Question 1

What is involved in a cost-benefit analysis aimed at determining whether to increase the size of a city police force?

Accepted Answer

The answer of What is involved in a cost-benefit analysis...

Question 2

Exhibit 15-1 
-Refer to Exhibit 15-1. The graph illustrates the presence of

Accepted Answer

The graph shows that the marginal private cost (MPC) of producing a good is less than the marginal social cost (MSC), indicating that there is a negative externality present. This means that the production of the good has a cost on society that is not being fully accounted for in the market price.

Question 3

Exhibit 15-2 
-Refer to Exhibit 15-2. The diagram illustrates an example of

Accepted Answer

The answer of Exhibit 15-2 
-Refer to Exhibit 15-2. The...

Question 4

Exhibit 15-1 
-Refer to Exhibit 15-1. The price and quantity combination that represents social efficiency for this market is

Accepted Answer

The answer of Exhibit 15-1 
-Refer to Exhibit 15-1. The...

Question 5

Costs to society will equal costs to a private firm when

Accepted Answer

Costs to society will equal costs to a private firm when no externalities occur as the firm produces its product. This means all costs associated with production are internalized by the firm, and there are no spillover effects (positive or negative) on third parties.

Question 6

Suppose that the production of a good causes negative externalities. What will happen if the good is produced at the level at which the marginal private cost curve meets the demand curve?

Accepted Answer

When the production of a good causes negative externalities and it is produced at the level at which the marginal private cost curve meets the demand curve, the level of output will result in a net social cost. This means that the production level is too high and that the negative externalities have not been taken into account in the production decision, leading to a situation where the costs to society are greater than the benefits.

Question 7

When a negative externality occurs,

Accepted Answer

When a negative externality occurs, social costs are greater than private costs. This is because the cost of the negative externality is borne not only by the producer or consumer involved but also by society as a whole. For example, if a factory pollutes a river, the cost of the pollution is borne not only by the factory but also by everyone who uses the river for swimming, fishing, or drinking water. Therefore, the total cost to society is greater than the private cost to the factory, leading to a market failure.

Question 8

When a good is produced or consumed, the side effects on the people who are not directly involved in the market are called

Accepted Answer

The side effects on people who are not directly involved in a market transaction are called externalities.

Question 9

A situation in which the costs of producing or the benefits of consuming a good spill over onto those who are neither producing nor consuming the good is called a(n)

Accepted Answer

An externality occurs when the costs or benefits of a transaction are not fully paid by the producer or consumer, but instead spill over onto third parties. This can lead to market failure, as the true social cost or benefit is not reflected in the market price. Choices A, B, C, and E are all related concepts, but do not accurately describe a situation where costs or benefits spill over onto third parties.

Question 10

An externality is the effect that occurs when the production or consumption of a good directly affects a third party.

Accepted Answer

This is the definition of an externality.

Question 11

Marginal social cost minus marginal external cost equals

Accepted Answer

Marginal social cost (MSC) is the total cost to society of producing an additional unit of a good, including both the private costs borne by the producer and any external costs to other members of society. Marginal external cost (MEC) is the cost of producing an additional unit of a good that falls on people other than the producer, such as pollution. Therefore, MSC minus MEC equals the marginal private cost (MPC), which is the cost borne by the producer alone.

Question 12

Exhibit 15-2 
-Refer to Exhibit 15-2. The deadweight loss due to externality is represented by the area

Accepted Answer

Deadweight loss due to externality is represented by the area between the social cost curve and demand curve, but to the left of the quantity at which the social cost curve intersects the supply curve. In this case, that is the area C+D. The other areas (A+B and E+F) are not part of the deadweight loss.

Question 13

Suppose that people value the continued presence of certain species of animals in rural areas, but home-building in those areas reduces the populations of the animals. Home-building creates

Accepted Answer

Home-building in rural areas reduces the populations of certain species of animals, which is a negative impact on the people who value the continued presence of those species. This negative impact is an example of a negative externality.

Question 14

In a competitive market with a negative externality, firms produce an

Accepted Answer

In a competitive market with a negative externality (such as pollution), firms tend to produce more than the socially efficient quantity because they do not bear the full cost of their production's negative effects on society.

Question 15

A negative externality occurs when the purchase of a product

Accepted Answer

Negative externality refers to a situation where the consumption or production of a good or service has a harmful impact on a third party who is not involved in the transaction. This impact adversely affects the well-being of individuals outside of the market, leading to market failure. Examples of negative externalities are pollution, noise pollution, and secondhand smoke.

Question 16

An example of a positive externality is when

Accepted Answer

The beauty of the neighbor's garden has a positive effect on the well-being of the person who can see it, without any additional cost to them. This is an example of a positive externality, as the benefit is felt by someone other than the person who created it. Choices A, C, and D describe negative externalities, where one person's actions have a negative effect on others. Choice E is a general statement that is not relevant to the question.

Question 17

The marginal cost of production as viewed by society as a whole is called the marginal

Accepted Answer

Marginal social cost takes into account both the internal costs to the producer and the external costs to society, such as pollution or congestion.

Question 18

Exhibit 15-1 
-Refer to Exhibit 15-1. The amount of externality is reflected in the difference between

Accepted Answer

The externality is the difference between the socially optimal quantity (where the MSB curve intersects the MSC curve) and the quantity produced without intervention. In this case, the socially optimal quantity is Q2 and the quantity produced without intervention is Q1. Therefore, the difference between P₁ and P₃ reflects the amount of externality. Choice A compares the quantities produced at two different prices and does not provide information about the externality. Choice C compares the prices of two different quantities and does not provide information about the externality. Choices D and E compare the price at the socially optimal quantity with the price at the current quantity produced, but they do not provide information about the difference between the two quantities.

Question 19

An example of a good with a positive externality is

Accepted Answer

Research is an example of a good with a positive externality because it has benefits for society beyond the people who conduct the research or directly benefit from its results. For example, research on medical treatments or renewable energy sources can improve the health and well-being of people and reduce pollution for everyone, regardless of whether they directly paid for or conducted the research.

Question 20

The negative effect of cigarette smoking on a smoker is an externality.

Accepted Answer

An externality refers to a cost or benefit incurred or received by a third party who did not choose to incur that cost or benefit. The negative effect of cigarette smoking on the smoker themselves is not an externality because it directly affects the individual choosing to smoke. Externalities from smoking would include effects on non-smokers, such as secondhand smoke.

Quiz 15: Public Goods, Externalities, and Government Behavior