Question 1

The existence of externalities results in
A) harm to those directly involved.
B) a misallocation of resources.
C) a greater than optimal level of production.
D) a less than optimal level of production.
E) harm to those indirectly involved.

Accepted Answer

Externalities lead to a misallocation of resources because they create costs or benefits that are not reflected in the market price, resulting in overproduction or underproduction.

Question 2

If an unregulated activity produces a negative externality,one can infer that the
A) equilibrium price is greater than the socially optimal price.
B) demand for the activity is greater than the socially optimal demand.
C) equilibrium quantity is greater than the socially optimal quantity.
D) equilibrium quantity is less than the socially optimal quantity.
E) supply of the activity is less than the socially optimal supply.

Accepted Answer

If an unregulated activity produces a negative externality, the marginal social cost (MSC) will be greater than the marginal private cost (MPC). This means that the equilibrium quantity, where MPC equals marginal social benefit (MSB), will be greater than the socially optimal quantity, where MSC equals MSB. Therefore, choice C is the correct answer.

Question 3

Parties affected by externalities have an incentive to negotiate as long as
A) the cost of the negotiation is less than the surplus that could be gained.
B) the cost of the negotiation is greater than the surplus that could be gained.
C) the cost of the negotiation is equal to the surplus that could be gained.
D) there is no surplus.
E) the surplus is positive regardless of the cost.

Accepted Answer

Parties will negotiate if the potential surplus from resolving the externality exceeds the cost of negotiation, making it beneficial for both parties.

Question 4

When collective action is taken,e.g. ,the passing of a new law,it is frequently an attempt to
A) eliminate a negative externality.
B) encourage a positive externality.
C) increase the income of lawyers.
D) correct a resource misallocation due to an externality.
E) further burden the operation of the economy.

Accepted Answer

The answer of When collective action is taken,e.g. ,the passing...

Question 5

One of the reasons why private markets produce less than the socially optimal level of goods that yield positive externalities is that
A) producers do not know that their goods yield positive externalities.
B) the market does not benefit from goods that yield positive externalities.
C) positive externalities are often unpriced.
D) those goods are usually taxed heavily.
E) prices are already too high and consumers refuse to pay more.

Accepted Answer

Positive externalities are often unpriced, meaning that their value is not fully captured in the price of the product or service. This creates a market failure where producers do not have an incentive to produce the socially optimal level of goods that yield positive externalities because they do not receive the full benefit of their production.

Question 6

Suppose that coal mining produces a negative externality in the form of polluted streams.One can deduce that the unregulated
A) price of coal is too high.
B) quantity is too small.
C) quantity is too large.
D) supply is too low.
E) demand is too great.

Accepted Answer

The negative externality of polluted streams means that the social cost of coal mining is higher than the private cost. In an unregulated market, firms will only consider their private costs and benefits, which means they will produce too much coal (quantity is too large) since the social cost is not reflected in the market price. Therefore, the quantity of coal produced is too large in an unregulated market.

Question 7

When some fraction of the benefit of an activity is received by people not participating in the activity,it is called a(n)
A) winner's curse.
B) positive externality.
C) external cost.
D) negative externality.
E) efficient allocation.

Accepted Answer

A positive externality occurs when an activity generates benefits for people who are not part of it. This can lead to a market failure, where the market does not fully account for the benefits, resulting in an inefficient allocation of resources.

Question 8

Which one of the following factors would NOT lessen the ability of the Coase theorem to solve an externality?
A) Negotiating requires lawyers and legal documents.
B) Many individuals bear the external cost.
C) The externality is an external benefit.
D) Many individuals generate the external cost.
E) The parties involved distrust and dislike each other.

Accepted Answer

The Coase theorem can still be applied to solve an externality even if it is an external benefit rather than an external cost. The other options listed can all hinder the ability of the Coase theorem to solve an externality in some way.

Question 9

Which of the following is NOT an example of an activity with an external benefit?
A) Eating a sandwich.
B) Planting flowers in the front yard.
C) Getting a haircut.
D) Washing and waxing the car.
E) Practicing safe sex.

Accepted Answer

Eating a sandwich only affects the individual consuming it and does not have any external benefits for others. The other options all have potential external benefits such as beautifying the neighborhood with flower planting, maintaining the value of a vehicle with washing and waxing, and reducing the spread of sexually transmitted infections with safe sex practices.

Question 10

Assume that reading produces a positive externality.It will be the case that the __________ than that which is socially optimal.
A) supply of reading will be greater
B) price of reading will be greater
C) supply of reading will be less
D) demand for reading will be greater
E) demand for reading will be less

Accepted Answer

The answer of Assume that reading produces a positive externality.It...

Question 11

A motorist with a noisy muffler will continue to drive around town,creating noise pollution wherever he goes,as long as
A) the cost to him is less than the benefit he derives from it.
B) there is no cost to the other people in the town.
C) there is an economic benefit to the society.
D) there are by-laws against noise pollution.
E) he considers the noise a positive externality.

Accepted Answer

The motorist will continue to drive with a noisy muffler as long as the cost to him (in potential fines or repairs) is less than the benefit he derives from it (such as feeling a sense of power or enjoying the sound).

Question 12

The major implication of the Coase theorem is that
A) government regulation is necessary to solve externalities.
B) competitive pressures will eliminate externalities.
C) resolving externalities is more costly than allowing them.
D) individuals can solve many externalities if they can buy and sell the right to commit the externality.
E) governmental solutions to externalities can only fail.

Accepted Answer

The Coase theorem states that if property rights are well-defined and transaction costs are low, then individuals can solve many externalities if they can buy and sell the right to commit the externality. This means that government regulation may not be necessary and that competitive pressures may not eliminate externalities on their own. However, there may be situations where resolving externalities through bargaining is more costly than simply allowing them to exist. The theorem does not suggest that governmental solutions to externalities can only fail, but rather that the private market can be an effective way of addressing externalities in some cases.

Question 13

Which of the following is NOT an example of an activity with an external cost?
A) Noise pollution from a steel mill.
B) Keeping junk in the front yard.
C) A car burning oil.
D) Having to buy batteries for the remote that came with the new TV.
E) Speeding on the Trans-Canada Highway.

Accepted Answer

Having to buy batteries for a remote that came with the new TV is not an example of an activity with an external cost. The cost of buying batteries is an internal cost because it is borne by the individual purchasing the batteries and is not imposed on others in the form of a negative externality. A, B, C, and E are all examples of activities with external costs because they create negative spillover effects on others in the form of pollution, disruption, or danger.

Question 14

An external benefit of an activity is one that is
A) not included in the social marginal cost.
B) received by those directly involved in the activity.
C) included in the private marginal benefit.
D) never present in the real world.
E) received by those not directly involved.

Accepted Answer

An external benefit is a benefit that is received by those who are not directly involved in the activity. It is not included in the private marginal benefit because it is not directly received by the individual participating in the activity. It is also not included in the social marginal cost because it is not a cost incurred by society as a whole. Therefore, the correct answer is E.

Question 15

Cigarettes are known to cause negative externalities.Which one of the following will help to reduce the consumption of cigarettes?
A) A subsidy paid to cigarette producers.
B) Compensation paid to the smokers who end up with lung cancer.
C) A special tax allowance for cigarette consumers.
D) A special tax imposed on the production of cigarettes.
E) Compensation paid to cigarette producers for the articles written about their product.

Accepted Answer

A special tax imposed on the production of cigarettes will increase the price of cigarettes, making it more expensive for consumers to purchase. This will decrease the demand for cigarettes and reduce consumption. Additionally, the tax revenue can be used to compensate for the negative externalities caused by smoking, such as funding healthcare programs for those with smoking-related illnesses. Options A, B, C, and E are unlikely to reduce cigarette consumption and may even incentivize it.

Question 16

An example of the way that externalities distort the allocation of resources is
A) positive economic surplus.
B) positive externalities only.
C) negative externalities only.
D) negative economic surplus.
E) both positive externalities and negative externalities.

Accepted Answer

Externalities can be positive or negative, meaning they can either create benefits or costs to parties not directly involved in a transaction. These externalities are not reflected in the price of the good, causing a distortion in resource allocation. When positive externalities exist, market outcomes may result in a lower quantity of goods produced and consumed than is socially optimal, and when negative externalities exist, market outcomes may result in a higher quantity of goods produced and consumed than is socially optimal. Therefore, both positive and negative externalities can cause a distortion in resource allocation.

Question 17

The motivation for private solutions to externalities is that
A) resources are misallocated and thus economic surplus can be increased.
B) individuals are more concerned about pollution now.
C) of profit maximization.
D) of utility maximization.
E) individuals mistrust governmental solutions.

Accepted Answer

Private solutions to externalities can lead to the optimal allocation of resources and increase economic surplus by internalizing external costs and benefits. This is because private actors can directly negotiate and come to agreements on how to internalize externalities, rather than relying on government intervention.

Question 18

An external cost of an activity is one that is
A) borne by those not directly involved in the activity.
B) borne only by those directly involved in the activity.
C) included in the private marginal cost curve.
D) present only if the activity yields pollution.
E) transferred from consumers to producers.

Accepted Answer

An external cost is a cost that is not accounted for in the market price of a good or service and is instead borne by individuals or groups not directly involved in the production or consumption of the good or service. Therefore, option A is the correct answer as it best describes the definition of an external cost.

Question 19

If public school education was not free in Canada,we would expect
A) more consumption of education.
B) less consumption of education.
C) education to start yielding positive externalities.
D) education to start yielding negative externalities.
E) what economists refer to as the tragedy of the commons.

Accepted Answer

If public school education was not free in Canada, we would expect less consumption of education as individuals may not be able to afford the cost of education, leading to lower participation rates. This would lead to a decrease in human capital and potentially harm the economy in the long run.

Question 20

In the case of either a positive or a negative externality,it will always be true that,relative to the social optimum,the
A) price will be too low.
B) price will be too high.
C) quantity will be too large.
D) demand will be too small.
E) supply will be too great.

Accepted Answer

Both positive and negative externalities cause market outcomes to diverge from the socially optimal outcomes. In the case of positive externalities, the market underproduces the good, as individuals do not consider the beneficial effect on others. Thus, the price will be too low relative to the social optimum. In the case of negative externalities, the market overproduces the good, as individuals do not consider the harmful effect on others. Hence, the price will be too high relative to the social optimum. Therefore, choice A is the correct answer.

Quiz 10: Externalities and Property Rights

The existence of externalities results in

If an unregulated activity produces a negative externality,one can infer that the

Parties affected by externalities have an incentive to negotiate as long as

When collective action is taken,e.g. ,the passing of a new law,it is frequently an attempt to

One of the reasons why private markets produce less than the socially optimal level of goods that yield positive externalities is that

Suppose that coal mining produces a negative externality in the form of polluted streams.One can deduce that the unregulated

When some fraction of the benefit of an activity is received by people not participating in the activity,it is called a(n)

Which one of the following factors would NOT lessen the ability of the Coase theorem to solve an externality?

Which of the following is NOT an example of an activity with an external benefit?

Assume that reading produces a positive externality.It will be the case that the __________ than that which is socially optimal.

A motorist with a noisy muffler will continue to drive around town,creating noise pollution wherever he goes,as long as

The major implication of the Coase theorem is that

Which of the following is NOT an example of an activity with an external cost?

An external benefit of an activity is one that is

Cigarettes are known to cause negative externalities.Which one of the following will help to reduce the consumption of cigarettes?

An example of the way that externalities distort the allocation of resources is

The motivation for private solutions to externalities is that

An external cost of an activity is one that is

If public school education was not free in Canada,we would expect

In the case of either a positive or a negative externality,it will always be true that,relative to the social optimum,the