Question 1

If a negative externality exists in the production of paper and paper is sold in a perfectly competitive market, at the equilibrium output:

Accepted Answer

When a negative externality exists, the social cost of production is higher than the private cost. Reducing output can align production with the true social cost, leading to net gains for society.

Question 2

When negative externalities are present, market failure often occurs because:

Accepted Answer

Negative externalities lead to market failure because the external costs imposed on third parties are not included in the market price, resulting in overconsumption or overproduction of the good.

Question 3

An externality is present in a free market whenever:

Accepted Answer

An externality occurs when an activity affects third parties and these effects are not captured in the market prices, leading to market failure.

Question 4

James enjoys gardening in the nude because he says it puts him in touch with nature. His neighbors find his gardening routine very offensive, but James replies that they should mind their own business and not watch him. To an economist this situation illustrates the concept of:

Accepted Answer

A negative externality occurs when an individual's actions impose costs on others. In this case, James's nude gardening is offensive to his neighbors, creating a negative impact on them.

Question 5

When positive externalities exist in the consumption of a good, the marginal social benefit:

Accepted Answer

The marginal social benefit includes both the benefit to consumers and the additional benefit to third parties, which is characteristic of positive externalities.

Question 6

Carbon dioxide emissions are thought to contribute to global warming, and there is a concern that changes in climate will be costly. Emitting carbon dioxide is an example of:

Accepted Answer

Emitting carbon dioxide is a negative externality because it imposes costs on others (such as environmental damage and health issues) that are not reflected in the market price of the activities causing the emissions.

Question 7

An example of a negative externality is the:

Accepted Answer

A negative externality occurs when an individual or firm's actions impose an uncompensated cost on others, such as the discomfort caused by a neighbor's noisy party.

Question 8

If a positive externality exists in the provision of education when education is provided in a perfectly competitive market without government intervention, at the market equilibrium level of education:

Accepted Answer

In the presence of a positive externality, the marginal social benefit of education exceeds the marginal private benefit. Therefore, the market equilibrium level of education is lower than the socially optimal level, and additional net gains to society are possible by increasing the level of education.

Question 9

College education provides higher income for the individual but also a more productive and more educated person who will contribute to society in many ways. Higher education is an example of:

Accepted Answer

Higher education is a positive externality because it benefits not only the individual receiving the education but also society as a whole through increased productivity and contributions.

Question 10

Which of the following is not an example of an externality?

Accepted Answer

A defective part causing an automobile to break down is a direct consequence of a transaction between the buyer and seller, not an externality. Externalities are effects of a transaction that impact third parties who are not directly involved in the transaction.

Question 11

If a positive externality is associated with the purchase of smoke detectors:

Accepted Answer

A positive externality means that the social benefit is greater than the private benefit. Therefore, the marginal social benefit of smoke detectors exceeds their price.

Question 12

Alex is playing his music at full volume in his dorm room. The other people living on his floor are enjoying his music, but Alex does not know or care. Alex's music playing is an example of a:

Accepted Answer

Alex's music playing is a positive externality because it provides a benefit to others (the people on his floor) without Alex intending to do so.

Question 13

The existence of negative externalities:

Accepted Answer

Negative externalities lead to market inefficiencies because they result in a cost to society that is not reflected in the market price, causing overproduction or overconsumption of the good or service.

Question 14

The cost of running an electrical utility includes costs for fuel, labor, and capital. In addition, there are sometimes costs associated with pollution from the utility, such an increased health care costs for people living near the utility. To an economist, the costs associated with the pollution resulting from additional electricity are:

Accepted Answer

The costs associated with pollution are external costs not borne by the utility, thus they represent the difference between marginal social costs (which include external costs) and marginal private costs (which do not).

Question 15

When negative externalities exist in the production of a good, the marginal social cost of producing the good:

Accepted Answer

The marginal social cost includes both the marginal cost borne by the firm and the additional costs imposed on third parties due to negative externalities.

Question 16

In the Flint Hills area of Kansas, proposals to build wind turbines to generate electricity have pitted environmentalist against environmentalist. Members of the Kansas Sierra Club support the turbines as a way to reduce use of fossil fuel, but local chapters of the Nature Conservancy say they will befoul the landscape. An argument that supports the Sierra Club position is that that wind turbines:

Accepted Answer

Wind turbines reduce negative externalities elsewhere in the economy by decreasing reliance on fossil fuels, which are associated with pollution and greenhouse gas emissions.

Question 17

If a negative externality is associated with burning firewood:

Accepted Answer

A negative externality means that the activity imposes additional costs on society that are not reflected in the market price. Therefore, the marginal social cost, which includes these external costs, exceeds the price.

Question 18

An economist argues that the states that have spent the most on higher education in the last 25 years have experienced the least economic growth. One might conclude that higher education:

Accepted Answer

The economist's argument suggests that higher education spending does not correlate with economic growth, implying that it may not provide the expected positive externalities, such as increased productivity or innovation, that contribute to economic growth.

Question 19

Proposals in Flint Hills, Kansas, to build wind turbines to generate electricity have pitted environmentalist against environmentalist. Members of the Kansas Sierra Club support the turbines as a way to reduce use of fossil fuel, but local chapters of the Nature Conservancy say they will befoul the landscape. The Nature Conservancy is arguing that that wind turbines:

Accepted Answer

The Nature Conservancy argues that wind turbines will "befoul the landscape," indicating they believe the turbines create negative externalities, which are unintended adverse effects on the environment.

Question 20

Under the Texas law known as "rule of capture," land owners "get to pump as much of the water under it as they want. . .. 'This means whoever sucks it out first, it's their water'-even if that means there isn't enough left for others." Under this law, pumping large amounts of water:

Accepted Answer

Pumping large amounts of water under the rule of capture can deplete the resource, negatively affecting others who rely on the same water source, thus imposing a negative externality.

Quiz 8: Market Failure Versus Government Failure