Question 1

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 2

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 3

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 4

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 5

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 6

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 of a good or service imposes costs on third parties not involved in the market transaction, such as environmental pollution from a power plant.

Question 7

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 8

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 that affects a party who did not choose to incur that cost or benefit. It can be either positive or negative and occurs outside of a market transaction, impacting third parties.

Question 9

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

When a profit-maximizing competitive firm does not have to compensate society for a negative externality, it will continue to produce where price equals marginal cost, ignoring the external costs its production imposes on society.

Question 10

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 11

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 a government makes a firm internalize a negative externality, it means the firm must take into account the external costs it imposes on society (e.g., pollution) in its production decisions. This typically leads to higher production costs for the firm, which are often passed on to consumers in the form of higher prices. Additionally, the firm may reduce its output to minimize the now-internalized costs, leading to a decrease in output.

Question 12

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 13

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 14

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

To encourage firms to internalize externalities, the government should tax activities that result in negative externalities (to discourage harmful impacts on third parties) and subsidize activities that result in positive externalities (to encourage beneficial impacts on third parties).

Question 15

________ 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 a party who did not choose to incur that cost or benefit. It occurs when the actions of individuals or businesses have effects on third parties that are not reflected in market prices.

Question 16

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 government taxes a firm that generates external costs, the firm faces higher production costs. To maximize profits under these new conditions, the firm will typically reduce its output, producing fewer units than before the tax was imposed. This adjustment is made to offset the increased costs associated with the tax.

Question 17

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) 15 units of food; $45
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. The competitive price is MB at q = 15, which is 60 - 15 = $45.

Question 18

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

Accepted Answer

Vaccinating children provides benefits not only to the individual child but also to others in the community by reducing the spread of infectious diseases, which is an example of a positive externality.

Question 19

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 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

Negative externalities (such as pollution from factories) lead to overproduction because the social costs are not fully accounted for by the producers. Positive externalities (like the benefits of education or vaccinations) result in underproduction because the full social benefits are not captured by the market.

Quiz 16: Externalities, Public Goods, and Common Resources

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.

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

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

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

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

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

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

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.

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

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

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

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

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.

Vaccinating your children is an example of

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

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.