Question 1

When there are beneficial externalities in a market,

Accepted Answer

When there are beneficial externalities in a market, the marginal social benefit is above the marginal private benefit. This is because, in addition to the benefits experienced by the individual making the decision, there are additional social benefits that are not accounted for in the private decision-making process, but accrue to society as a whole. For example, a person who decides to get vaccinated not only receives personal benefits (reduced risk of illness), but also contributes to the health of the community by reducing the spread of the disease. Thus, the marginal social benefit (including both personal and social benefits) exceeds the marginal private benefit (based only on individual decision-making).

Question 2

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

Accepted Answer

If a detrimental externality is being produced, it is likely that the social cost (including the cost of the externality) exceeds the private cost of production. Therefore, the output produced is inefficiently large as the marginal social cost (MSC) is greater than the marginal private cost (MPC). This situation occurs when there is overproduction of the good, and resources are being allocated in a way that is not socially optimal.

Question 3

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 the...

Question 4

According to Coase,

Accepted Answer

Coase argued that externalities can be overcome through negotiation and bargaining, but in competitive markets, negotiating can be costly and time-consuming, leading to the failure to overcome externalities. Therefore, option C is the correct choice. Option A is incorrect because externalities can still affect market outcomes, and bargaining is not always possible. Option B is also incorrect because bargaining and negotiation are possible in competitive markets. Option D is unrelated to Coase's theory on externalities.

Question 5

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

In a monopolized industry, the profit-maximizing output level occurs where marginal revenue (MR) equals marginal cost (MC). This occurs at point X in the diagram. The monopolist charges a price equal to the demand curve at the output level, which is represented by point Y on the diagram. Therefore, the correct answer is B.

Question 6

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 marginal cost equals marginal revenue (MC=MR), which occurs at point Y in the figure. At this point, the industry produces the quantity of output that minimizes the cost of production for society as a whole, and consumers receive the highest possible consumer surplus. Therefore, output quantity Y is the best choice.

Question 7

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 of alcohol consumption outweigh the current taxes imposed on alcohol, indicating that alcohol consumption is greater than the socially optimal level. Therefore, there is a need to increase taxes, reduce consumption or take other measures to internalize the external costs of alcohol consumption and achieve social efficiency.

Question 8

In a free market economy,

Accepted Answer

In a free market economy, externalities may arise due to the lack of property rights or the inability of individuals to internalize the cost or benefit of their actions. However, policy makers can use market methods such as taxes, subsidies, and cap-and-trade systems to incentivize individuals to internalize externalities and minimize their negative effects on society. Therefore, D is the best choice. Option A is incorrect as externalities can be solved using policy tools; option B is incorrect as public goods are typically not provided efficiently by the private sector due to the free-rider problem; option C is incorrect as negative externalities such as pollution are common in many industries.

Question 9

Which of the following is true?

Accepted Answer

Public institutions, private firms, and consumers all create externalities. This is because any action taken by these entities may have unintended consequences on others that are not captured in the market price. For example, a factory may release pollution into the air, which impacts the health of nearby residents but is not reflected in the cost of production. Therefore, externalities are relevant to policy makers as they need to regulate and internalize these costs. Option A is incorrect as competitive markets alone may not be sufficient to price externalities effectively. Option B is incorrect as there is no clear evidence to suggest that nonmarket economies are better at protecting the environment. Option C is incorrect as externalities are common and affect many sectors of the economy.

Question 10

Which of the following statements is correct?

Accepted Answer

Marginal social cost is the cost to society as a whole, which includes both the private cost borne by the individual or firm carrying out the activity and any incidental costs imposed on others. Therefore, option C is correct. Option A is incorrect because marginal social cost includes all costs, not just those paid for by the persons carrying out the activity. Option B is incorrect because it describes marginal external cost, not marginal private cost. Option D is incorrect because incidental costs are separate from private costs.

Question 11

Figure 15-2

The firm illustrated in Figure 15-2 is producing

Accepted Answer

The firm is producing more than it would if external costs were internalized because it is not taking into account the negative effects of its production on the environment or society. Internalizing those external costs would result in the firm producing less to account for those negative effects.

Question 12

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 13

When beneficial externalities are present in a market, the actual output will be

Accepted Answer

When beneficial externalities are present, the social benefit exceeds the private benefit. Therefore, the market equilibrium output will be smaller than the optimal output. This is because the market only takes into consideration the private costs and benefits while ignoring the broader social costs and benefits. Thus, the market will produce less than what is socially optimal, resulting in an underallocation of resources.

Question 14

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

Accepted Answer

In a competitive market, firms will produce where marginal cost equals marginal benefit, which only accounts for the private cost and private benefit of production. If a firm's production causes negative externalities (such as pollution), then the social cost will be greater than the private cost, resulting in an inefficiently high level of production. Therefore, choice A is the best answer.

Question 15

Market economies have air and water pollution, but nonmarket economies

Accepted Answer

Nonmarket economies, such as those in communist countries, have typically had much worse pollution problems than market economies due to a lack of incentives for pollution control and environmental protection.

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 due to their focus on industrialization and economic growth at the expense of environmental protection. The lack of government transparency and accountability also exacerbated environmental problems.

Question 17

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

Accepted Answer

If a firm generates beneficial externalities, then the social benefit exceeds the private benefit. This means that there is an underproduction of the good or service by the firm. To align the private and social benefit, the firm should produce a larger output level. This will generate more external benefits and increase the overall well-being of society.

Question 18

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 19

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 20

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.

Quiz 15: The Shortcomings of Free Markets

When there are beneficial externalities in a market,

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

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

According to Coase,

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

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

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

In a free market economy,

Which of the following is true?

Which of the following statements is correct?

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

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

When beneficial externalities are present in a market, the actual output will be

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

Market economies have air and water pollution, but nonmarket economies

The former communist countries of eastern Europe and the Soviet Union

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

One of the reasons why firms pollute the air is that

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

Marginal social cost is defined as marginal private cost