Question 1

In a market, the presence of an external cost causes themarket equilibrium output to exceed the efficient level ofoutput.

Accepted Answer

An external cost is a negative externality that is not accounted for in the market price. This means that the cost is borne by parties outside of the market transaction, such as the environment or society as a whole. As a result, the market equilibrium output will be too high since the cost is not factored into the price. This creates an inefficient outcome where the marginal cost of production exceeds the marginal benefit to society.

Question 2

Vaccines benefit the person who is vaccinated but they alsocreate an external cost for others.

Accepted Answer

Vaccines primarily benefit the person who is vaccinated by providing immunity against diseases, but they also create an external benefit for others by reducing the spread of infectious diseases, contributing to herd immunity, and protecting those who cannot be vaccinated.

Question 3

If the private benefit of getting a flu shot for a person is lessthan the social benefit, the market quantity will be greaterthan the efficient quantity.

Accepted Answer

When the private benefit of getting a flu shot is less than the social benefit, it indicates a positive externality. In such cases, the market quantity of flu shots will be less than the efficient quantity, as individuals do not account for the external benefits their vaccination provides to others.

Question 4

When a transaction between a buyer and seller directly affectsa third party, the effect is called an externality.

Accepted Answer

An externality occurs when the actions of a buyer or seller have an impact on a third party who is not involved in the transaction. This can be positive (such as a company providing job opportunities in the local community) or negative (such as pollution caused by a factory affecting the health of nearby residents). The presence of externalities can lead to market failures, as the cost or benefit of the externality is not reflected in the price of the transaction.

Question 5

The social cost of pollution includes the private producer costsplus the costs to bystanders adversely affected by thepollution.

Accepted Answer

The social cost of pollution includes the private producer costs as well as the costs to those who are negatively impacted by the pollution but are not part of the transaction or decision-making process, such as bystanders.

Question 6

While the Coase theorem is appealing, private actors often failto resolve the problems caused by external costs and benefits.

Accepted Answer

The Coase theorem assumes that private actors can negotiate and find a mutually beneficial solution to externalities, but in reality, this often does not happen due to transaction costs, information asymmetry, and other market failures.

Question 7

The Coase theorem says that if transaction costs are high andproperty rights are clearly defined, the private bargains willensure that the market equilibrium is efficient even whenthere are externalities.

Accepted Answer

The Coase theorem actually states that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient, even when there are externalities. High transaction costs can impede these efficient outcomes.

Question 8

If transaction costs are low and property rights are clearlyidentifiable, an efficient market equilibrium can be achievedeven when externalities exist.

Accepted Answer

Low transaction costs and clearly identifiable property rights can help facilitate bargaining and negotiation between parties affected by externalities, leading to an efficient market equilibrium where the costs and benefits of the externality are internalized. This concept is known as the Coase Theorem.

Question 9

In an efficient market, the supply curve will decrease by theamount of the external cost.

Accepted Answer

In an efficient market, the price of a good will reflect all the costs associated with its production and consumption, including any external costs such as pollution or health impacts. Therefore, as the external cost is taken into account, the supply curve will shift upward, decreasing the quantity supplied at any given price. This helps to internalize the externality and move closer to a socially optimal outcome.

Question 10

The social cost of antibiotic consumption equals the privatecost of producing antibiotics plus the cost of increasedbacterial resistance to antibiotics.

Accepted Answer

The social cost of antibiotic consumption includes both the private cost of producing antibiotics and the cost of increased bacterial resistance, as antibiotic overuse can lead to the proliferation of resistant bacterial strains, making infections more difficult and costly to treat.

Question 11

An external cost is built into the market price of a good andthus paid by the consumers.

Accepted Answer

An external cost is a cost that is not included in the market price of a good, and thus it is not paid by the consumers. Instead, it is imposed on third parties or society as a whole. This is why external costs are often referred to as externalities. Examples of external costs include pollution, traffic congestion, and noise pollution.

Question 12

Antibiotics tend to be overused, as the producers of antibioticsare required to bear all the costs of antibiotic use.

Accepted Answer

Antibiotics tend to be overused due to factors such as prescription for viral infections (where they are ineffective), patient demand, and agricultural use, not because producers bear all the costs. In fact, the societal costs of antibiotic resistance, spurred by overuse, are not fully borne by producers.

Question 13

External benefits lead to inefficient market outcomes.

Accepted Answer

External benefits occur when the production or consumption of a good or service benefits individuals or third parties who are not involved in the market transaction. Since these benefits are not reflected in the price of the good, the market may produce less of the good than is socially optimal, leading to an inefficient outcome.

Question 14

External costs cause deadweight losses, whereas externalbenefits do not.

Accepted Answer

Both external costs and external benefits can cause deadweight losses, as they both involve spillover effects that are not reflected in market prices. External costs create deadweight losses by imposing costs on third parties that are not accounted for in the price paid by buyers and sellers, which can lead to inefficient levels of production and consumption. External benefits, on the other hand, create deadweight gains by providing benefits to third parties that are not reflected in market prices, which can lead to underproduction and inefficient allocation of resources.

Question 15

Government intervention is necessary to correct allexternalities.

Accepted Answer

Not all externalities require government intervention because some can be resolved through private negotiation or market mechanisms, and intervention might sometimes lead to inefficiencies or unintended consequences.

Question 16

If the government subsidizes activities with external benefits,the market price falls and people consume more.

Accepted Answer

Subsidies can lead to a lower market price for goods or activities that offer external benefits (benefits to individuals who are not directly involved in the transaction). This can incentivize more people to consume the good or engage in the activity, leading to a greater overall benefit to society.

Question 17

Markets are always able to find solutions to externalityproblems, and thus maximize social surplus.

Accepted Answer

Markets may not be able to find solutions to externality problems without government intervention. For example, a pollution externality cannot be easily solved by markets as the cost of pollution is not reflected in the market price of the product causing the pollution. This leads to an inefficient allocation of resources and a suboptimal social surplus.

Question 18

External costs lead markets to produce a smaller quantity of agood than is socially desirable, while external benefits leadmarkets to produce a larger quantity of a good than is sociallydesirable.

Accepted Answer

External costs lead markets to produce a larger quantity of a good than is socially desirable because the market does not account for the negative impacts on third parties. Conversely, external benefits lead markets to produce a smaller quantity of a good than is socially desirable because the market does not account for the positive impacts on third parties.

Question 19

Barking dogs cannot be considered an externality becauseexternalities must be associated with some form of marketexchange.

Accepted Answer

Barking dogs can be considered an externality, as they impose costs (disrupting sleep, causing annoyance) on those who did not choose to own the dog. The statement that externalities must be associated with market exchange is incorrect. Externalities occur when the cost or benefit of a transaction is imposed on parties not involved in the transaction, regardless of whether a market exchange takes place.

Question 20

According to the Coase theorem, the private market will needgovernment intervention in order to reach an efficientoutcome when externalities are present.

Accepted Answer

According to the Coase theorem, if property rights are clearly defined, and transaction costs are low, private parties can negotiate and reach an efficient outcome on their own without government intervention. However, in reality, transaction costs may be high and property rights may not be well-defined, which can lead to market failures and the need for government intervention to address externalities.

Quiz 10: Monopolistic Competition and Oligopoly