Question 1

A positive externality or external benefit occurs when:
A)product differentiation increases the variety of products available to consumers.
B)the benefits associated with a product exceed those accruing to people who consume it.
C)a firm produces at the P = MC output.
D)economic profits are zero in the long run.

Accepted Answer

A positive externality occurs when the benefits associated with a product exceed those accruing to people who consume it. This means that there are additional benefits to society as a whole that are not captured by the consumer or producer. For example, education can have positive externalities as it benefits not only the person who receives the education but also society as a whole in terms of increased productivity and economic growth.

Question 2

Refer to the below competitive market diagram for product Z.Assume that the current market demand and supply curves for Z are D₂ and S₂.If there are substantial positive externalities associated with the production of Z, it can be argued that: A)efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits. B)an output smaller than G would improve resource allocation. C)government should levy a per unit excise tax on Z to shift the demand curve toward D₁. D)an output greater than G would result in a more efficient allocation of resources.

Accepted Answer

The answer of Refer to the below competitive market diagram...

Question 3

One condition for individual bargaining to occur according to the Coase Theorem is that there must be:
A)clearly defined property rights.
B)many people affected and involved.
C)government intervention to establish bargaining.
D)government creation of a market for externalities.

Accepted Answer

Clear property rights are essential for individual bargaining to occur under the Coase Theorem. Without clear property rights, it would be difficult to identify who has the right to negotiate and make decisions regarding the externalities.

Question 4

Refer to the diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs.Assume that the number of people affected by these external costs is large.If the government wishes to establish an optimal allocation of resources in this market, it should: A)not intervene because the market outcome is optimal. B)subsidize consumers so that the market demand curve shifts leftward. C)subsidize producers so that the market supply curve shifts leftward (upward). D)tax producers so that the market supply curve shifts leftward (upward).

Accepted Answer

To establish an optimal allocation of resources, the government must internalize the external costs. One way to achieve this is by imposing a tax on the producers, which would increase their costs of production and shift the market supply curve leftward (upward). This would lead to a higher market price and lower quantity traded, which would reduce the negative externality caused by the production. Subsidizing consumers or producers would not address the external cost issue, and not intervening would result in an inefficient outcome.

Question 5

The graphs below refer to two separate product markets.Assume that society's optimal level of output in each market is Q₀ and that government purposely shifts the market supply curve from S to S₁in diagram (a) and from S to S₂ in diagram (b).We can conclude that the government is correcting for: A)negative externalities in diagram (a) and positive externalities in diagram (b). B)positive externalities in diagram (a) and negative externalities in diagram (a). C)negative externalities in both diagrams. D)positive externalities in both diagrams.

Accepted Answer

In diagram (a), the government has shifted the market supply curve to the left (S₁) in order to correct for negative externalities. This will result in a decrease in the quantity produced and consumed, shifting towards the socially optimal output level. In diagram (b), the government has shifted the market supply curve to the right (S₂) in order to correct for positive externalities. This will result in an increase in the quantity produced and consumed, shifting towards the socially optimal output level. Therefore, the correct answer is A.

Question 6

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building.The Coase Theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings would best be resolved by:
A)the owners themselves.
B)city government officials.
C)a zoning ordinance restricting high-rise buildings.
D)a government fine for the builder of the high-rise.

Accepted Answer

The Coase Theorem suggests that in situations like this, where there are property rights in dispute, the parties involved can negotiate and come to an agreement that benefits both parties. In this case, the owner of the high-rise building could potentially pay the owner of the low-rise building for the right to build in a way that does not obstruct the view. Alternatively, the owners could work together to find a mutually beneficial solution. This approach is preferred over involving government officials or implementing fines, as it allows the parties involved to reach a solution that best suits their needs.

Question 7

The Coase Theorem states that:
A)government should levy excise taxes on firms which generate spillover or external costs.
B)taxes should be levied such that they change private behavior as little as possible.
C)under the right conditions, bargaining between private parties will remedy externality problems without the need for government intervention.
D)trading of votes to secure favorable voting outcomes may increase efficiency.

Accepted Answer

The Coase Theorem states that private parties can bargain and come to a mutually beneficial solution to externality problems without the need for government intervention, as long as transaction costs are low and property rights are clearly defined. Therefore, choice C is the correct answer. Choices A and B may be methods for government intervention in externalities, but they are not direct implications of the Coase Theorem. Choice D is unrelated to the Coase Theorem.

Question 8

The Coase Theorem:
A)applies only to circumstances in which externalities are extensive and bargaining costs are high.
B)holds that the median voter will decide the outcome of elections.
C)states that in some circumstances majority voting can yield inconsistent results.
D)suggests that in some circumstances government intervention is not needed to resolve externality problems.

Accepted Answer

The Coase Theorem states that in some circumstances, government intervention is not needed to resolve externality problems, as long as the affected parties can negotiate and bargain with each other at low costs. This implies that private parties can find mutually beneficial solutions to externalities without requiring government intervention.

Question 9

If there are external benefits or positive externalities associated with consumption and production of a product, it can be said that the:
A)government should consider placing a special tax on producers.
B)government should consider prohibiting the production of the commodity.
C)supply curve for the product lies too far to the right to provide an efficient allocation of resources.
D)demand curve understates the total benefit from the product and resources are under-allocated to its production.

Accepted Answer

When there are external benefits or positive externalities, the demand for the product understates the total benefit from the product. This means that resources are under-allocated to the production of the product, and therefore, the government should take measures to encourage its production, such as subsidizing or providing incentives for producers. Choice A (special tax) and Choice B (prohibition of production) would discourage the production of a product that has external benefits, which is not desirable. Choice C is incorrect because the supply curve is not affected by external benefits, but rather the demand curve.

Question 10

If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be:
A)taxed.
B)prohibited.
C)subsidized.
D)left alone.

Accepted Answer

If the activity creates external benefits, this means that there are benefits to society as a whole that are not reflected in the private benefits of the individual or firm engaging in the activity. In this case, subsidizing the activity would encourage more of it to occur, leading to greater overall benefits for society.

Question 11

Refer to the below diagram of the market for product X.Curve S_t embodies all costs (including spillovers) and D_t embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q₁, we can conclude that the existence of spillover: A)costs have resulted in an over-allocation of resources to X. B)benefits have resulted in an over-allocation of resources to X. C)costs have resulted in an under-allocation of resources to X. D)benefits have resulted in an under-allocation of resources to X.

Accepted Answer

The answer of Refer to the below diagram of the...

Question 12

When producing a good generates external or negative externalities, the private market for that good tends to produce too:
A)much of the product at too low a price.
B)much of the product at too high a price.
C)little of the product at too low a price.
D)little of the product at too high a price

Accepted Answer

When a good produces negative externalities (costs not borne by the producer or consumer of the good, but by third parties), the market tends to overproduce that good relative to the socially optimal level. This is because the private market does not account for the external costs, leading to a higher quantity of the product being produced and sold at a lower price than what would be socially optimal.

Question 13

Refer to the diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs.Assume that the number of people affected by these external costs is large.Without government interference, this market will result in: A)an optimal allocation of society's resources. B)an under-allocation of resources to this product. C)an over-allocation of resources to this product. D)a higher price than is consistent with an optimal allocation of resources.

Accepted Answer

Without government interference, the market will result in an over-allocation of resources to this product as the market supply curve S underestimates the true cost of production due to external costs not being accounted for. As a result, the market equilibrium quantity and price will be higher than the socially optimal quantity and price, leading to an over-allocation of resources.

Question 14

Refer to the below supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.This supply and demand graph indicates that there is (are): 
A)positive externalities to the production of this product.
B)negative externalities to the production of this product.
C)an overallocation of resources to the production of this product.
D)a negative externality from the production of this product.

Accepted Answer

The answer of Refer to the below supply and demand...

Question 15

The proposition that under some circumstances externalities can get resolved through private negotiation is known as:
A)the paradox of externalities.
B)the median-voter theory.
C)the Coase Theorem.
D)logrolling.

Accepted Answer

The Coase Theorem explains that under some circumstances externalities can be resolved through private bargaining between the parties involved. It suggests that if the property rights are clearly defined and transaction costs are low, then the parties will negotiate and arrive at an efficient outcome without the need for intervention.

Question 16

Refer to the below diagram of the market for product X.Curve S_t embodies all costs (including spillovers) and D_t embodies all benefits (including spillovers) associated with the production and consumption of X.Assuming the equilibrium output is Q₂, we can conclude that the existence of spillover: A)costs have resulted in an over-allocation of resources to X. B)benefits have resulted in an over-allocation of resources to X. C)costs have resulted in an under-allocation of resources to X. D)benefits have resulted in an under-allocation of resources to X.

Accepted Answer

The existence of spillover costs means that the social costs of producing and consuming X are higher than the private costs, which are only accounted for by the producer and consumer. Therefore, the equilibrium quantity of Q₂ results in an over-allocation of resources to X since the social costs outweigh the social benefits.

Question 17

Suppose that a large tree on Shawn's property is blocking Sam's view of the lake below.Shawn accepts Sam's offer to pay Shawn $100 for the right to cut down the tree.This situation describes:
A)the Coase Theorem.
B)the diamond-water paradox.
C)logrolling.
D)a market for externality rights.

Accepted Answer

The Coase Theorem suggests that if property rights are well-defined and transaction costs are low, parties will negotiate to correct externalities, such as the blocked view, on their own. This is exemplified by Sam paying Shawn to remove the tree, thereby resolving the externality through private negotiation.

Question 18

If a good that generates negative externalities was priced to take into account these negative externalities, then its:
A)price would decrease and its output would increase.
B)output would increase but its price would remain constant.
C)price would increase and its output would decrease.
D)price would increase but its output would remain constant.

Accepted Answer

Pricing in negative externalities would increase the cost of producing the good, resulting in a higher price for consumers. This, in turn, would decrease demand for the good leading to a decrease in output.

Question 19

If there are external benefits or positive externalities associated with the consumption of a good or service:
A)the private demand curve will overestimate the true demand curve.
B)the private demand curve will underestimate the true demand curve.
C)consumers will be willing to pay for all these benefits in private markets.
D)the market demand curve will be the vertical summation of the individual demand costs.

Accepted Answer

When there are positive externalities associated with the consumption of a good or service, the private demand curve only takes into account the private benefits received by the consumer, while ignoring the external benefits that accrue to others in society. As a result, the private demand curve underestimates the true demand for the product. This leads to a market failure in which the product is underproduced and under-consumed, relative to what would be socially optimal.

Question 20

Which of the following is an example of externalities?
A)There are not enough tickets available to concerts of extremely popular performers.
B)The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and techniques.
C)Polio shots and chest x-rays provide widespread benefits to the community as a whole as well as to the individuals who get them.
D)Extensive decreases in the prices of electronic equipment resulted in large numbers of bankruptcies in the computer industry.

Accepted Answer

Polio shots and chest x-rays provide a positive externality, as they not only benefit the individual who receives them but also the community as a whole by reducing the spread of disease and improving public health. Options A, B, and D do not involve externalities but rather relate to supply and demand, technology, and market competition, respectively.

Quiz 4: Part B: Market Failures: Public Goods and Externalities

A positive externality or external benefit occurs when:

Refer to the below competitive market diagram for product Z.Assume that the current market demand and supply curves for Z are D₂ and S₂.If there are substantial positive externalities associated with the production of Z, it can be argued that:

One condition for individual bargaining to occur according to the Coase Theorem is that there must be:

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building.The Coase Theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings would best be resolved by:

The Coase Theorem states that:

The Coase Theorem:

If there are external benefits or positive externalities associated with consumption and production of a product, it can be said that the:

If some activity creates external benefits as well as private benefits, then economic theory suggests that the activity ought to be:

When producing a good generates external or negative externalities, the private market for that good tends to produce too:

Refer to the diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs.Assume that the number of people affected by these external costs is large.Without government interference, this market will result in:

Refer to the below supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.This supply and demand graph indicates that there is (are) :

The proposition that under some circumstances externalities can get resolved through private negotiation is known as:

Suppose that a large tree on Shawn's property is blocking Sam's view of the lake below.Shawn accepts Sam's offer to pay Shawn $100 for the right to cut down the tree.This situation describes:

If a good that generates negative externalities was priced to take into account these negative externalities, then its:

If there are external benefits or positive externalities associated with the consumption of a good or service:

Which of the following is an example of externalities?