Question 1

A well-maintained waterfront property that is enjoyed by other property owners is an example of
A)an inefficient allocation of resources.
B)a negative consumption externality.
C)a positive consumption externality.
D)a negative production externality.
E)a positive production externality.

Accepted Answer

A well-maintained waterfront property that is enjoyed by other property owners creates a positive consumption externality because it provides a benefit to others who are not paying for it.

Question 2

An example of an activity that creates a positive consumption externality is
A)logging, which pollutes rivers.
B)locating beehives next to an orange orchard.
C)smoking, which harms the health of a bystander.
D)a flu vaccination.
E)a noisy party.

Accepted Answer

A flu vaccination creates a positive consumption externality because it not only benefits the individual receiving the vaccination, but also reduces the chance of that individual spreading the flu to others, therefore benefiting society as a whole.

Question 3

A person driving while talking on a cellphone creates ________. A beautiful sunset creates ________.
A)a negative production externality; a positive consumption externality
B)a negative production externality; no externality
C)a negative consumption externality; a positive consumption externality
D)a negative consumption externality; no externality
E)a negative consumption externality; a positive production externality

Accepted Answer

D

Question 4

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then the quantity produced is
A)zero.
B)Q₁.
C)Q₂.
D)Q₃.
E)too low.

Accepted Answer

The answer of Use the figure below to answer the...

Question 5

Smoking tobacco creates a ________ externality.
A)negative consumption
B)negative production
C)positive consumption
D)positive production
E)marginal

Accepted Answer

Smoking tobacco creates a negative consumption externality, as it imposes a cost on individuals who do not smoke but are exposed to second-hand smoke. This cost includes health risks and potentially decreased quality of life.

Question 6

Air pollution generated by a paper mill factory is an example of a
A)positive production externality.
B)positive consumption externality.
C)negative consumption externality.
D)marginal external benefit.
E)negative production externality.

Accepted Answer

Air pollution generated by a paper mill factory is a negative production externality, as it is an unintended negative consequence of the factory's production activities that affects people or the environment outside the factory.

Question 7

If the marginal private cost of producing one kilowatt of power in British Columbia equals five cents and the marginal social cost of each kilowatt equals nine cents, then the marginal external cost equals ________ per kilowatt.
A)five cents
B)nine cents
C)four cents
D)fourteen cents
E)forty-five cents

Accepted Answer

The marginal external cost is the difference between the marginal social cost and the marginal private cost, which is nine cents minus five cents, equaling four cents.

Question 8

A homeowner planting an attractive garden in front of his house creates ________. A bakery baking bread creates ________.
A)no externality; a positive production externality
B)a positive consumption externality; no externality
C)no externality; no externality
D)a positive consumption externality; a positive production externality
E)a positive production externality; no externality

Accepted Answer

A homeowner planting an attractive garden in front of his house creates a positive consumption externality because it enhances the beauty of the surrounding area for not only the homeowner but also for the neighbors and passers-by. On the other hand, a bakery baking bread creates a positive production externality because the aroma of freshly baked bread may attract people to the area and increase business for other nearby shops.

Question 9

An externality is
A)the amount by which price exceeds marginal private cost.
B)the amount by which price exceeds marginal social cost.
C)the effect of government regulation on market price and output.
D)someone who consumes a good without paying for it.
E)a cost or benefit that arises from an activity but affects people not part of the original activity.

Accepted Answer

An externality is a cost or benefit that arises from an activity but affects people not part of the original activity. Choices A and B describe the concept of market failure, not externality. Choice C describes the effect of government regulation, and choice D describes free-riders.

Question 10

Which of the following illustrates the concept of external cost?
A)Bad weather reduces the size of the wheat crop.
B)A reduction in the size of the wheat crop causes income of wheat farmers to fall.
C)Smoking harms the health of the smoker.
D)Smoking harms the health of nearby nonsmokers.
E)Public health services reduce the transmission of disease.

Accepted Answer

External cost occurs when the consumption or production of a good or service imposes a negative effect on a third party who is not involved in the transaction. Smoking harms the health of nearby nonsmokers, who are not involved in the decision to smoke, and therefore represents an external cost.

Question 11

An example of an activity that creates a negative consumption externality is
A)logging, which pollutes rivers.
B)locating beehives next to an orange orchard.
C)smoking, which harms the health of a bystander.
D)a flu vaccination.
E)a sales tax.

Accepted Answer

Smoking creates a negative consumption externality because it harms the health of people who are exposed to secondhand smoke.

Question 12

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then at the equilibrium output the marginal social cost of production is
A)less than the marginal benefit to consumers.
B)greater than the marginal benefit to consumers.
C)equal to the marginal benefit to consumers.
D)equal to the marginal private cost of production.
E)less than the marginal private cost of production.

Accepted Answer

At the equilibrium output, the marginal social cost curve intersects with the demand curve at point E. This means that the goods and services produced and consumed in the market cause external costs to third parties, which are not reflected in the market price. The marginal social cost curve is above the marginal private cost curve, indicating that the cost to society of producing the last unit of the product is greater than the cost borne by the producer. Since the demand curve represents the marginal benefit to consumers, the marginal social cost of production is greater than the marginal benefit to consumers, suggesting that resources are being over-allocated to the production of the good. Therefore, choice B is the correct answer.

Question 13

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If a constant per unit tax is imposed that generates an efficient allocation of resources, then consumers pay a per unit price of
A)zero.
B)P₁.
C)P₂.
D)P₃.
E)P₄.

Accepted Answer

The efficient allocation occurs where the marginal social cost curve intersects the market demand curve. At this point, the price consumers pay is P₃.

Question 14

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If a constant per unit tax is imposed that generates an efficient allocation of resources, then the quantity produced is
A)zero.
B)Q₁.
C)Q₂.
D)Q₃.
E)greater than Q₃.

Accepted Answer

When a constant per unit tax is imposed, the marginal private cost (MC) curve will shift upwards to MC+tax, while the marginal social cost (MSC) curve will remain unchanged. This will cause the new equilibrium to be where the MC+tax curve intersects with the market demand curve at point C. At this point, the quantity produced will be Q2, which is the efficient level of output where MSC=MB. Therefore, the answer is C.

Question 15

A private cost of production is a cost that is borne by the ________ of a good or service. A social cost of production is a cost that is ________.
A)consumer; borne by the producer and by everyone else on whom the cost falls
B)consumer; not borne by the producer but borne by other people
C)producer; not borne by the producer but borne by other people
D)producer; borne by the producer and by everyone else on whom the cost falls
E)producer; borne by the consumer

Accepted Answer

A private cost of production is a cost that is directly borne by the producer of a good or service. A social cost of production includes both the private cost and any additional costs (externalities) borne by others who were not involved in the transaction.

Question 16

An externality is defined as
A)an additional cost imposed by the government on producers.
B)an additional gain received by consumers from decisions made by the government.
C)a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.
D)a marginal social cost.
E)the additional amount consumers have to pay to consume an additional amount of a good or service.

Accepted Answer

An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. This can arise from production or consumption activities and falls on someone other than the producer or consumer. A classic example of a negative externality is pollution caused by a factory, which affects the environment and people living nearby but may not be fully reflected in the cost of production. On the other hand, a positive externality could be education, which benefits individuals and society as a whole in the long run.

Question 17

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. To promote an efficient allocation of resources, the government could impose a constant per unit tax equal to
A)zero.
B)P₁.
C)P₃ - P₁.
D)P₄ - P₁.
E)P₃ - P₂.

Accepted Answer

The efficient allocation of resources occurs where the marginal social cost equals the market demand. The tax should equal the difference between the marginal social cost and the marginal private cost, which is P₃ - P₁.

Question 18

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then
A)the quantity produced is efficient but price is too low.
B)the quantity produced is less than the efficient quantity.
C)the quantity produced is greater than the efficient quantity.
D)the quantity produced is efficient but the price is too high.
E)the externality is eliminated.

Accepted Answer

If the market is unregulated, the equilibrium quantity will be where the market demand curve intersects with the marginal private cost curve. This quantity is greater than the efficient quantity, which is where the marginal social cost curve intersects with the market demand curve. Therefore, the quantity produced is greater than the efficient quantity. The price will be determined by the intersection of the market demand and supply curves, which in this case is below the marginal social cost curve. Therefore, the price is too low from a social perspective. This creates a negative externality, which is not eliminated in an unregulated market.

Question 19

An externality is a cost or benefit arising from an economic activity that falls on
A)consumers but not producers.
B)producers but not consumers.
C)consumers or producers.
D)someone other than consumers or producers.
E)foreigners.

Accepted Answer

An externality is a cost or benefit that affects someone other than the consumers or producers engaged in the activity. For example, pollution from a factory affects the environment and possibly nearby residents who did not choose to engage in the economic activity.

Question 20

Use the figure below to answer the following questions.
  
Figure 16.2.1
-Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then the price is
A)P₁.
B)P₄.
C)below P₁.
D)P₂.
E)P₃.

Accepted Answer

In an unregulated market, the price is determined by the intersection of the market demand curve and the marginal private cost curve, which is at P₂.

Quiz 16: Externalities

A well-maintained waterfront property that is enjoyed by other property owners is an example of

An example of an activity that creates a positive consumption externality is

A person driving while talking on a cellphone creates . A beautiful sunset creates .

Use the figure below to answer the following questions. Figure 16.2.1 -Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then the quantity produced is

Smoking tobacco creates a ________ externality.

Air pollution generated by a paper mill factory is an example of a

If the marginal private cost of producing one kilowatt of power in British Columbia equals five cents and the marginal social cost of each kilowatt equals nine cents, then the marginal external cost equals ________ per kilowatt.

A homeowner planting an attractive garden in front of his house creates . A bakery baking bread creates .

An externality is

Which of the following illustrates the concept of external cost?

An example of an activity that creates a negative consumption externality is

A private cost of production is a cost that is borne by the of a good or service. A social cost of production is a cost that is .

An externality is defined as

Use the figure below to answer the following questions. Figure 16.2.1 -Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then

An externality is a cost or benefit arising from an economic activity that falls on

Use the figure below to answer the following questions. Figure 16.2.1 -Refer to Figure 16.2.1. The figure shows the marginal private cost curve, the marginal social cost curve and the market demand curve. If the market is unregulated, then the price is