Question 1

If government regulation forces firms in an industry to internalize the externality,then the

Accepted Answer

When firms are forced to internalize externality, their production costs increase which leads to a decrease in the supply of the product. Therefore, the supply curve shifts to the left.

Question 2

Consider the market for refined oil.In the market equilibrium,

Accepted Answer

In market equilibrium, the internal supply (the quantity producers are willing to supply) equals the internal demand (the quantity consumers are willing to buy). This is the point where the market clears and there is no excess supply or demand, and therefore no deadweight loss. Choices B and C are not correct because the social supply is not necessarily the same as the internal supply or demand, as it includes external costs and benefits. Choice D is not necessarily true in market equilibrium, as it depends on the level of demand relative to the supply.

Question 3

Consider a market where production of a good generates a negative externality.In the market equilibrium,

Accepted Answer

In a market with a negative externality, the market equilibrium results in too much of the good being produced relative to the socially optimal level. This is because the market only considers the private costs and benefits of production, while ignoring the external costs imposed on third parties. As a result, producers are incentivized to produce more than the socially optimal level, resulting in a deadweight loss and negative impact on society as a whole.

Question 4

Consider a market with a negative externality.The market will tend to ________ the good because the market participants tend to ignore the ________ of their decision.

Accepted Answer

In a market with a negative externality, the market participants tend to ignore the external cost of their decisions. This means that they do not take into account the costs imposed on third parties, and as a result, they will overproduce the good. For example, if a factory is producing goods that create pollution, the cost of the pollution is borne by the people who live near the factory, rather than the factory itself. If the factory does not have to pay for the cost of the pollution, it will produce more than is socially optimal, and the market will tend to overproduce the good.

Question 5

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities to answer the following questions.
 
-The social optimum occurs where price is ________ and quantity is ________.

Accepted Answer

The answer of Refer to the accompanying table,where Q represents...

Question 6

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

Accepted Answer

The answer of Refer to the accompanying figure.Which area represents...

Question 7

Refer to the accompanying figure to answer the following questions.
 
-To achieve the social optimum,the government could set a tax equal to ________ per unit sold.

Accepted Answer

To achieve the social optimum, the government should set a tax equal to the external cost per unit sold. This tax internalizes the externality, making the private cost of production equal to the social cost. Without specific details on the external costs, it's impossible to provide a detailed explanation. However, if option A ($6) is the correct answer, it implies that the external cost per unit is $6.

Question 8

Refer to the accompanying figure to answer the following questions.
 
-At the market equilibrium,price is equal to ________ units of the good are produced.

Accepted Answer

At market equilibrium, the quantity supplied equals the quantity demanded. The correct choice, $14 and 70 units, represents a price and quantity where the supply and demand curves intersect, indicating market equilibrium.

Question 9

Which of the following is a benefit of internalizing a negative externality?

Accepted Answer

Internalizing a negative externality means that the cost of the negative impact is borne by the producer, which in turn reduces the quantity produced and moves the market closer to the socially optimal level. This elimination of deadweight loss is the main benefit of internalizing a negative externality. The other choices are not necessarily true, as eliminating all pollution is often not feasible or cost-effective, more output is not necessarily a good thing if it creates more negative externalities, and selling goods for a lower price may not be a benefit for the producer.

Question 10

Refer to the accompanying figure to answer the following questions.
 
-The figure best illustrates what type of market?

Accepted Answer

The figure likely shows a market where the social cost is higher than the private cost, indicating a negative externality, such as pollution.

Question 11

Consider a market where production of the good is creating a negative externality.In the market equilibrium,there is a deadweight loss because the

Accepted Answer

The deadweight loss in the presence of a negative externality occurs because the internal cost of production (the cost borne by the producer) is less than the social cost (the total cost to society, including external costs not borne by the producer). This discrepancy leads to overproduction relative to the socially optimal level, causing a deadweight loss.

Question 12

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities to answer the following questions.
 
-The market equilibrium occurs where price is __________ and quantity is _________.

Accepted Answer

Market equilibrium occurs where the quantity supplied equals the quantity demanded. Without specific supply and demand data, we assume the given options represent equilibrium points. Option B is a plausible choice for equilibrium.

Question 13

When pollution (a negative externality)is created by firms,which of the following is NOT a valid way for the government to restore the social optimum?

Accepted Answer

Offering a subsidy to firms to reduce their production costs does not directly address the issue of pollution and does not create an incentive for firms to reduce their emissions. Instead, it may even result in an increase in production and thus more pollution without mitigating the negative externality. The other choices, A through D, all directly address the issue of pollution and create incentives for firms to reduce emissions or pay for the environmental damage they create, thus helping restore the social optimum.

Question 14

Which of the following is true of a negative externality?

Accepted Answer

A negative externality occurs when the actions of a producer or consumer impose costs on a third party. For example, pollution from a factory imposes costs on nearby residents or wildlife. The costs are not directly borne by the producer or consumer, but instead affect others in society.

Question 15

Which of the following is a cost of internalizing a negative externality?

Accepted Answer

Internalizing a negative externality means that the producers who are creating the negative externalities must bear the costs of the negative effects. This will cause the cost of production to rise, resulting in less output being produced.

Question 16

If government regulation forces firms in an industry to internalize the externality,then we can expect the equilibrium price of the good to ________ and the equilibrium quantity to ________.

Accepted Answer

When firms are forced to internalize an externality, it means they must bear the previously external costs themselves, such as pollution mitigation. This typically leads to higher production costs, resulting in an increase in the price of the good. However, the higher price tends to reduce demand, leading to a decrease in the equilibrium quantity.

Question 17

Jack's roommate is studying to be a drummer in a rock band.She practices in Jack's apartment every evening for three hours and the noise makes it difficult for Jack to concentrate.This is an example of

Accepted Answer

This is an example of the third-party problem where Jack is the third party affected by the actions of Jack's roommate. Jack is not involved in the transaction between his roommate and the rock band, yet he faces negative externalities in the form of noise pollution.

Question 18

The third-party problem

Accepted Answer

The third-party problem occurs when a market activity leads to either a negative or a positive externality, affecting individuals who are not directly involved in the transaction.

Question 19

Elijah's neighbor likes to mow his grass each Saturday at 7 A.M.and the noise invariably wakes Elijah up.This is an example of

Accepted Answer

Elijah is not directly involved in the activity of his neighbor, yet he is still affected by it. This is an example of the third-party problem, where the actions of one party have a negative impact on another party who has no control over the situation.

Question 20

Siri's neighbor is an avid gardener who changes his flower displays four times per year and who was given the "best yard on the block" award last year.While Siri personally enjoys these changing flower displays,some of her neighbors have said they do not like some of the flowers her neighbor chooses to plant.For Siri,this is an example of

Accepted Answer

The answer of Siri's neighbor is an avid gardener who...

Quiz 7: Market Inefficiencies: Externalities and Public Goods

If government regulation forces firms in an industry to internalize the externality,then the

Consider the market for refined oil.In the market equilibrium,

Consider a market where production of a good generates a negative externality.In the market equilibrium,

Consider a market with a negative externality.The market will tend to the good because the market participants tend to ignore the of their decision.

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

Refer to the accompanying figure to answer the following questions. -To achieve the social optimum,the government could set a tax equal to ________ per unit sold.

Refer to the accompanying figure to answer the following questions. -At the market equilibrium,price is equal to ________ units of the good are produced.