Deck 10: Externalities

Question 1

Negative consumption externalities will have a socially optimal quantity that is smaller than the quantity determined by the private market.

Answer 1

True

Question 2

Taxation is often able to correct market externalities at a lower cost than regulations designed to achieve the same goal.

Answer 2

True

Question 3

Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.

Answer 3

False

Question 4

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Question 5

The externality associated with the production of electricity will lead the market to produce a larger quantity than socially desirable.

Question 6

When regulating a market in which an externality arises, the government can only command how much of the good companies are allowed to produce.

Question 7

When weighing the costs and benefits of pollution, the costs always exceed the benefits because the benefit equals zero.

Question 8

Market outcomes cannot be improved by government policies.

Question 9

The Internet is a good example of a negative externality because it has aspects which may be inappropriate for some users.

Question 10

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Question 11

Externalities can be solved if parties are able to bargain without cost.

Question 12

The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.

Question 13

If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

Question 14

Government can solve externality problems that are too costly for private parties to solve.

Question 15

Internalising a negative consumption externality will cause the market supply curve to shift to the left.

Question 16

The size and scope of technology spillovers is easy for governments to measure.

Question 17

Education has negative externalities for society.

Question 18

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

Question 19

Government can accurately measure the social value of an externality.

Question 20

The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

Question 21

Vaccinations are heavily subsidised in order to get the optimal number of people vaccinated.

Question 22

Because a driver's private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.

Question 23

All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.

Question 24

Private parties can negotiate a solution to an externality in all cases.

Question 25

A market for pollution permits can efficiently allocate the right to pollute through the forces of supply and demand.

Question 26

When Jake takes into account how his actions affect Jill, and then changes his behaviour, an externality is solved.

Question 27

The main goal of a tax on pollution is to raise revenue for the government.

Question 28

Pigovian taxes enhance efficiency but the cost of administering such taxes frequently exceeds the revenue they raise for the government.

Question 29

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Question 30

Firms that can reduce pollution easily will be willing to sell their emissions permits.

Question 31

Aaron and Katie are building a house. They want to make sure they have a good relationship with the neighbours and do not want to impose any negative externalities on them. Which of the following are measures to avoid negative externalities on Aaron and Katie's neighbours?
(i) making sure their windows do not look into the neighbours' yarD.
(ii) carefully insulating their house so that sound doesn't carry when they play loud musiC.
(iii) building an environmentally friendly house.

A) (i), (ii) and (iii)
B) only (i) and (iii)
C) only (ii) and (iii)
D) only (i) and (ii)

Question 32

Charities are an example of a private solution to an externality.

Question 33

In essence, the Pigovian tax places a price on the right to pollute.

Question 34

When the government decides to dredge a bay to let big ships into the port, they are causing:

A) a positive externality because dredging will allow bigger ships into the bay
B) a positive externality because the dredging will create profit for the dredging company
C) a negative externality because marine life will be displaced by the dredging
D) a negative externality because the dredging will take a long time to complete

Question 35

Contracts cannot solve the inefficiency that arises from externalities.

Question 36

Policies aimed at reducing an externality sometimes have unintended consequences.

Question 37

Government policies to encourage technology spillovers may go to industries with the most political clout rather than industries with the largest spillovers.

Question 38

When a tax is used to give buyers and sellers in a market the incentive to take into account the external effects of their actions, it is said to be 'internalising an externality'.

Question 39

Social welfare can be enhanced by allowing firms to trade their carbon credits.

Question 40

When there are transaction costs to resolving an externality, the distribution of rights does not matter.

Question 41

Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods. Policies to reduce this noise problem include:

A) charging passengers an airport departure tax
B) charging excise taxes on airline fuel
C) encouraging people to drive rather than fly
D) requiring aircraft to use 'whisper' technology to quieten their engines

Question 42

Graph 10-1

Refer to Graph 10-1. In the figure shown, an optimal government policy would be a tax on production to the value of:

A) P₃ - P₁
B) P₃ - P₂
C) P₃ - P₁.
D) The value of the optimal tax cannot be measured

Question 43

Graph 10-1

Refer to Graph 10-1. This graph reflects the presence of a:

A) negative production externality
B) positive production externality
C) negative consumption externality
D) positive consumption externality

Question 44

Tom is very tall. When he goes to a music festival it is likely he will create:

A) no externality because there are lots of people at the festival
B) a positive externality because he can hear the music very well, being above the crowd
C) a positive externality because he can easily find his friends if he loses them
D) a negative externality because he will block the view of shorter people who find themselves standing behind him

Question 45

A positive externality exists when:

A) a person engages in an activity that has a spillover that makes a bystander better off
B) the market has only one seller
C) a firm sells its product in an external foreign market
D) a person engages in an activity that has a spillover that makes a bystander worse off

Question 46

Suppose that a fish-food manufacturing company is located up the river from a fishing firm and often releases some of the food into the river. This means:

A) the fish food manufacturing company is imposing a negative externality on the fishing firm
B) the fish food manufacturing company is imposing a positive externality on the fishing firm
C) under the Coase theorem the two companies should be able to negotiate away the externality
D) unless the government imposes a tax on river pollution, the fishing firm will continue to be negatively impacted by the fish-food manufacturing company

Question 47

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. The difference between the social cost curve and the supply curve reflects the:

A) profit margin of each kiwifruit tray
B) cost of spillover effects from the kiwifruit orchards (replacing bees, lost honey output)
C) value of kiwifruit to society as a whole
D) amount by which the government should subsidise the kiwifruit orchardists

Question 48

Markets are often inefficient when negative production externalities are present because:

A) private costs exceed social costs at the private market solution
B) externalities can never be corrected without government regulation
C) social costs exceed private costs at the private market solution
D) production externalities lead to consumption externalities

Question 49

A _________ is enacted to correct the effects of a negative externality:

A) regulation
B) deadweight loss
C) corrective tax
D) tradeable permit

Question 50

An externality will:

A) usually be characterised as a form of market failure
B) cause markets to allocate resources efficiently
C) strengthen the role of the 'invisible hand' in the marketplace
D) always require the producer to compensate society

Question 51

To produce honey, beekeepers place hives of bees in orchards and crop fields. As bees gather nectar that they use to produce honey, they pollinate the orchards and fields increasing their yields of fruit and grain. This arrangement results in:

A) positive externalities that benefit both the beekeeper and the owner of the fields of fruit and grain
B) no significant additional benefit to anyone
C) a positive externality that benefits only the owner of the fields of fruit and grain
D) a positive externality that solely benefits the beekeeper

Question 52

Graph 10-1

Refer to Graph 10-1. Which price and quantity combination represents the social optimum?

A) P₁, Q₁
B) P₂, Q₁
C) P₁, Q₂
D) P₂, Q₂

Question 53

Suppose people plant flowering trees near their homes to encourage rare native birds to feed. If people believe that an increase in native bird populations is valuable, people who plant these trees:

A) generate a negative consumption externality for their neighbours
B) generate a positive production externality for their neighbours
C) generate a positive consumption externality for their neighbours
D) generate a negative production externality for their neighbours

Question 54

Using the information in question 30, what would be a private solution to the above externality?

A) under the Coase theorem the two companies should be able to negotiate away the externality
B) the two companies would need to trade permits for river pollution in order to achieve an optimal outcome
C) the fishing firm could buy the fish-food manufacturing company
D) the fishing firm should continue to make the most of the positive externality

Question 55

It is generally difficult or impossible for private markets to take externalities into account because:

A) decision makers in the market fail to take account of the spillover effects of their behaviour
B) buyers and sellers in private markets are only interested in social wellbeing
C) people are only interested in short-term gains
D) governments are responsible for externality problems

Question 56

When the social cost of an externality is lower than its private cost:

A) society is likely to benefit from a corrective tax
B) the externality is a positive one and society will not consume enough of the good
C) the externality is a positive one and society will consume too much of the good
D) society will benefit from the introduction of tradeable permits for production of the good

Question 57

If a particular market is associated with an externality, the social optimum should include the wellbeing of:

A) buyers, sellers and bystanders
B) bystanders and buyers
C) bystanders and sellers
D) buyers and sellers only

Question 58

Jack loves surfing but prefers to go in winter instead of summer and always tries to find spots most surfers usually avoid. What could be one of the reasons for which Jack chooses to surf in this way?

A) he only likes to surf in dangerous circumstances
B) having other surfers around imposes a negative externality on Jack
C) the spots most surfers avoid usually have the best conditions
D) he doesn't want to impose a negative externality on other surfers by taking their waves

Question 59

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. The social cost curve is above the supply curve because:

A) it takes into account the external costs imposed on society by the kiwifruit farmers
B) honeybees are also a cost to society
C) kiwifruits are likely to cost more than growing the kiwifruit costs the organisers
D) workers on kiwifruit orchards also benefit from the job opportunities

Question 60

Negative externalities occur when one person's actions:

A) cause another person to lose money in a stock-market transaction.
B) cause his or her employer to lose business.
C) adversely affect the wellbeing of a bystander (or bystanders) who is (are) not party to a market exchange.
D) reveal his or her preference for foreign produced goods.

Question 61

Suppose that a steel factory emits a certain amount of air pollution and that this pollution constitutes a negative externality. If this market is not required to internalise this externality:

A) the supply curve would adequately reflect the marginal social cost of production
B) consumers will be required to pay a higher price for steel than they would have if the externality were internalised
C) the market equilibrium would not be the socially optimal quantity
D) producers will produce less steel than they otherwise would have if the externality were internalised

Question 62

Internalising a positive production externality will cause the demand curve faced by an industry to:

A) shift to the right
B) shift to the left
C) become more elastic
D) remain unchanged

Question 63

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. Assume that the kiwifruit orchardists must purchase a pesticide application permit (the cost for the permit is included in private cost) before spraying their fruit. What criteria should the government use in determining whether or not to issue a permit?

A) the majority vote of the affected beekeepers should determine whether a permit is issued
B) as long as the value to consumers of kiwifruit exceeds the cost of kiwifruit (including the external costs), the permit should be issued
C) as long as kiwifruit orchardists are willing to replace the dead honeybees, the permit should be issued
D) the permit should not be issued as long as there are identifiable external costs imposed on local beekeepers.

Question 64

Which of the following statements about a market that is affected by a positive production externality is correct?

A) the optimum level of output is less than the free market level of output and the optimum price is greater than the free market price
B) the optimum level of output is greater than the free market level of output and the optimum price is less than the free market price
C) the optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price
D) the optimum level of output is less than the free market level of output and the optimum price is less than the free market price

Question 65

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. At the private market outcome, the equilibrium price of kiwifruit will be:

A) P₁
B) P₂
C) P₃
D) P₄

Question 66

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. At the private market outcome, quantity Q₁ represents the:

A) quantity of kiwifruit consumers will buy
B) quantity of kiwifruit and honey consumers will buy
C) socially optimal quantity of kiwifruit that should be produced
D) optimal price of a kiwifruit from the standpoint of society as a whole

Question 67

Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall. If a tax on fertiliser was set at the optimal level:

A) farmers would choose not to use any fertiliser
B) farmers fully internalise the pollution costs of the fertiliser
C) farm output would be maximised
D) the value to consumers of pastoral products would exceeds the cost of production (including tax) at the market equilibrium

Question 68

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. What price and quantity combination best represents the optimum price and number of kiwifruit trays that should be produced?

A) P₁, Q₁
B) P₂, Q₀
C) P₃, Q₁
D) The optimum quantity is zero kiwifruit as long as honey production by beekeepers is lower because of pesticide use.

Question 69

Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
Refer to Graph 10-2. The producer surplus derived from the most efficient kiwifruit production levels is represented by the area:

A) g
B) e + g
C) a + b
D) a + b + c

Question 70

Technology spillover occurs when:

A) the firm's innovations allow it to establish monopoly power
B) new products by high-tech firms create harmful wastes
C) research by a firm creates innovations that are easily applied and used by others
D) patent laws are used to hinder other firms adopting new technology

Question 71

Internalising a positive production externality will cause the supply curve faced by an industry to:

A) shift to the right
B) shift to the left
C) expand
D) remain unchanged

Question 72

Markets are inefficient when positive production externalities are present because:

A) private benefits of consumption exceed social benefits of consumption when the market is in equilibrium
B) social costs of production exceed private costs of production when the market is in equilibrium
C) social benefits of consumption exceed private benefits of consumption when the market is in equilibrium
D) private costs of production exceed social costs of production when the market is in equilibrium

Question 73

Which of the following statements is most correct about a market that is characterised by a negative production externality?

A) the equilibrium quantity of output is equal to the socially optimal quantity
B) the equilibrium quantity of output is greater than the socially optimal quantity
C) government intervention is only required for negative externalities
D) the equilibrium quantity of output is less than the socially optimal quantity

Question 74

When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:

A) give sellers the incentive to take account of the external effects of their actions
B) have an offsetting effect that reduces the producer's private production costs
C) increase the amount of the commodity exchanged in market equilibrium
D) restrict the producer's ability to take the costs of the externality into account when deciding how much to supply

Question 75

A positive production externality will cause a market to produce:

A) less than is socially desirable
B) more than is socially desirable
C) more than is market optimal
D) less than is market optimal

Question 76

Which of the following statements about internalising a negative production externality is LEAST correct?

A) internalising a negative production externality will cause the supply curve for the good to shift to the left
B) internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced
C) internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced
D) internalising a negative production externality will cause an industry to move closer to the socially optimal price and quantity of the good

Question 77

Melbourne city council is trying to quantify the social cost of smoking in order to determine the optimal value of a tax on smoking. What factors should they include when calculating the social cost of smoking?

A) The chewing gum costs of the smokers and the price consumers pay for cigarettes
B) The price consumers pay for cigarettes and the costs to bystanders affected by air pollution
C) The costs to the bystanders affected by the air pollution only
D) The price consumers pay for the cigarettes

Question 78

Internalising a positive production externality through technology policy:

A) involves a subsidy to industries that yield the largest spillovers
B) requires that the government be able to measure the size of technology spillovers
C) does not have the support of economists who believe technology spillovers are difficult to measure
D) all of the above are true

Question 79

Internalising a positive production externality through a government subsidy will cause the industry's supply curve to:

A) remain unchanged
B) shift down by an amount less than the subsidy
C) shift down by an amount equal to the subsidy
D) shift down by an amount greater than the subsidy

Question 80

Encouraging firms to increase production via a subsidy will tend to be socially optimal when:

A) the firms are producing necessities
B) there is excess supply in the market
C) the firms output is associated with large technology spillovers
D) the market equilibrium output level is greater than the social optimum