Question 1

If the production of a good causes a negative externality, the efficient level of output of that good is zero.

Accepted Answer

The efficient level of output is not necessarily zero, but rather the level where the marginal social cost of producing the good equals the marginal social benefit. It may be possible to produce some units of the good with a positive net benefit to society, but beyond a certain point the negative externality outweighs the benefits and production should be reduced or eliminated.

Question 2

Markets are always able to find solutions to externality problems and thus maximize social surplus.

Accepted Answer

While markets are effective in allocating resources and maximizing social surplus in situations where property rights are well-defined and transaction costs are low, they may fail to address the negative externalities that arise when costs or benefits of an economic activity are borne by individuals who are not parties to the market transaction. In such cases, government intervention may be necessary to achieve an efficient outcome.

Question 3

The market for a good that generates an external benefit is still considered efficient.

Accepted Answer

The market for a good that generates an external benefit is not considered efficient because the price paid by consumers does not fully reflect the total social benefit of the good. As a result, there is an underallocation of resources towards the production of such goods, leading to a market failure.

Question 4

The efficient equilibrium maximizes private surplus.

Accepted Answer

The efficient equilibrium maximizes total surplus, which includes both private and social surplus, not just private surplus.

Question 5

Social surplus is consumer surplus plus producer surplus and is maximized in markets with externalities.

Accepted Answer

Social surplus is maximized in markets without externalities, as externalities cause market failures that prevent the efficient allocation of resources.

Question 6

The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.

Accepted Answer

The Coase theorem states that if transaction costs are low (not high) and property rights are clearly defined, private bargains can lead to an efficient market equilibrium despite externalities.

Question 7

Overproduction occurs in the presence of a negative externality because the external costs are paid by someone other than the producers and consumers.

Accepted Answer

Overproduction leads to a negative externality, which is an external cost that is imposed on a third party who is not involved in the transaction. This means that the producers and consumers do not pay the full cost of their actions, and this can lead to overproduction. The third party may be affected by pollution, congestion, or other external costs that result from overproduction. Therefore, overproduction can occur in the presence of a negative externality when the external costs are paid by someone other than the producers and consumers.

Question 8

An externality is either an external cost or external benefit that spills over to bystanders.

Accepted Answer

This statement accurately defines what an externality is. It refers to costs or benefits that affect individuals or groups who are not directly involved in a transaction or activity. These third parties can be affected positively or negatively due to the actions of others, creating externalities.

Question 9

If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist.

Accepted Answer

When transaction costs are low and property rights are clearly identifiable, individuals are able to negotiate and bargain with each other to internalize externalities, thus achieving an efficient market equilibrium despite the presence of externalities. This is known as the Coase theorem. However, if transaction costs are high or property rights are not well-defined, the market may fail to achieve an efficient outcome.

Question 10

External costs cause deadweight losses, whereas external benefits do not.

Accepted Answer

External benefits can create positive spillover effects that can result in increased efficiency and welfare, thus not resulting in deadweight losses.

Question 11

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

Accepted Answer

Vaccines benefit the person who is vaccinated and create an external benefit, not a cost, for others by reducing the spread of disease.

Question 12

External benefits lead to inefficient market outcomes.

Accepted Answer

External benefits occur when the benefits of a transaction spill over to individuals or parties other than the buyer or seller. Inefficient market outcomes occur because the market is not able to capture these external benefits in the form of prices, leading to market failure. In such cases, government intervention may be necessary to internalize the external benefits and restore market efficiency.

Question 13

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

Accepted Answer

When the government subsidizes activities with external benefits, it effectively lowers the cost of production for the producers. This causes a downward shift in the supply curve, resulting in a lower market price. As the price falls, consumers are incentivized to consume more of the product, leading to an increase in consumption.

Question 14

Government subsidies for goods that generate external benefits may increase economic efficiency.

Accepted Answer

Government subsidies for goods that generate external benefits can help to correct market failures and incentivize the production and consumption of goods that have positive spillover effects on society. This can lead to increased economic efficiency by promoting the optimal allocation of resources and the realization of additional benefits beyond what markets would achieve on their own.

Question 15

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

Accepted Answer

If the private benefit is less than the social benefit, then the individual is not considering all of the positive externalities (such as not spreading the flu to others) that come with getting a flu shot. This means that the individual may be less likely to get a flu shot, which would result in a market quantity that is lower than the efficient quantity.

Question 16

The efficient equilibrium is always equal to the market equilibrium.

Accepted Answer

The efficient equilibrium is where resources are allocated optimally, maximizing total surplus, while market equilibrium is where supply equals demand. They may not always coincide due to market failures or externalities.

Question 17

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

Accepted Answer

According to the Coase theorem, if transaction costs are low, private parties can negotiate and reach an efficient outcome without government intervention, even in the presence of externalities. However, if transaction costs are high, government intervention may be necessary to ensure an efficient outcome.

Question 18

If a good has an external cost, the efficient price is greater than the market price.

Accepted Answer

If a good has an external cost, it means that the market price does not reflect the full cost of producing or consuming the good, as some costs are imposed on parties outside of the market transaction. As a result, the market price is lower than the efficient price, which takes into account all costs (including external costs) and benefits. Therefore, to achieve efficiency, the price would need to be raised to reflect the external cost, resulting in an efficient price that is greater than the market price.

Question 19

Deadweight loss results when a good generates external benefits.

Accepted Answer

Deadweight loss occurs when the market equilibrium is not efficient, such as when external benefits are present but not accounted for, leading to underproduction and a loss of potential welfare.

Question 20

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

Accepted Answer

Private actors may not be able to bargain efficiently, may have unequal bargaining power, may not be able to fully capture the costs or benefits of externalities, or may not have incentives to cooperate due to short-term gains or conflicting interests. This leads to market failures and the need for government intervention to internalize externalities.

Quiz 10: Externalities- When the Price Is Not Right