Question 1

If a firm's production creates detrimental externalities, then in a competitive market,

Accepted Answer

In a competitive market, firms produce until marginal cost equals price. However, if a firm's production creates detrimental externalities, such as pollution, then the social cost is higher than the private cost. This means that the marginal social cost (MSC) is higher than the marginal private cost (MPC). Since the firm only considers MPC in its production decision, it will produce at a level where MPC equals price, which is lower than the socially optimal level. Therefore, the firm will produce at an inefficiently high level.

Question 2

Figure 15-1 
-Figure 15-1 describes conditions in the monopolized weezil industry.In the absence of government intervention, the monopolist will produce an output equal to

Accepted Answer

A monopolist maximizes profit by producing at the quantity where marginal cost (MC) equals marginal revenue (MR). This quantity corresponds to point X in typical diagrams illustrating monopolistic markets.

Question 3

A local flower grower grows products in a plot of land, which is exceptionally colorful and is admired by many passersby.There is no way to charge for this in the price of the flowers.We can safely conclude that

Accepted Answer

The beauty of the flowers that passersby enjoy for free is an example of a positive externality, where benefits extend beyond the buyer and seller. Since these external benefits are not compensated or charged for, the market may produce fewer flowers than is socially optimal, indicating the florist produces too few flowers.

Question 4

Figure 15-1 
-Figure 15-1 describes conditions in the monopolized weezil industry.If the government replaces the monopolist with perfectly competitive firms and forces these firms to take account of all the costs and benefits they impose on society, the industry will produce an output equal to

Accepted Answer

In a perfectly competitive market, firms produce where the price equals the marginal cost (P=MC), which corresponds to the socially optimal output level. This level is also where the marginal social benefit equals the marginal social cost (MSB=MSC), typically resulting in a higher output than under monopoly, where output is restricted to maximize profits. Therefore, without seeing Figure 15-1, the correct answer is the one that represents a higher output level than the monopolist's output but is determined by the intersection of MSB and MSC, which is typically described as the socially optimal output level.

Question 5

Figure 15-1 
-Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram, the production of weezils

Accepted Answer

The answer of Figure 15-1 
-Figure 15-1 portrays conditions in...

Question 6

The Rand Corporation estimates that external costs imposed by alcohol consumption (e.g., deaths caused by drunk drivers) to be 48 cents per ounce consumed.If taxes on alcohol are 23 cents per ounce consumed, then

Accepted Answer

The external costs imposed by alcohol consumption are higher than the taxes imposed on it. This implies that the social cost of consuming alcohol is greater than the private cost paid by individuals. Therefore, the level of alcohol consumption is greater than the socially optimal level, and there is a market failure. To correct this market failure, policymakers should consider policies such as increasing taxes on alcohol or implementing regulations to reduce the external costs imposed by alcohol consumption.

Question 7

The desirable level of output in a perfectly competitive market if there exists a detrimental externality is

Accepted Answer

The desirable level of output in a perfectly competitive market, when there's a detrimental externality, is at the point where the Marginal Social Cost (MSC) curve intersects the marginal revenue curve. This intersection ensures that the external costs are accounted for in the production decision, leading to a socially optimal output level.

Question 8

According to Coase,

Accepted Answer

Coase argued that in competitive markets, efficient outcomes can be achieved through negotiation, but in practice, negotiating is often costly and difficult, leading to the persistence of externalities. Therefore, answer C is the correct choice.

Question 9

Figure 15-2 
-The firm illustrated in Figure 15-2 is producing

Accepted Answer

The firm is producing at a level where marginal private cost (MPC) is equal to marginal social cost (MSC). However, the external costs are not internalized and are not reflected in the MPC. Therefore, if the external costs were internalized, the MPC would increase and the firm would produce less, resulting in a socially optimal point where MSC equals Marginal Social Benefit (MSB). Thus, the firm is producing more than it would if external costs were internalized.

Question 10

In a free market economy,

Accepted Answer

In a free market economy, externalities may exist as a market failure. However, policy makers can use market methods such as taxes or subsidies to correct the externalities and promote efficient resource allocation in the market. Thus, the externalities can be solved or at least reduced through policy interventions. Option A is incorrect as externalities can be solved through policy interventions. Option B is incorrect as public goods are non-rival and non-excludable with free access, and hence cannot always be efficiently provided by the private sector. Option C is incorrect as externalities can be both beneficial or harmful to society, and even if they are detrimental, they are not rare.

Question 11

Where a firm generates beneficial externalities, society would be better off if

Accepted Answer

Beneficial externalities are positive externalities, and they occur when the production and consumption of a good or service benefits not only the direct participants, but also third parties who are not directly involved in the market transaction. In such a case, social welfare is higher than private welfare. Therefore, in order to maximize social welfare, the firm should increase its output level to reach the socially optimal level, which is where marginal social benefit equals marginal social cost. This would increase the total benefits to all society, including third parties who benefit from the positive externalities.

Question 12

Figure 15-1 
-When beneficial externalities are present in a market, the actual output will be

Accepted Answer

Beneficial externalities lead to a situation where the marginal social benefit (MSB) is greater than the marginal private benefit (MPB). As a result, the market equilibrium output will be smaller than the socially optimal output. Therefore, option B is the best choice.

Question 13

If a detrimental externality is being produced in the course of producing a good, then

Accepted Answer

If a detrimental externality is being produced, then the social cost of producing the good (MSC) is higher than the private cost of production (MPC), resulting in an inefficiently large output. Thus, the correct choice is D, output is inefficiently large.

Question 14

Figure 15-1 
-When there are beneficial externalities in a market,

Accepted Answer

When there are beneficial externalities in a market, marginal social benefit (MSB) is above marginal private benefit (MPB), which means that there is a positive spillover effect on society that is not accounted for by individual consumers. As a result, the market equilibrium output level is lower than the socially optimal output level, leading to an underallocation of resources. To achieve the socially optimal level of output, the government can intervene by providing subsidies, tax credits, or other incentives to encourage the consumption of the good or service that generates the positive externality.

Question 15

Marginal social cost is defined as marginal private cost

Accepted Answer

Marginal social cost includes the private cost incurred by a producer plus any costs that are incurred by society but not accounted for by the producer, which are known as incidental costs.

Question 16

The former communist countries of eastern Europe and the Soviet Union

Accepted Answer

The former communist countries of eastern Europe and the Soviet Union have a dismal environmental record. This is because the emphasis on rapid industrialization and agricultural development during the communist era led to the neglect of environmental concerns, resulting in pollution and environmental degradation. While some progress has been made since the fall of communism, these countries still face significant environmental challenges.

Question 17

Market economies have air and water pollution, but nonmarket economies

Accepted Answer

Nonmarket economies, such as those found in many developing countries, often lack the regulations and incentives found in market economies that help to control pollution. As a result, pollution in nonmarket economies can be much worse than in market economies.

Question 18

Which of the following is true?

Accepted Answer

Externalities are a common occurrence in society and can be created by various entities such as public institutions (e.g. pollution caused by government-run factories), private firms (e.g. emissions from factories), and even individual consumers (e.g. littering). Therefore, choice D is the correct answer. A is incorrect because while competitive markets can lead to efficient outcomes, they may not fully internalize externalities without government intervention. B is incorrect as historical evidence suggests that nonmarket economies have often been associated with significant environmental damage. C is also incorrect because externalities are a real problem that policy makers actively try to address through regulations and pricing mechanisms.

Question 19

One of the reasons why firms pollute the air is that

Accepted Answer

The use of air is not easily excludable, meaning firms cannot be easily prevented from using it as a dumping ground for pollutants. This leads to overuse and pollution because there is no direct cost to the firms for emitting pollutants into the air.

Question 20

Which of the following statements is correct?

Accepted Answer

Marginal social cost consists of the marginal private cost incurred by the producers of a good or service, as well as any incidental costs borne by third parties. Therefore, statement C is correct. Statement A is incorrect because marginal social cost includes all costs, not just those paid for by the persons carrying out the activity. Statement B is incorrect because marginal private cost refers to the cost borne by the producer, not by third parties. Statement D is incorrect because incidental costs are separate from marginal private cost, although they are both components of marginal social cost.

Quiz 15: The Shortcomings of Free Markets