Question 1

Bobby's neighbor is growing a tree that is blocking Bobby's ocean view. Bobby is considering taking his neighbor to court. This is most likely an example of a:

Accepted Answer

The answer of Bobby's neighbor is growing a tree that...

Question 2

Denise is thinking about setting up a butterfly garden in her backyard. She estimates that it will cost her $2,000 to purchase and install special plants and an irrigation system to attract butterflies. The benefit she expects to receive is $1,800. In addition, neighbor Billy will receive a benefit of $150 and neighbor Sammy will receive a benefit of $100. From this, we can conclude that:

Accepted Answer

If Billy and Sammy are willing to contribute the amounts they value the butterfly garden ($150 and $100 respectively), Denise will be able to cover the total cost of $2,000 and receive a benefit of $1,800. This is a win-win situation for all parties involved as Denise will receive her desired benefit and the neighbors will benefit as well. This is an example of a positive externality where the benefits spill over to parties who do not directly pay for it.

Question 3

Sometimes the government deals with externalities by creating laws to regulate behavior instead of using taxes to correct the market failure. So, requiring auto manufacturers to install a device called a catalytic converter which removes some toxins from exhaust may be preferable to a gas tax that reduces driving levels. This route is often preferred because:

Accepted Answer

The cost of the externality is often unknown or difficult to quantify accurately, making direct regulation, such as requiring catalytic converters, a more straightforward approach than trying to correct the market failure through taxes or other financial incentives.

Question 4

The government would use production taxes to remedy the problem of substantial:

Accepted Answer

Production taxes are meant to reduce the external costs associated with production, such as pollution and resource depletion. Therefore, the best choice is C, external costs of production.

Question 5

When there are positive externalities associated with the consumption of a good, we can expect the market:

Accepted Answer

When there are positive externalities associated with the consumption of a good, the market demand curve lies below the social demand curve because the market demand does not account for the additional benefits to society that are not captured by the private consumers.

Question 6

Cindy discovers that when she goes to the beach, she does not have to bring her radio. She can put her blanket near someone who has a radio and listen all day (without having to carry her radio, get sand in her speakers, or buy new batteries). This is an example of:

Accepted Answer

This is an example of a positive externality, where Cindy benefits from someone else's behavior (having a radio) without paying for it or causing any negative impact.

Question 7

Albert and Betty hire Christine to play music at their wedding. David, who lives behind the church, cannot study because of the loud music. The third party is:

Accepted Answer

David is the third party because he is not directly involved in the hiring of Christine or the wedding itself. He is affected by the loud music and is therefore an external party.

Question 8

When airplanes take off and land at Logan airport, residents of East Boston complain about the noise. The same planes make the same noise during the trip to Boston from Paris, but there are no ____ for most of the trip because ____.

Accepted Answer

C) externalities; there are no third parties - This is correct because externalities refer to the costs or benefits that affect a party who did not choose to incur that cost or benefit. Over the ocean, there are no third parties (residents or otherwise) to be affected by the noise, hence no externalities in the form of noise complaints.

Question 9

Which of the following is an example of a negative externality?

Accepted Answer

Talking loudly when others are trying to study economics is a negative externality because it has a negative impact on the external parties (those who are trying to study) and is not reflected in the cost or decision-making of the person talking.

Question 10

There are apartments in Chicago whose rooftops overlook Wrigley Field. On game day you can find free riders on the roof enjoying ____.

Accepted Answer

The people on the rooftop are benefiting from an externality, meaning they are able to enjoy the game without paying for a ticket or for being inside the stadium. This is because the noise and atmosphere generated by the game is spilling over onto the rooftop, which they can access freely.

Question 11

Suppose the government imposes a per unit tax on an item whose production process creates a negative externality. Suppose the tax is exactly the value of the marginal externality cost. If the government now uses the tax revenue to clean up pollution from this process, the market will:

Accepted Answer

By taxing the item exactly the value of the marginal externality cost and using the revenue to clean up pollution from this process, the government has internalized all costs and benefits. This creates a situation where producers will account for the full cost of production, including the negative externality cost, and consumers will pay the full cost of consumption. As a result, market outcomes will be efficient and optimal.

Question 12

Much of the nation's coal is extracted by strip mining. This process leaves a huge barren hole in the ground when complete, and the cost of replanting the trees is approximately $10 per ton of coal. Burning the coal for electricity causes air pollution. No one knows how much damage the air pollution causes, but we know that for another $10 per ton the power plant can be outfitted with a pollution control device. What is one measure of the true social cost of coal fired electricity, in dollars per ton?

Accepted Answer

The true social cost of coal fired electricity should include the private marginal cost (the cost of extracting, producing and transmitting the electricity) plus the costs of replanting and emission control, which are externalities that affect society as a whole. Therefore, the best choice is D, which includes both costs for a total of $20 per ton.

Question 13

When there is a positive externality associated with the watering of one's lawn, the free market results in:

Accepted Answer

If there is a positive externality associated with lawn watering, it means that the benefits of lawn watering extend beyond the individual who does the watering. For example, if a well-watered lawn improves air quality or provides beauty to the neighborhood, these benefits are not reflected in the price that the individual pays for the water or the effort to water their lawn. In a free market, individuals make decisions based on their own costs and benefits, and without the full benefits being realized, individuals will likely underinvest in lawn watering. Therefore, the result is not enough lawn watering.

Question 14

Suppose a wallet firm has been dumping its wastes into the local river. The government finds out and insists that the firm pay for the cost of the river cleanup. As a result, we can expect:

Accepted Answer

The cost of the cleanup will increase the overall cost of production for the wallet firm. In order to make up for this increased cost, the firm will have to either produce fewer wallets or raise the price of each wallet. Therefore, we can expect fewer wallets to be produced at a higher price.

Question 15

Most economists believe that there are positive externalities in education. One can conclude that a free market would fail to give the socially optimal outcome because the equilibrium:

Accepted Answer

Positive externalities in education mean that the benefits of education extend beyond the individual to society at large, but these benefits are not reflected in the market price. Therefore, without intervention, the market would provide less education than is socially optimal, leading to a situation where the price is higher and the quantity lower than the socially optimal level.

Question 16

The positive externality associated with education is:

Accepted Answer

Education has a positive externality because it not only benefits the individual who receives it but also benefits society as a whole. Educated individuals are more productive and can contribute more to the economy, which leads to economic growth. Additionally, educated individuals are typically healthier and make better decisions, which can improve overall societal well-being.

Question 17

In the presence of positive externalities, a free market will choose a price which is too ____ and produce an output which is too ____ compared with the social optimum.

Accepted Answer

Positive externalities lead to underproduction in a free market because not all benefits are captured by the market price, resulting in a price that is too low and an output that is too low compared to the socially optimal level.

Question 18

The reason individual homeowners usually do not hire a private contractor to fill the potholes on their street is because:

Accepted Answer

If one individual homeowner hires a private contractor to fill the potholes on their street, other homeowners and drivers who use the street will benefit from the repair without contributing to the cost. This creates a situation of free-ridership, making it unlikely for individual homeowners to voluntarily pay for the repair.

Question 19

If a chemical factory causes noxious fumes to be emitted in the neighborhood, a third party would be:

Accepted Answer

Local homeowners are third parties in this scenario as they are not directly involved in the operation of the chemical factory. The workers at the factory, owners of the factory, and chemical customers are all directly involved and therefore not considered third parties.

Question 20

Which of the following would generate positive externalities?

Accepted Answer

Flu vaccinations not only benefit the person receiving the vaccine but also reduce the likelihood of the disease spreading to others, generating a positive externality. B, C, and D all have negative externalities associated with them.

Quiz 4: Markets in Action