Question 1

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

The air pollution generated by the paper mill factory is a cost imposed on the surrounding community, which is not factored into the production cost of the company. Therefore, it is a negative production externality.

Question 2

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

Without regulation, the market will produce at the intersection of the market demand curve and the marginal private cost curve. This quantity is greater than the efficient quantity where the marginal social cost intersects with the market demand curve. Therefore, the market is producing more than the efficient quantity.

Question 3

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

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 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 market demand curve intersects with the marginal private cost curve, which is lower than the marginal social cost curve. Therefore, the marginal social cost is greater than the marginal private cost of production. Since the marginal benefit to consumers is given by the market demand curve, which is the same as the marginal benefit to society, the equilibrium output leads to a situation where the marginal social cost exceeds the marginal benefit to consumers. This is known as the market failure due to negative externalities. Thus, the correct answer is B.

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 because it imposes costs or harm on individuals who have not chosen to smoke. Secondhand smoke can cause health problems for those who are exposed to it, which is an example of a negative externality.

Question 6

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 arises from production or consumption of a good or service and falls on someone other than the producer or consumer. In other words, it is a spillover effect that affects third parties. For example, pollution from a factory may negatively impact the health of nearby residents, who do not bear the cost of the pollution but rather the factory owners do. Alternatively, a homeowner who invests in landscaping may increase the property value of neighboring homes, creating an external benefit for those homeowners.

Question 7

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 refers to negative effects on third parties who are not directly involved in an economic transaction. In this case, smoking harms the health of nearby nonsmokers who are not involved in the decision to smoke. This is an external cost imposed on the nonsmokers by smokers. Choices A and B relate to natural factors and market outcomes, respectively, and do not involve external costs. Choice C describes a personal cost to the smoker, but not an external cost. Choice E describes a positive benefit, not a cost.

Question 8

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 falls on someone other than the consumers or producers involved in the economic activity. It is sometimes referred to as a third-party effect. For example, pollution from a factory may have negative effects on the health of nearby residents, who are not involved in the production process and are not paying for the pollution. Similarly, if a company builds a park next to their property, the neighboring residents may enjoy the benefits of the park without paying for it. These are both examples of externalities.

Question 9

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

Question 10

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

Question 11

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

Marginal external cost equals marginal social cost minus marginal private cost. Therefore, in this case, the marginal external cost would be nine cents minus five cents, which equals four cents per kilowatt. Hence, the correct answer is C.

Question 12

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, as it provides aesthetic pleasure to passers-by. A bakery baking bread creates a positive production externality, as it generates delicious smells that waft out and attract potential customers. Thus, the best answer is option D.

Question 13

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 who receives the vaccine by protecting them from getting the flu, but it also benefits others by reducing the spread of the flu virus. This is because when a larger portion of the population is vaccinated, there is less opportunity for the flu virus to spread from person to person.

Question 14

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 the smoke harms the health of bystanders who have not consented to the effects of the activity. The other options either do not create negative externalities or are not examples of consumption activities.

Question 15

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, as it provides benefits to others who do not own the property.

Question 16

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 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.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 18

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. For example, pollution from a factory affects the air quality and health of nearby residents who did not participate in the production or consumption of the goods produced by the factory.

Question 19

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

The answer of A person driving while talking on a...

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 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

The efficient allocation of resources occurs where the marginal social cost (MSC) intersects the demand curve, at quantity Q₂. If a constant per unit tax is imposed that generates an efficient allocation of resources, it will shift the marginal private cost (MPC) curve upward by the amount of the tax. This means that the new intersection of the MPC and demand curves will occur at a lower quantity, which we can see as Q₃. However, this is not the efficient allocation of resources because the MSC still intersects the demand curve at Q₂. Therefore, a tax must be imposed that shifts the MPC curve upward by the amount necessary to bring it in line with the MSC curve at Q₂. This tax will reduce the quantity produced to Q₂, which is the efficient allocation of resources.

Quiz 16: Externalities

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

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

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

Smoking tobacco creates a ________ externality.

An externality is defined as

Which of the following illustrates the concept of external cost?

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

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 example of an activity that creates a positive consumption externality is

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

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

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 .

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

An externality is

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