Question 1

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow.  Figure 16.3
-Refer to Figure 16.3. At 15 units of output there are external ________ per unit.
A) costs of $0
B) benefits of $2
C) costs of $6
D) benefits of $8

Accepted Answer

The answer of Refer to the information provided in Figure...

Question 2

If a subsidy is granted to perfectly competitive firms that provide external benefits to society, the firm's marginal cost curve will shift ________ and the industry supply curve will shift to the ________.
A) down; left
B) down; right
C) up; right
D) up; left

Accepted Answer

When a subsidy is granted to firms, it effectively lowers their cost of production, which is represented by a downward shift in the marginal cost curve. Since the firms can now produce at a lower cost, they are willing to supply more at each price level, which shifts the industry supply curve to the right.

Question 3

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow.  Figure 16.3
-Refer to Figure 16.3. If the firm maximizes profits and the government ________, it will produce 20 units of output.
A) establishes a price floor of $6
B) establishes a price ceiling of $8
C) requires it to take damages into account
D) does not require it to take damages into account

Accepted Answer

Without seeing Figure 16.3, the correct answer can be inferred based on economic principles. If the government does not require the firm to take damages into account, the firm will produce at the level where its private costs equal its private benefits, which is typically the profit-maximizing level of output. The other options (A, B, C) involve government interventions that would alter the firm's production decisions by either setting price controls or requiring the firm to consider external damages, thus likely affecting the quantity produced.

Question 4

Education generates external benefits. When these external benefits are not considered, the market will produce
A) an efficient level of education.
B) more than the efficient level of education.
C) less than the efficient level of education.
D) zero units of education.

Accepted Answer

External benefits of education, such as increased productivity and lower crime rates, are not fully captured by the market, leading to underinvestment in education compared to the socially optimal level.

Question 5

Refer to Scenario 16.1 below to answer the question(s) that follow.
SCENARIO 16.1: The marginal benefit for a particular food is described by MB = 30 - q, where q refers to the quantity of the food. The marginal cost of producing the food is described by MC = 2q. There is a negative externality associated with food production and the marginal social cost of food production is MSC = 4q.
-Refer to Scenario 16.1. The efficient output level is ________ and the efficient price is ________.
A) 10 units of food; $20
B) 6 units of food; $24
C) 0 units of food; $0
D) 4.29 units of food; $25.71

Accepted Answer

To find the efficient output level, set the marginal benefit (MB) equal to the marginal social cost (MSC): 30 - q = 4q. Solving for q gives q = 6. To find the efficient price, substitute q = 6 into the MC or MSC equation (since they should be equal at the efficient point), giving MC = 2(6) = 12 or MSC = 4(6) = 24. The correct efficient price is based on the MSC, so it's $24.

Question 6

You spend $300 every month to keep your lawn and garden maintained. Your neighbor has told you that she derives $50 a month in enjoyment from being able to look at your beautiful yard. Which of the following is true?
A) You are spending too much on your yard, because your neighbor derives only $50 worth of benefits.
B) You should refuse to spend anything on your yard unless your neighbor pays you $50 a month.
C) If you took into consideration the benefits your neighbor derived, the efficient level of lawn maintenance would be greater than $300 a month.
D) If you took into consideration the benefits your neighbor derived, the efficient level of lawn maintenance would be less than $300 a month.

Accepted Answer

The efficient level of lawn maintenance considers both your costs and the benefits to others. Since your neighbor enjoys benefits from your yard, the total benefits of maintaining the lawn are greater than just your personal enjoyment. Therefore, if these external benefits were considered, the efficient spending on lawn maintenance could be higher than your current expenditure.

Question 7

Taxes on a producing firm's spillovers
A) are designed to make it easier for economists to measure spillovers.
B) will lead to a zero level of output.
C) are simply meant to force decision makers to consider the full costs of their actions.
D) are designed primarily as a way to raise money so that the government can compensate the victims of the externality.

Accepted Answer

Taxes on a firm's spillovers, also known as Pigouvian taxes, are meant to internalize the external costs (or benefits) associated with a firm's activities. By imposing a tax equal to the external cost, it forces the firm to consider the full social costs of its actions, not just the private costs, leading to a more efficient allocation of resources.

Question 8

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow.  Figure 16.3
-Refer to Figure 16.3. At 20 units of output there are external
A) costs of $2 per unit.
B) benefits of $2 per unit.
C) costs of $5 per unit.
D) benefits of $5 per unit.

Accepted Answer

At 20 units of output, the external costs are the difference between the social cost curve and the private cost curve, which is $2 per unit.

Question 9

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

Accepted Answer

When the government taxes a steel company by an amount equal to the damages of each marginal ton of steel, it effectively internalizes the external costs associated with steel production. This means the marginal cost curve of the company now reflects not only the private costs of production but also the external costs (damages) associated with each additional ton of steel. Therefore, the company's marginal cost curve becomes the same as the marginal social cost curve, which includes both private and external costs.

Question 10

When the government taxes a firm that generates external costs, the firm will produce
A) more units of output than before the tax was imposed in order to continue maximizing profits.
B) the same number of units of output as before the tax was imposed to continue maximizing profits.
C) fewer units of output than before the tax was imposed in order to continue maximizing profits.
D) either more or fewer units of output than before the tax was imposed depending upon what happens to the profit-maximizing level of output.

Accepted Answer

When the government taxes a firm for generating external costs, it increases the firm's production costs. To continue maximizing profits under these new conditions, the firm will typically produce fewer units of output, as the marginal cost of producing each additional unit now includes the tax. This adjustment aims to align the firm's private costs with the social costs of its production.

Question 11

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow.  Figure 16.3
-Refer to Figure 16.3. The ________ level of output of this product is 15.
A) unregulated
B) efficient
C) break-even
D) market

Accepted Answer

The efficient level of output is the quantity at which the marginal social benefit of consuming the product equals the marginal social cost of producing it, typically considered the socially optimal level of production.

Question 12

Refer to Scenario 16.1 below to answer the question(s) that follow.
SCENARIO 16.1: The marginal benefit for a particular food is described by MB = 30 - q, where q refers to the quantity of the food. The marginal cost of producing the food is described by MC = 2q. There is a negative externality associated with food production and the marginal social cost of food production is MSC = 4q.
-Refer to Scenario 16.1. The competitive output level is ________ and the competitive price is ________.
A) 10 units of food; $20
B) 6 units of food; $24
C) 0 units of food; $0
D) 4.29 units of food; $25.71

Accepted Answer

The competitive output level is determined where MB = MC, so 30 - q = 2q. Solving for q gives q = 10. The competitive price is found by substituting q = 10 into the MB equation: MB = 30 - 10 = $20.

Question 13

When the government imposes a tax on a firm that generates external costs, the tax is
A) always borne entirely by the firm.
B) always borne entirely by the consumer.
C) usually borne by both the firm and the consumer.
D) borne only by the government.

Accepted Answer

When the government imposes a tax on a firm that generates external costs, the tax burden is typically shared between the firm and the consumer. The firm may face higher production costs, leading to higher prices for consumers, thus both parties bear some of the tax burden.

Question 14

Suppose that you rent a house next to a factory. The factory legally emits a chemical into the air that smells like feet. You now have to spend $300 more per month on air fresheners because the firm pollutes the air. You could move to another house far enough away from the factory, but the rent for that house is $200 more than you now pay. The efficient solution to this problem is that
A) the factory owner should compensate you $300 so that you can pay for the additional expenses you incur.
B) you should move to the new house because the additional rent on that new house is less than the additional expenses you incur from living next to the factory.
C) the factory owner should reimburse you $100, the difference between your expenses and the higher rent on the new house.
D) the firm should be able to continue to pollute because only one person is being harmed by the factory's pollution.

Accepted Answer

Moving to the new house is the efficient solution because it minimizes the additional expenses incurred from the pollution, costing only $200 more in rent compared to the $300 for air fresheners.

Question 15

If the government wishes to encourage firms to internalize externalities, they should ________ activities resulting in negative externalities and ________ activities resulting in positive externalities
A) tax; subsidize
B) subsidize; tax
C) ban; generate
D) place an injunction against; tax

Accepted Answer

Taxing activities that result in negative externalities makes those activities more expensive for firms, encouraging them to reduce or eliminate the negative externalities. Subsidizing activities that result in positive externalities encourages firms to engage in more of those activities, increasing the positive externalities.

Question 16

For the efficient level of output to be produced, marginal
A) private cost must equal zero.
B) benefit must equal marginal private cost.
C) social cost must be zero.
D) benefit must equal marginal social cost.

Accepted Answer

The efficient level of output occurs when the marginal benefit equals the marginal social cost, ensuring that all externalities are accounted for in the production decision.

Question 17

If a tax is placed on perfectly competitive firms that impose external costs on society, the firm's marginal cost curve will shift ________ and the industry supply curve will shift to the ________.
A) down; left
B) down; right
C) up; right
D) up; left

Accepted Answer

When a tax is placed on firms that impose external costs, it effectively increases their cost of production. This causes the firm's marginal cost curve to shift up, reflecting higher costs at each level of output. Consequently, the industry supply curve shifts to the left, indicating a decrease in the total quantity supplied at each price level, as it becomes more costly for firms to produce.

Question 18

If the production of a good generates external benefits, the government could increase efficiency by
A) taxing the production of the good to reduce the amount produced.
B) subsidizing production of the good to increase the amount produced.
C) regulating production of the good to reduce the amount produced.
D) requiring all producers of the product to be licensed to produce the product.

Accepted Answer

When a good generates external benefits (positive externalities), the social value of the good is higher than the private value. This means that the good is underproduced in the free market. Subsidizing production can help align the social and private costs, increasing production to a more socially optimal level.

Question 19

In the presence of negative externalities, ________ is produced and in the presence of positive externalities, ________ is produced.
A) too little of the good; too much of the good
B) too much of the good; too little of the good
C) too much of the good; the right amount of the good
D) the right amount of the good; too little of the good

Accepted Answer

In the presence of negative externalities (e.g., pollution), producers do not bear the full cost of production, leading to overproduction. Conversely, with positive externalities (e.g., education), not all benefits are captured by the producer, leading to underproduction.

Question 20

Once a firm is made to internalize a negative externality, the price will
A) increase and output will decrease.
B) increase and output will increase.
C) decrease and output will decrease.
D) decrease and output will increase.

Accepted Answer

When a firm is made to internalize a negative externality, it means the firm now bears the external costs that previously were not accounted for in its production costs. This leads to an increase in the firm's costs, which typically results in higher prices for consumers and a reduction in the quantity of goods produced, as the firm adjusts to the new cost structure.

Quiz 16: Externalities, Public Goods, and Common Resources

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3 -Refer to Figure 16.3. At 15 units of output there are external ________ per unit.

If a subsidy is granted to perfectly competitive firms that provide external benefits to society, the firm's marginal cost curve will shift and the industry supply curve will shift to the .

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3 -Refer to Figure 16.3. If the firm maximizes profits and the government ________, it will produce 20 units of output.

Education generates external benefits. When these external benefits are not considered, the market will produce

You spend $300 every month to keep your lawn and garden maintained. Your neighbor has told you that she derives $50 a month in enjoyment from being able to look at your beautiful yard. Which of the following is true?

Taxes on a producing firm's spillovers

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3 -Refer to Figure 16.3. At 20 units of output there are external

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

When the government taxes a firm that generates external costs, the firm will produce

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3 -Refer to Figure 16.3. The ________ level of output of this product is 15.

When the government imposes a tax on a firm that generates external costs, the tax is

If the government wishes to encourage firms to internalize externalities, they should activities resulting in negative externalities and activities resulting in positive externalities

For the efficient level of output to be produced, marginal

If a tax is placed on perfectly competitive firms that impose external costs on society, the firm's marginal cost curve will shift and the industry supply curve will shift to the .

If the production of a good generates external benefits, the government could increase efficiency by

In the presence of negative externalities, is produced and in the presence of positive externalities, is produced.

Once a firm is made to internalize a negative externality, the price will