where Q represents the quantity produced,internal cost and social cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities,to answer the following questions.

The external cost is equal to ________ per unit.

A) $60
B) $70
C) $20
D) $50
E) $30

Question 8

The costs of a market activity paid for by an individual NOT engaged in the market activity are ________ costs.

A) external
B) internal
C) free-rider
D) social
E) common

Question 9

An external cost is best defined as the cost of an activity paid for by

A) the individual who is engaged in the activity.
B) the government.
C) a third party.
D) a free-rider.
E) the individual and the third party.

Question 10

A negative externality exists whenever

A) there are no internal costs.
B) production of a good creates an external cost.
C) production of a good creates an external benefit.
D) production of a good has no social cost.
E) production of a good has no social benefit.

Question 11

An internal cost is best defined as the cost of an activity paid for by

A) the individual who is engaged in the activity.
B) the government.
C) a third party.
D) a free-rider.
E) the individual and the third party.

Question 12

Refer to the accompanying table,where Q represents the quantity produced,internal cost and social cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities,to answer the following questions.

The social optimum occurs where price is ________ and quantity is ________.

A) $70; 200
B) $50; 200
C) $60; 300
D) $80; 300
E) $60; 100

Question 13

Which of the following is true?

A) social costs = internal costs - external costs
B) social costs = internal costs +external costs
C) internal costs = social costs + external costs
D) external costs = social costs + internal costs
E) internal costs - social costs = external costs

Question 14

Suzanne drives to work each day.The best example of an internal cost is the

A) amount of pollution emitted by Suzanne's car.
B) congestion created by Suzanne's car being on the road.
C) amount the government paid to build the road.
D) amount Suzanne pays to maintain her car.
E) amount of money Suzanne saves each day by avoiding the toll roads.

Question 15

External costs are the result of the actions of

A) firms.
B) consumers.
C) firms and consumers.
D) the government.
E) firms,consumers,and the government.

Question 16

The amount an individual pays for gasoline for his or her car is an example of a(n)________ cost.

A) internal
B) social
C) external
D) third-party
E) public-good

Question 17

The amount an individual pays for insurance on his or her car is an example of a(n)________ cost.

A) internal
B) social
C) external
D) third-party
E) public-good

Question 18

The costs of a market activity paid for by an individual engaged in the market activity are ________ costs.

A) external
B) internal
C) free-rider
D) social
E) common

Question 19

Refer to the accompanying table,where Q represents the quantity produced,internal cost and social cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities,to answer the following questions.

The market equilibrium occurs where price is ________ and quantity is ________.

A) $70; 200
B) $50; 200
C) $60; 300
D) $80; 300
E) $60; 100

Question 20

The personal decisions of consumers and firms are based on ________ cost(s).

A) external
B) social
C) internal
D) third-party
E) public-good

Question 21

If government regulation forces firms in an industry to internalize the externality,then the

A) supply curve shifts to the left.
B) supply curve shifts to the right.
C) demand curve shifts to the left.
D) demand curve shifts to the right.
E) supply curve and the demand curve shift to the left.

Question 22

Consider the market for refined oil.In the market equilibrium,

A) the internal supply equals the internal demand.
B) the internal supply equals the social supply.
C) the social supply equals the internal demand.
D) there is too little of the good being produced.
E) there is no deadweight loss.

Question 23

Consider a market where production of a good generates a negative externality.In the market equilibrium,

A) too much of the good is being produced.
B) too little of the good is being produced.
C) there is no deadweight loss.
D) the external costs have been internalized.
E) firms are not maximizing profit.

Question 24

Consider a market with a negative externality.The market will tend to ________ the good because the market participants tend to ignore the ________ of their decision.

A) overproduce; external benefit
B) underproduce; external benefit
C) overproduce; external cost
D) underproduce; external cost
E) overproduce; internal benefit

Question 25

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities to answer the following questions.

The social optimum occurs where price is ________ and quantity is ________.

A) $4; 6
B) $8; 4
C) $10; 3
D) $10; 5
E) $12; 6

Question 26

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

A) A
B) B
C) A + B
D) C
E) A + B + C

Question 27

Refer to the accompanying figure to answer the following questions.

To achieve the social optimum,the government could set a tax equal to ________ per unit sold.

A) $6
B) $4
C) $2
D) $3
E) $5

Question 28

Refer to the accompanying figure to answer the following questions.

At the market equilibrium,price is equal to ________ units of the good are produced.

A) $18 and 70
B) $14 and 70
C) $12 and 50
D) $14 and 50
E) $18 and 50

Question 29

Which of the following is a benefit of internalizing a negative externality?

A) All pollution is eliminated.
B) More output is produced.
C) The deadweight loss is eliminated.
D) The good is sold for a lower price.
E) Output increases and prices are lower.

Question 30

Refer to the accompanying figure to answer the following questions.

The figure best illustrates what type of market?

A) The good produced creates a positive externality.
B) The good produced creates a negative externality.
C) The good produced is a club good.
D) The good produced is a public good.
E) Firms in this industry have been given a subsidy to encourage more production.

Question 31

Consider a market where production of the good is creating a negative externality.In the market equilibrium,there is a deadweight loss because the

A) internal cost of production is less than the social cost.
B) internal cost of production is not equal to the internal benefit.
C) internal benefit is not equal to the external benefit.
D) social cost is greater than the internal benefit.
E) internal benefit is less than the internal cost.

Question 32

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities to answer the following questions.

The market equilibrium occurs where price is __________ and quantity is _________.

A) $4; 2
B) $8; 4
C) $10; 3
D) $10; 5
E) $12; 6

Question 33

When pollution (a negative externality)is created by firms,which of the following is NOT a valid way for the government to restore the social optimum?

A) require firms to install pollution-abatement equipment
B) require firms to change production techniques to reduce emissions
C) levy a tax on the production of the good
D) require firms to pay for the environmental damage they create
E) offer a subsidy to firms to reduce their production costs

Question 34

Which of the following is true of a negative externality?

A) Some costs are borne by a third party.
B) The government can use subsidies to encourage firms to internalize the externality.
C) The government must take over the production of this good so that the externality can be internalized.
D) Some benefits accrue to a third party.
E) Its existence always requires corrective measures by the government.

Question 35

Which of the following is a cost of internalizing a negative externality?

A) Less output is produced.
B) The deadweight loss is larger.
C) The level of pollution rises.
D) Taxes must increase to cover the external cost.
E) The government must pay firms to encourage them to change production techniques.

Question 36

If government regulation forces firms in an industry to internalize the externality,then we can expect the equilibrium price of the good to ________ and the equilibrium quantity to ________.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
E) increase; remain unchanged

Question 37

Jack's roommate is studying to be a drummer in a rock band.She practices in Jack's apartment every evening for three hours and the noise makes it difficult for Jack to concentrate.This is an example of

A) the third-party problem.
B) the tragedy of the commons.
C) an internal cost.
D) the free-rider problem.
E) a positive externality.

Question 38

The third-party problem

A) occurs when a market activity leads to a negative externality.
B) occurs when a market activity leads to a positive externality.
C) occurs when a market activity leads to a negative or a positive externality.
D) is the same as the free-rider problem.
E) is associated with the production of private goods but not public goods.

Question 39

Elijah's neighbor likes to mow his grass each Saturday at 7 A.M.and the noise invariably wakes Elijah up.This is an example of

A) the third-party problem.
B) the tragedy of the commons.
C) an internal cost.
D) the free-rider problem.
E) a positive externality.

Question 40

Siri's neighbor is an avid gardener who changes his flower displays four times per year and who was given the "best yard on the block" award last year.While Siri personally enjoys these changing flower displays,some of her neighbors have said they do not like some of the flowers her neighbor chooses to plant.For Siri,this is an example of

A) a positive externality.
B) the tragedy of the commons.
C) an internal cost.
D) internalizing the external cost.
E) a negative externality.

Question 41

The government imposes a tax on each plastic bag sold such that the producer of the plastic bags must pay the tax to the government.In the market for plastic bags,the

A) supply curve shifts to the left.
B) supply curve shifts to the right.
C) demand curve shifts to the left.
D) demand curve shifts to the right.
E) the supply curve and the demand curve shift to the left.

Question 42

Congestion charges effectively decrease the number of cars on the road.This is an example of

A) the law of supply.
B) the public-good problem.
C) the free-rider problem.
D) the common-resource problem.
E) internalizing the externality.

Question 43

When a negative externality is not internalized,then the equilibrium price of the good produced is too ________ and the equilibrium quantity produced is too ________.

A) high; high
B) low; low
C) low; high
D) high; low
E) expensive; inefficient

Question 44

If the government decides to adopt a carbon tax,the price of goods whose production generates carbon emissions will ________ and the quantity produced will ________.

A) increase; increase
B) increase; decrease
C) increase; remain unchanged
D) decrease; increase
E) decrease; decrease

Question 45

The government identifies a situation where production of a good is generating a negative externality.A reasonable option for the government to consider is to

A) impose a tax on the sale of this good.
B) pass a law preventing the production of this good.
C) subsidize the cost of producing the good.
D) pass a law preventing the consumption of this good.
E) ration the good.

Question 46

When people elect to spend more years in school,this results in a ________ externality because there are ________ associated with this decision.

A) negative; internal costs
B) negative; external costs
C) positive; external benefits
D) positive; external costs
E) positive; internal benefits

Question 47

The government imposes a tax on the sale of a good whose production is creating a negative externality.The value of the tax is $4 per unit sold.In the new equilibrium,we would expect

A) the same amount to be sold and the price to be $4 higher.
B) the same amount to be sold and the price to increase by less than $4.
C) less to be sold and the price to increase by $4.
D) less to be sold and the price to increase by less than $4.
E) less to be sold and the price to increase by more than $4.

Question 48

Positive externalities have ________ for third parties.

A) internal costs
B) internal benefits
C) external costs
D) external benefits
E) social costs

Question 49

If the government imposes a tax on each aluminum can sold,payable by consumers when they purchase the item,then,in the market for goods sold in aluminum cans,the

A) supply curve shifts to the left.
B) supply curve shifts to the right.
C) demand curve shifts to the left.
D) demand curve shifts to the right.
E) supply curve and the demand curve shift to the left.

Question 50

Consider a market with a positive externality.The market will tend to ________ the good because the market participants tend to ignore the ________ of their decision.

A) overproduce; external benefit
B) underproduce; internal benefit
C) overproduce; external cost
D) underproduce; external cost
E) underproduce; external benefit

Question 51

Christopher's roommate is studying to be a chef and likes to try new recipes.He leaves his delicious creations in the refrigerator for anyone who wants to eat them.The food he leaves is always gone within a day.This is an example of

A) the third-party problem.
B) the tragedy of the commons.
C) an internal cost.
D) the free-rider problem.
E) a positive externality.

Question 52

A government decision to impose a tax on the sale of plastic disposable water bottles is an example of

A) a positive externality.
B) internalizing the externality.
C) the third-party problem.
D) an external cost.
E) the Coase theorem.

Question 53

Which activity is most likely to create a positive externality?

A) A person drives downtown each day.
B) An oil refinery operates for 16 hours each day.
C) A new airport is built in a big city.
D) A person receives a flu shot.
E) The government offers reduced-cost financing toward the purchase of a new car.

Question 54

When production of a good creates an external benefit

A) there is a negative externality.
B) too much of the good is being produced.
C) there is a positive externality.
D) it results in the tragedy of the commons.
E) a club good is being produced.

Question 55

A positive externality exists whenever

A) there are no internal costs.
B) production of a good creates an external cost.
C) production of a good creates an external benefit.
D) production of a good has no social cost.
E) production of a good has no social benefit.

Question 56

Refer to the accompanying figure.The market for dry-cleaning services is currently in equilibrium at point A,and the government decides to tax the stores that offer dry-cleaning services in order to improve the air quality.The new equilibrium will be at point

A) B.
B) C.
C) E.
D) F.
E) G.

Question 57

The government has identified a situation where the production of a good is creating a negative externality.The government should enact legislation to require firms to internalize the externality

A) in all such cases.
B) if the benefits of doing so outweigh the costs.
C) as long as it will not increase the price of the good being produced.
D) as long as it will not create unemployment in this industry.
E) as long as there are positive health benefits associated with this policy.

Question 58

Congestion charges cause the price of driving to ________.Therefore,the number of cars on the road will ________.

A) rise; rise
B) rise; fall
C) fall; fall
D) fall; rise
E) remain unchanged; remain unchanged

Question 59

Which of the following is true of a positive externality?

A) Some costs are borne by a third party.
B) The government can use taxes to move the market to the social optimum.
C) There are no internal benefits.
D) Some benefits accrue to a third party.
E) Its existence always requires corrective measures by the government.

Question 60

Positive externalities exist because ________ benefits are ________ than ________ benefits.

A) internal; less; external
B) internal; greater; external
C) external; greater; social
D) internal; greater; social
E) internal; less; social

Question 61

Which of the following is true?

A) social benefits = internal benefits - external benefits
B) social benefits = internal benefits + external benefits
C) internal benefits = social benefits + external benefits
D) external benefits = social benefits + internal benefits
E) internal benefits - social benefits = external benefits

Question 62

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

A) A
B) B
C) C
D) A + B
E) B + C

Question 63

External benefits arise from the actions of

A) firms.
B) consumers.
C) firms and consumers.
D) the government.
E) firms,consumers,and the government.

Question 64

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

A) A
B) B
C) A + B
D) C
E) A + B + C

Question 65

Clean air becomes polluted because

A) it is a private good.
B) no one owns the air.
C) it is a club good.
D) the air is owned by private corporations.
E) the air is owned by the government.

Question 66

Consider the accompanying figure to answer the following questions.

When a positive externality exists,which point best identifies the social optimum?

A) A
B) B
C) C
D) D
E) either A or D

Question 67

Standing in line at a small-town grocery store gives people a chance to socialize.Is this a positive externality associated with the act of shopping? Why or why not?

A) Yes,because chatting with others is not inherently part of buying groceries.
B) No,because the benefit is to the shoppers,not to third parties.
C) Yes,because in large cities such socializing would not occur.
D) No,because people can easily socialize elsewhere,as well.
E) Yes,because not every shopper is in a mood to talk.

Question 68

Which good has well-defined property rights?

A) wild animals
B) the ocean
C) a country club golf course
D) the air
E) a street performance

Question 69

Refer to the accompanying figure.The market for college degrees is currently in equilibrium at point A,and the government decides to subsidize the cost of a college education by offering grants to students.The new socially optimal equilibrium will be at point

A) R.
B) W.
C) T.
D) U.
E) V.

Question 70

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

A) Drag racing on urban streets puts pedestrians at risk.
B) Drinking a glass or two of wine makes one feel pleasantly drowsy.
C) Working out at a fitness club makes one more cheerful around others.
D) Failure to save for retirement now means a lower quality of life later on.
E) Rooting for a particular team increases one's enjoyment of sporting events.

Question 71

What makes an externality positive rather than negative?

A) The deadweight loss is greater than zero,not less.
B) The socially optimal quantity exchanged is less,not greater,than at market equilibrium.
C) The externality affects the demand curve rather than the supply curve.
D) The externality benefits third parties rather than harming them.
E) The externality becomes internalized without government action.

Question 72

Consider the accompanying figure to answer the following questions.

When a negative externality exists and the government does not intervene,which point best identifies the market equilibrium?

A) A
B) B
C) C
D) D
E) either C or D

Question 73

Externalities are minimized if

A) private property rights are well established.
B) the government owns all of the productive resources.
C) there are no private goods.
D) there are no public goods.
E) there are no free-riders.

Question 74

A major reason why the market equilibrium for a manufactured good may not be efficient is

A) there is too much government regulation.
B) property rights are not well defined.
C) there is likely to be a positive externality associated with production.
D) the industry is likely to be a monopoly.
E) the industry is producing too little output.

Question 75

Which of the following correctly describes the deadweight loss associated with any positive externality?

A) the cost borne by third parties if the externality is not internalized
B) the benefit to third parties of keeping the externality in place
C) the cost to consumers of government actions to internalize the externality
D) the cost to producers of government actions to internalize the externality
E) the combined cost,to consumers and producers,of government actions to internalize the externality

Question 76

Externalities exist because

A) owners of private property have an incentive to maintain their property.
B) owners of private property have little incentive to protect their property.
C) owners of private property are not able to trade with others.
D) property rights are not clearly defined.
E) there is too much private ownership of property.

Question 77

According to the Coase theorem,negative externalities can be internalized if

A) property rights are assigned to either party.
B) property rights are assigned to the party who is being damaged.
C) property rights are assigned to the party who is doing the damage.
D) the party causing the damage is forced out of business.
E) the government takes action to solve the problem.

Question 78

The Coase theorem suggests that private parties

A) will never be able to negotiate to correct a negative externality.
B) can always negotiate to correct a negative externality.
C) can negotiate to correct a negative externality if there are no barriers to negotiation.
D) can negotiate to correct a negative externality if the government passes a law allowing them to do so.
E) can never negotiate to correct a negative externality if there are more than two parties involved.

Question 79

Which of the following supply and demand situations definitely involves a positive externality?

A) An S_internal or D_internal curve lies to the right of the corresponding S_social or D_social curve.
B) An S_internal or D_internal curve lies to the left of the corresponding S_social or D_social curve.
C) An S_internal curve lies to the left or right of the corresponding S_social curve.
D) A D_internal curve lies to the left or right of the corresponding D_social curve.
E) The externality has not been internalized through government intervention.

Question 80

Consider the accompanying figure to answer the following questions.

A positive externality exists and the government does not intervene.Which point best identifies the market equilibrium?

A) A
B) B
C) C
D) D
E) either C or D