Question 1

The ________ cost to society of producing an additional unit of a good or service is the marginal social cost.
A) private
B) subsidized
C) total
D) damage

Accepted Answer

The marginal social cost includes all costs to society, both private and external, of producing one more unit of a good or service, hence "total" is the correct term.

Question 2

Vaccinating your children is an example of
A) a positive externality.
B) a negative externality.
C) a public good.
D) logrolling.

Accepted Answer

Vaccinating your children not only benefits them but also helps reduce the spread of diseases within the community. This is because vaccinated individuals are less likely to contract and spread diseases to others, resulting in a positive externality.

Question 3

If firms have to account for external costs of production, then marginal social cost
A) equals marginal cost.
B) is less than marginal cost.
C) is greater than marginal cost.
D) is zero.

Accepted Answer

The answer of If firms have to account for external...

Question 4

If a profit-maximizing competitive firm ________ compensate society for a negative externality, the firm will choose to produce where price equals marginal cost.
A) does not have to
B) is pressured to
C) voluntarily chooses to
D) is legally bound to

Accepted Answer

A profit-maximizing competitive firm is only concerned with their own profits and not external factors. Therefore, unless they are forced to compensate for negative externalities through legal regulations or taxes, they will not voluntarily do so. As a result, they will choose to produce where price equals marginal cost, which is the point of profit maximization for the firm.

Question 5

Assuming there are no externalities, if a firm produces an output level where the benefits to consumers ________ the cost to suppliers to produce it, then price is ________ marginal cost.
A) are less than; greater than
B) exceed; greater than
C) exceed; less than
D) equal; less than

Accepted Answer

When the benefits to consumers exceed the cost to suppliers to produce it, it implies that the price consumers are willing to pay is higher than the cost of production, hence price is greater than marginal cost.

Question 6

A cost or benefit resulting from some activity that is imposed or bestowed on third parties is
A) a market failure.
B) an externality.
C) a public good.
D) logrolling.

Accepted Answer

An externality is a cost or benefit resulting from some activity that is imposed or bestowed on third parties. It is a market failure because the market fails to account for the external effects of an activity. A public good is a good that is non-excludable and non-rivalrous, meaning it is available to all and consumption by one person does not diminish its availability to others. Logrolling is a practice in which two or more parties agree to support each other's initiatives or policies.

Question 7

Refer to Scenario 16.2 below to answer the question(s) that follow.
SCENARIO 16.2: The marginal benefit for a particular food is described by MB = 60 - q, where q refers to the quantity of the food. The marginal cost of producing the food is described by MC = 3q. There is a negative externality associated with food production and the marginal social cost of food production is MSC = 5q.
-Refer to Scenario 16.2. The competitive output level is ________ and the competitive price is ________.
A) 20 units of food; $40
B) 10 units of food; $50
C) 0 units of food; $0
D) 10 units of food; $20

Accepted Answer

The competitive output level is where MB = MC, so 60 - q = 3q, solving gives q = 15. However, none of the options match this, so we check the competitive price: P = MB at q = 15, P = 60 - 15 = $45. Again, none match, but A is closest with q = 20 and P = $40.

Question 8

Assuming no externalities exist, if a good's price is more than its marginal cost, then the benefits consumers derive are ________ than the cost of resources needed to produce it and ________ should be produced.
A) greater; less
B) greater; more
C) less; less
D) less; more

Accepted Answer

When the price of a good is higher than its marginal cost, it indicates that consumers value the good more than it costs to produce additional units, suggesting that increasing production would enhance overall economic welfare.

Question 9

________ is a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction.
A) An externality
B) Marginality
C) Utility
D) A provisional injunction

Accepted Answer

An externality is a cost or benefit that affects parties outside of the activity or transaction, such as pollution from a factory affecting nearby residents or a person's decision to get vaccinated positively impacting the health of others. Marginality refers to the concept of making decisions at the margin, weighing the costs and benefits of small changes. Utility refers to the satisfaction or pleasure a person gains from a good or service. A provisional injunction is a court order that temporarily prohibits a specific action until a trial or hearing can take place.

Question 10

An example of ________ is a power plant generating water pollution.
A) a positive production externality
B) a negative production externality
C) a public good
D) the free-rider problem

Accepted Answer

A negative production externality occurs when the production or consumption of a good or service imposes costs on others who are not involved in the production or consumption process. In this example, the power plant generating water pollution is producing a negative externality because it is imposing costs (pollution) on others who are not involved in the production process (the general public).

Question 11

We assume the marginal benefit of consumption ________ as we consume fewer units of a good.
A) remains constant
B) increases
C) decreases
D) could either increase or decrease

Accepted Answer

The marginal benefit of consumption typically increases as we consume fewer units of a good, reflecting the principle of diminishing marginal utility, which suggests that as we consume less of something, the satisfaction (utility) from each additional (marginal) unit increases.

Question 12

Price will increase and output will decrease once government makes a firm
A) internalize a negative externality.
B) externalize a negative externality.
C) internalize a positive externality.
D) externalize a positive externality.

Accepted Answer

When the government makes a firm internalize a negative externality, it means that the firm has to bear the cost of the negative external effect it is creating. This cost will lead to an increase in the production cost, hence, the price of the product will increase. Moreover, as the firm has to reduce the negative externality, it needs to decrease the output, leading to a decrease in the production level.

Question 13

If the government wishes to encourage firms to internalize externalities, they should tax activities resulting in ________ externalities and subsidize activities resulting in ________ externalities.
A) negative; positive
B) positive; negative
C) no; positive
D) negative; no

Accepted Answer

Taxing activities resulting in negative externalities, such as pollution or congestion, makes these activities more expensive for firms and encourages them to finding ways to reduce the negative impact on society. Subsidizing activities that result in positive externalities, such as education or research, encourages firms to engage in these activities which benefits the society as a whole. Therefore, choice A is the best option.

Question 14

If the government taxes a coal company by an amount equal to the damages of each marginal ton of coal, then the coal company's marginal social cost curve is the same as the marginal ________ curve.
A) damage cost
B) cost
C) private cost
D) benefit

Accepted Answer

The answer of If the government taxes a coal company...

Question 15

Due to a firm generating external costs, the government decides to ________ the firm. When this happens, the firm will produce ________ units of output than before the tax was imposed in order to continue maximizing profits.
A) subsidize; fewer
B) subsidize; more
C) tax; fewer
D) tax; more

Accepted Answer

When a firm generates external costs, such as pollution, the government may impose a tax on the firm to discourage the production of the harmful activity. This tax increases the firm's production costs, leading to a decrease in profits. To continue maximizing profits, the firm will produce fewer units of output than before the tax was imposed. Choice A, subsidizing the firm, would encourage rather than discourage the harmful activity and lead to increased production. Choice B, subsidizing the firm and requiring more output, would not make sense as it would provide a false incentive for the firm to continue producing harmful activities. Choice D, increasing the tax and production, would result in even higher costs for the firm and potentially lead to a decrease in profits.

Question 16

If perfectly competitive firms have to account for external costs of production, then at the equilibrium level of output
A) P = MC
B) P < MSC
C) MC = MSC
D) Both A and C are correct.

Accepted Answer

In a perfectly competitive market, firms produce where price (P) equals marginal cost (MC) for efficiency. When accounting for external costs, the marginal social cost (MSC) includes both MC and external costs. Thus, at equilibrium, P = MC and MC = MSC, making both A and C correct.

Question 17

Assuming there are no externalities, if a firm produces an output level where the benefits to consumers ________ the cost to suppliers to produce it, then price is ________ marginal cost.
A) are less than; greater than
B) exceed; less than
C) are less than; less than
D) equal; greater than

Accepted Answer

The answer of Assuming there are no externalities, if a...

Question 18

Refer to Scenario 16.2 below to answer the question(s) that follow.
SCENARIO 16.2: The marginal benefit for a particular food is described by MB = 60 - q, where q refers to the quantity of the food. The marginal cost of producing the food is described by MC = 3q. There is a negative externality associated with food production and the marginal social cost of food production is MSC = 5q.
-Refer to Scenario 16.2. The efficient output level is ________ and the efficient price is ________.
A) 10 units of food; $20
B) 10 units of food; $50
C) 0 units of food; $0
D) 20 units of food; $40

Accepted Answer

To find the efficient output level, we set the marginal benefit (MB) equal to the marginal social cost (MSC) because the efficient output level occurs where the social benefit of consuming the last unit is equal to the social cost of producing it. From the scenario, MB = 60 - q and MSC = 5q. Setting these equal to each other gives us 60 - q = 5q, which simplifies to 60 = 6q. Solving for q gives us q = 10 units of food. To find the efficient price, we substitute q = 10 into the MSC equation (since the price should reflect the social cost), which gives us MSC = 5(10) = $50. Therefore, the efficient output level is 10 units of food, and the efficient price is $50.

Question 19

If firms have to account for external costs in production, then they will produce an output level that is ________ the efficient level.
A) at
B) below
C) above
D) either above or below

Accepted Answer

When firms have to account for external costs in production, they adjust their output to reflect the true cost of production, including the externalities. This adjustment leads to a production level that aligns with the efficient level, as it incorporates all social costs and benefits.

Question 20

In the presence of ________ externalities, too much of the good is produced and in the presence of ________ externalities, too little of the good is produced.
A) positive; negative
B) negative; positive
C) positive; no
D) no; negative

Accepted Answer

In the presence of negative externalities, too much of the good is produced (for example, pollution), and in the presence of positive externalities, too little of the good is produced (for example, education or research). Therefore, option B is the correct answer.

Quiz 16: Externalities, Public Goods, and Common Resources

The ________ cost to society of producing an additional unit of a good or service is the marginal social cost.

Vaccinating your children is an example of

If firms have to account for external costs of production, then marginal social cost

If a profit-maximizing competitive firm ________ compensate society for a negative externality, the firm will choose to produce where price equals marginal cost.

Assuming there are no externalities, if a firm produces an output level where the benefits to consumers the cost to suppliers to produce it, then price is marginal cost.

A cost or benefit resulting from some activity that is imposed or bestowed on third parties is

Assuming no externalities exist, if a good's price is more than its marginal cost, then the benefits consumers derive are than the cost of resources needed to produce it and should be produced.

________ is a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction.

An example of ________ is a power plant generating water pollution.

We assume the marginal benefit of consumption ________ as we consume fewer units of a good.

Price will increase and output will decrease once government makes a firm

If the government wishes to encourage firms to internalize externalities, they should tax activities resulting in externalities and subsidize activities resulting in externalities.

If the government taxes a coal company by an amount equal to the damages of each marginal ton of coal, then the coal company's marginal social cost curve is the same as the marginal ________ curve.

Due to a firm generating external costs, the government decides to the firm. When this happens, the firm will produce units of output than before the tax was imposed in order to continue maximizing profits.

If perfectly competitive firms have to account for external costs of production, then at the equilibrium level of output

Assuming there are no externalities, if a firm produces an output level where the benefits to consumers the cost to suppliers to produce it, then price is marginal cost.

If firms have to account for external costs in production, then they will produce an output level that is ________ the efficient level.

In the presence of externalities, too much of the good is produced and in the presence of externalities, too little of the good is produced.