Deck 5: Externalities, Environmental Policy, and Public Goods

Question 1

Figure 5.1

Figure 5-1 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
Refer to Figure 5.1.If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does S₂ represent?

A)the market supply curve reflecting private cost
B)the market supply curve reflecting social cost
C)the market supply curve reflecting external cost
D)the market supply curve reflecting implicit cost

Answer 1

B

Question 2

A positive externality causes

A)the marginal social benefit to be equal to the marginal private cost of the last unit produced.
B)the marginal social benefit to be less than the marginal private cost of the last unit produced.
C)the marginal social benefit to exceed the marginal private cost of the last unit produced.
D)the marginal private benefit to exceed the marginal social cost of the last unit produced.

Answer 2

C

Question 3

Which of the following activities create a negative externality?

A)cleaning up the sidewalk on your block
B)graduating from college
C)repainting the house you live in to improve its appearance
D)keeping a junked car parked on your front lawn

Answer 3

D

Question 4

Which of the following is an example of a positive externality?

A)banning the sale of candy in elementary schools
B)planting trees along a sidewalk which add beauty and creates shade
C)forbidding the use of cell phones in public
D)prohibit street parking in all residential neighborhoods

Question 5

If you burn your class notes in your dorm room at the end of the semester in spite of regulations against it, then you are

A)acting economically irrationally and creating a social cost.
B)avoiding the private costs associated with taking your notes to the recycling and creating a social cost.
C)acting rationally and creating a positive externality.
D)saving landfill space and creating a social benefit.

Question 6

Private costs

A)are borne by producers of a good while social costs are borne by government.
B)are borne by consumers of a good while social costs are borne by government.
C)are borne by producers of a good while social costs are borne by society at large.
D)are borne by producers of a good while social costs are borne by those who cannot afford to purchase the good.

Question 7

Figure 5.1

Figure 5-1 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
Refer to Figure 5.1.If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does S₁ represent?

A)the market supply curve reflecting external cost
B)the market supply curve reflecting implicit cost
C)the market supply curve reflecting social cost
D)the market supply curve reflecting private cost

Question 8

Figure 5.1

Figure 5-1 shows a market with an externality. The current market equilibrium output of Q₁ is not the economically efficient output. The economically efficient output is Q₂.
Refer to Figure 5.1.Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality.The economically efficient output is Q₂.In that case, the diagram shows

A)the effect of a positive externality in the production of a good.
B)the effect of a negative externality in the production of a good.
C)the effect of an external cost imposed on a producer.
D)the effect of an external benefit such as a subsidy granted to consumers of a good.

Question 9

The stated goal of the British Columbia tax on the burning of fossil fuels is to

A)control the economy.
B)reduce greenhouse gas emissions.
C)raise revenue for the provincial government.
D)punish everyone living outside downtown Vancouver.

Question 10

What is a market failure?

A)It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.
B)It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost.
C)It refers to a situation where an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event.
D)It refers to a breakdown in a market economy because of widespread corruption in government.

Question 11

A negative externality exists if

A)there are price controls in a market.
B)there are quantity controls in a market.
C)the marginal social cost of producing a good or service exceeds the private cost.
D)the marginal private cost of producing a good or service exceeds the social cost.

Question 12

Conceptually, the efficient level of carbon emissions is the level for which

A)the marginal benefit of reducing carbon emissions is maximized.
B)the marginal cost of reducing carbon emissions is minimized.
C)the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions.
D)the marginal benefit of reducing carbon emissions is minimized and the marginal cost of reducing carbon emissions is maximized.

Question 13

When a negative externality exists, the private market produces

A)more than the economically efficient output level.
B)less than the economically efficient output level.
C)products at a low opportunity cost.
D)products at a high opportunity cost.

Question 14

Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle accidents which cost the health care system millions of dollars a year.In this sense, these mandatory helmet laws are reducing ________ of risky behavior.

A)positive externalities
B)negative externalities
C)the private benefit
D)the social benefit

Question 15

What are property rights?

A)the title to ownership of any physical asset
B)a legal document verifying ownership of intangible assets
C)the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
D)the right of the government to appropriate private assets for the good of society

Question 16

An externality is

A)a benefit realized by the purchaser of a good or service.
B)a cost paid for by the producer of a good or service.
C)a benefit or cost experienced by someone who is not a producer or consumer of a good or service.
D)anything that is external or not relevant to the production of a good or service.

Question 17

Two countries that were not covered under the Kyoto Protocol were

A)China and the United States.
B)Canada and Zimbabwe.
C)The United States and the United Kingdom.
D)China and Japan.

Question 18

Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

A)the private cost of production
B)the social cost of production
C)the external cost of production
D)the explicit cost of production

Question 19

What is a "social cost" of production?

A)the cost of the natural resources used up in production
B)the total costs of producing a product, both implicit and explicit costs
C)the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product
D)the cost of the environmental damage created by production

Question 20

Which of the following is a source of market failure?

A)unforeseen circumstances which leads to the bankruptcy of many firms
B)a lack of government intervention in a market
C)incomplete property rights or inability to enforce property rights
D)an inequitable income distribution

Question 21

Figure 5.3

Refer to Figure 5.3.In the absence of any government intervention, the private market

A)under produces by Qₒ - Qm units.
B)over produces by Qₒ - Qm units.
C)over produces by Qn - Qm units.
D)under produces by Qn - Qm units.

Question 22

Figure 5.2

Figure 5-2 shows a market with a negative externality.
Refer to Figure 5.2.The efficient output level is

A)Qd.
B)Qb.
C)Qₐ.
D)Qb - Qd.

Question 23

A market failure arises when an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event.

Question 24

Figure 5.2

Figure 5-2 shows a market with a negative externality.
Refer to Figure 5.2.The private profit maximizing quantity for the firm is

A)Qₐ.
B)Qb.
C)Qb - Qd.
D)Qd.

Question 25

When there is a negative externality, the competitive output is more than the economically efficient output level.

Question 26

Figure 5.3

Refer to Figure 5.3.The size of marginal external benefits can be determined by

A)the demand curve D₂.
B)D₂ + D₁ at each output level.
C)D₂ - D₁ at each output level.
D)the demand curve D₁.

Question 27

The private cost of a good or service is the cost borne by the producer.

Question 28

Figure 5.3

Refer to Figure 5.3.At the competitive market equilibrium, for the last unit produced,

A)the size of the external cost is Pm - Pₒ.
B)the size of the external benefit is Pm - Pₒ.
C)the size of the external cost is Pn - Pₒ.
D)the size of the external benefit is Pn - Pₒ.

Question 29

When there is a positive externality in a free market, too much of the good is produced and consumed.

Question 30

Which of the following conditions holds in an economically efficient competitive market equilibrium?

A)The deadweight loss is positive but at a minimum.
B)Producer and consumer surplus are exactly equal in size.
C)There are no positive and no negative external effects from consumption and production.
D)The marginal benefit of the last unit produced and consumed is maximized.

Question 31

Figure 5.2

Figure 5-2 shows a market with a negative externality.
Refer to Figure 5.2.The size of marginal external costs can be determined by

A)S₂ + S₁ at each output level.
B)S₂ - S₁ at each output level.
C)the supply curve S₂.
D)the supply curve S₁.

Question 32

Figure 5.3

Refer to Figure 5.3.The efficient output level is

A)Qm.
B)Qn.
C)Qₒ.
D)Qₒ - Qm.

Question 33

Figure 5.2

Figure 5-2 shows a market with a negative externality.
Refer to Figure 5.2.The true marginal cost of the last unit produced is represented by the price

A)Pₐ.
B)Pb.
C)Pc.
D)Pf.

Question 34

A market supply curve reflects the

A)external costs of producing a good or service.
B)external benefits of producing a good or service.
C)social costs of producing a good or service.
D)private costs of producing a good or service.

Question 35

Figure 5.3

Refer to Figure 5.3.The deadweight loss due to the externality is represented by the area

A)mso.
B)msn.
C)nso.
D)mtn.

Question 36

Figure 5.2

Figure 5-2 shows a market with a negative externality.
Refer to Figure 5.2.The marginal benefit of the last unit produced is represented by the price

A)Pₐ.
B)Pb.
C)Pc.
D)Pf.

Question 37

An externality refers to economic events outside a market.

Question 38

Figure 5.3

Refer to Figure 5.3.The private profit maximizing output level is

A)Qm.
B)Qn.
C)Qₒ.
D)Qₒ - Qm.

Question 39

Figure 5.2

Figure 5-2 shows a market with a negative externality.
Refer to Figure 5.2.The deadweight loss due to the externality is represented by the area

A)abc.
B)abf.
C)abd.
D)ade.

Question 40

A market demand curve reflects the

A)private benefits of consuming a product.
B)external benefits of consuming a product.
C)social benefits of consuming a product.
D)the sum of private and social benefits of consuming a product.

Question 41

Because producers do not bear the external cost of pollution

A)the economically efficient level of production is achieved.
B)private production is below the economically efficient level.
C)private production exceeds the economically efficient level.
D)the market price is too high.

Question 42

Suppose a negative externality exists in a market.If transactions costs are low and parties are willing to bargain, then, according to the Coase theorem,

A)an equitable solution can be reached only if property rights are assigned to the victims of pollution and not the polluters.
B)an equitable solution can be reached only if property rights are assigned to polluters and not to the victims of pollution.
C)an efficient solution can be reached regardless of the initial assignment of property rights.
D)government intervention is necessary to reach an efficient and equitable solution.

Question 43

Why was the Montreal Protocol necessary to reduce the use fo chlorofluorocarbons (CFC)which damage the ozone layer and increase cases of skill cancer?

A)The people getting skin cancer weren't necessarily the same people who decided to uses CFCs.
B)No one understood the ozone layer prior to the Montreal Protocol.
C)The benefits of using CFCs outweighed the cost of increased cases of skin cancer.
D)CFCs are an example of a positive externality.

Question 44

Explain how mandatory bicycle helmet laws may reduce the negative externalities of risky behaviour.

Question 45

In economics, the optimal level of pollution is

A)zero.
B)the level for which the total benefit from reducing the pollution is the greatest.
C)the level for which the marginal benefit from reducing the pollution is the greatest.
D)the level for which the net total benefit from reducing the pollution is the greatest.

Question 46

Figure 5.4

Refer to Figure 5.4.What is the incremental cost of increasing the quantity of pollution reduction from QB to QE units?

A)PE
B)the value of the area QBBEQE
C)PE × QE
D)the value of the area BEF

Question 47

Figure 5.4

Refer to Figure 5.4.The marginal cost of reducing pollution curve is the same curve as

A)the supply of pollution reduction curve.
B)the demand for pollution reduction curve.
C)the negative externality curve.
D)the value of pollution reduction curve.

Question 48

Consider a situation in which a utility company emits high levels of sulfur dioxide and the company is not liable for the damages its pollution causes.According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution.

A)necessary; equitable
B)necessary; efficient
C)not necessary; equitable
D)not necessary; efficient

Question 49

If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered

A)external costs.
B)transaction costs.
C)marginal benefits.
D)social costs of the pollution.

Question 50

Economists argue that the level of pollution should be

A)reduced completely to zero because by definition, it is a negative external effect.
B)ignored because it has always been present since the beginning of history.
C)reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society.
D)best determined by elected officials who can speak on behalf of the public.

Question 51

If pollution is created when producing a product, then the market equilibrium price

A) is too high and equilibrium quantity is too low.
B)and equilibrium quantity are too low.
C)and equilibrium quantity are too high.
D)is too low and equilibrium quantity is too high.

Question 52

What is an externality?

Question 53

The Coase theorem states that

A)government intervention is always needed if externalities are present.
B)assigning property rights is the only thing the government should do in a market economy.
C)if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.
D)a free market equilibrium is the best solution to address externalities.

Question 54

How does a negative externality in production reduce economic efficiency?

Question 55

What is a private cost of production? What is a social cost of production? When is the private cost of production equal to the social cost of production?

Question 56

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

A)A) C. Pigou
B)Adam Smith
C)Ronald Coase
D)John Maynard Keynes

Question 57

Consider the following characteristics:
A)low transaction costs
B)small levels of pollution
C)high levels of pollution
D)clear assignment of property rights.
Which of the above are assumptions behind the Coase Theorem?

A)a, b, and d
B)a, c, and d
C)a and d
D)a only

Question 58

Figure 5.4

Refer to Figure 5.4.Which of the following statements is true?

A)At QE the benefits of reducing pollution outweighs the cost of pollution reduction.
B)At QB society is under allocating resources to pollution reduction.
C)The optimal quantity of pollution reduction is QB.
D)The optimal quantity of pollution reduction is QE.

Question 59

Figure 5.4

Refer to Figure 5.4.The marginal benefit of reducing pollution curve is the same curve as

A)the supply of pollution reduction curve.
B)the demand for pollution reduction curve.
C)the positive externality curve.
D)the external benefit curve.

Question 60

Figure 5.4

Refer to Figure 5.4.What is the incremental benefit of increasing the quantity of pollution reduction from QB to QE units?

A)PF
B)PF × QE
C)the value of the area BEF
D)the value of the area QBBFQE

Question 61

James Meade, who won the Nobel Prize in Economics in 1977, argued that positive externalities resulted from

A)reducing emissions of sulfur dioxide.
B)producing automobiles and automobile tires.
C)home owners in the Northeast moving to the South and Southwest United States.
D)apple growing and beekeeping.

Question 62

Figure 5.5

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
Refer to Figure 5.5.The private profit-maximizing output level is

A)Q₁.
B)Q₂.
C)Q₃.
D)Q₄.

Question 63

Figure 5.5

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
Refer to Figure 5.5.The efficient output is

A)Q₁.
B)Q₂.
C)Q₃.
D)Q₄.

Question 64

Figure 5.5

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
Refer to Figure 5.5.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

A)(P₂- P₁)per ton of output
B)(P₂- P₀)per ton of output
C)(P₁- P₀)per ton of output
D)P₁ per ton of output

Question 65

In Canada bee keepers can travel within and sometimes between provinces renting out their bee colonies to farmers for pollination services.This is an example of

A)a Coasian solution to a positive externality problem.
B)a Pigouvian solution to a positive externality problem.
C)a tradable exchange contract.
D)command and control policy.

Question 66

For the Coase theorem to work there must be clear assignment of property rights.

Question 67

Should the level of pollution be reduced to zero and if not, then to what level?

Question 68

If pollution is created when producing a product, then the market equilibrium price is too high and equilibrium quantity is too low.

Question 69

State the Coase theorem.

Question 70

Figure 5.5

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.5 illustrates the situation in the toilet paper market.
Refer to Figure 5.5.An efficient way to get the firm to produce the socially optimal output level is

A)for government to set a quota on the quantity of toilet paper that the toilet paper industry can produce.
B)to impose a tax to make the industry bear the external costs it creates.
C)to grant a subsidy to enable the industry to internalize the external costs of production.
D)to assign property rights to the firms in the industry.

Question 71

The Montreal Protocol and later agreements are expected to result in 60 million fewer cases of skin cancer in 2020 due to lower chlorofluorocarbon (CFC)levels in the atmosphere, than would have been the case without these agreements.Why was agreement on the Montreal Protocol possible in 1987 while agreement on reducing the level of carbon dioxide has been all but impossible?

A)The cost of pollution abatement today is much higher than it was in the 1980s. Thus, it would be far more costly to achieve the same level of pollution reduction now than it was in 1987.
B)The costs of reducing CFC emissions to efficient levels was lower than the cost of reducing carbon dioxide emissions to efficient levels.
C)Carbon dioxide levels are not very high in most Canadian cities.
D)It is better to tackle one problem rather than two.

Question 72

In economics, the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest.

Question 73

An advantage of imposing a tax on the producer that generates pollution is that

A)it forces the polluting producer to internalize the external cost of the pollution.
B)the government can keep tabs on exactly what is produced in an industry.
C)it will eliminate pollution.
D)a producer can pass the cost of the pollution to consumers.

Question 74

Which of the following must be present to reach a private solution to an externality problem?

A)A majority of the parties affected by the externality must agree to a solution.
B)The transaction costs to negotiate a solution must be relatively low.
C)The total number of people, creators of the problem and those affected, must be relatively large to justify negotiating a solution.
D)The government must approve the solution for it to be a legal solution.

Question 75

Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?

A)Ronald Coase
B)A) C. Pigou
C)Adam Smith
D)David Hume

Question 76

Which of the following criteria should be used to evaluate if government intervention in a market for the purpose of environmental protection is justified?

A)Does the intervention program reduce pollution to zero using the least costly method?
B)Is the intervention program economically efficient?
C)Does the intervention program make the amount of economic surplus as large as possible?
D)Is the damage to the environment from government intervention as small as possible?

Question 77

What does the phrase "internalizing an external cost" mean?

A)limiting the extent to which domestic firms can outsource production
B)prohibiting economic activities that create externalities
C)forcing producers to factor into their production costs the cost of the externalities created in the production of their output
D)finding a way to address cross-border pollution

Question 78

The Fairmount Banff Springs Hotel has a spectacular view of the Rocky Mountains.Suppose a commercial logger has purchased the logging rights to the area and is planning to clear-cut the forest in a way that will have a negative impact on the resort.Can the two parties arrive at a Coasian solution and if so what is it?

Question 79

If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set

A)equal to the marginal external cost at the economically efficient level of pollution.
B)equal to the marginal private cost of production at the economically efficient level of pollution.
C)equal to the amount of the deadweight loss created in the absence of a pollution tax.
D)at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.

Question 80

In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed.Many residents are pushing for a change in policy.Canine lover Sara Northridge observed, "There are 800 or more homes here.There are three parks within 10 minutes, and almost everyone has a dog, but we can't take our dogs there." Others fear that allowing dogs would detract from their enjoyment of the parks.Tim Cortis retorted, "We're not preventing dog lovers from enjoying the park, just come without your dog." Which of the following is a way of dealing with the problem by assigning property rights to a particular group?

A)impose a two-tier entry fee system - a lower fee for non dog owners and a higher fee for dog owners
B)impose a fee only for dog-owners to use the public parks; non dog owners do not pay a fee
C)dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park
D)allow dog owners to bring their dogs to the park but insist that they keep watch over their dogs