Question 1

Suppose external benefits are present in a market which results in the actual market price of $34 and market output of 126 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When external benefits are present, the market tends to underproduce compared to the efficient level, so the efficient outcome would be greater than 126 units.

Question 2

As a general rule, if pollution costs are external, firms will produce

Accepted Answer

If pollution costs are external, firms will not take into account the costs of their pollution on society, and as a result, they will produce too much of a polluting good. By not factoring in the costs of their actions, they will overproduce because they can make a larger profit by doing so.

Question 3

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

Accepted Answer

If firms are not bearing any costs for the pollution they emit, it implies that pollution is an externality in this market. This means that the producers and consumers of steel are not bearing the full costs of the pollution generated from steel production. In other words, the negative impact of pollution is being transferred onto society as a whole, rather than being absorbed by the steel industry.

Question 4

When production of a good provides external benefits, there will be

Accepted Answer

When production of a good provides external benefits, it means that there are benefits to society that are not reflected in the private benefits earned by producers. As a result, producers may not have enough incentive to produce as much of the good as is optimal for society. This leads to too few resources devoted to its production.

Question 5

When a firm generates external benefits, a more efficient outcome would result if

Accepted Answer

The answer of When a firm generates external benefits, a...

Question 6

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

The answer of Suppose that an MBA degree creates no...

Question 7

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

In the absence of government subsidies, the market for MBAs will function like any other market. The equilibrium quantity of MBAs will be where the marginal benefit equals the marginal cost, which is the efficient quantity. As there are no externalities, the equilibrium quantity will also be the socially optimal quantity, and hence, the equilibrium quantity of MBAs will equal the efficient quantity. Therefore, option A is correct. The equilibrium price of MBAs is not mentioned in the question stem and cannot be determined.

Question 8

Markets fail when externalities are present

Accepted Answer

Externalities are costs or benefits that are not fully reflected in the market price. When externalities exist, the market price does not fully capture all costs and benefits of producing the good, which can lead to an inefficient outcome. Therefore, markets fail when externalities are present because some of the costs and benefits of producing a good are not reflected in the market price.

Question 9

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $15 and market output of 614 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When there is an external benefit, the efficient outcome requires a higher price and greater output to account for the positive externality.

Question 10

If education creates external benefits,

Accepted Answer

The answer of If education creates external benefits,
...

Question 11

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

Accepted Answer

Dumping radioactive waste at no cost into a recreational waterway is an example of a negative externality, meaning that the firm is able to produce electricity at a lower cost than the true opportunity cost to the community. This results in a misallocation of resources and a reduction in societal welfare. Therefore, the firm's cost of producing electricity will be lower than the community's true opportunity cost.

Question 12

Suppose external costs are present in a market which results in the actual market price of $50 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

The presence of external costs in the market implies that the actual market price and output are higher than the ideal equilibrium. Therefore, to achieve the efficient outcome in which external costs are internalized, the market output should be lower than 800 units. Thus, B is the correct answer.

Question 13

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

Accepted Answer

The answer of Consider two goods - one that generates...

Question 14

If production of a good creates external benefits, a competitive market will likely produce

Accepted Answer

The answer of If production of a good creates external...

Question 15

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

Accepted Answer

The answer of If in market equilibrium the true marginal...

Question 16

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

Accepted Answer

Those who are most willing to pay for the right to pollute will be able to purchase the transferable rights, meaning they will be the ones creating the pollution. This system creates a market for pollution, allowing those who value the right to pollute more highly to obtain the permits. The funds collected by the government may not be enough to fully compensate individuals harmed by the pollution, and there may still be incentive for polluters to attempt to sneak emissions past government monitoring devices. The law sets a limit on the total amount of pollution allowed, but it does not necessarily mean that pollution will increase from zero to 1,000 units per day.

Question 17

Externalities are fundamentally the result of

Accepted Answer

Externalities occur when the production or consumption of a good or service affects the well-being of a third party without being reflected in the market price. This is often the result of the absence or incompleteness of property rights, which makes it difficult for those affected by the externality to negotiate a mutually beneficial solution with the parties responsible for creating it. The other options (A, C, and D) do not directly relate to the concept of externalities.

Question 18

If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,

Accepted Answer

When consumption of education creates an external benefit, such as a more educated populace leading to a more productive economy and a higher standard of living for all members of society, then the outcome determined by private decisions may not be efficient. In this case, the government can intervene to increase efficiency by producing more education, which will increase the social benefit and move society closer to the optimal outcome.

Question 19

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When there is an external cost, the market price and quantity will not reflect the full social cost. The efficient outcome would be achieved at a higher price (reflecting the full social cost) and a lower quantity, as the marginal cost to society exceeds the marginal benefit. Therefore, the efficient price would be higher than $25 while the efficient output would be less than 1,000 units. Choice A is the only option that reflects this understanding.

Question 20

If government taxes a firm which pollutes this will

Accepted Answer

The answer of If government taxes a firm which pollutes...

Quiz 5: Difficult Cases for the Market, and the Role of Government