Question 1

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 there is an increase in pollutants emitted by firms in the steel industry without an accompanying increase in costs, it suggests that pollution is an externality in the market. This means that the producers and consumers of steel do not bear the full costs of the pollution, but instead these costs are shifted onto society as a whole, creating a market failure.

Question 2

Markets fail when externalities are present

Accepted Answer

Externalities are costs or benefits that are not reflected in the market price, and if they exist, the market outcome will not be efficient. Market efficiency occurs when all costs and benefits of producing a good are reflected in the market price. When externalities are present, market prices do not reflect all of the social costs and benefits of a good, resulting in an inefficient allocation of resources.

Question 3

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

The external cost imposed by the producers leads to an underallocation of resources, meaning that the market output is greater than the efficient output. In the efficient, ideal equilibrium, the price would be higher than $25 in order to internalize the external cost, and the output would be less than 1,000 units to reflect the true social costs of production. So, the efficient price would be higher while the efficient output would be less than the current market price and output.

Question 4

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

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway, the firm is not paying for the true cost of their production. This means that their cost of producing electricity will be lower than the community's true opportunity cost. This leads to an inefficient production level as the firm is not taking into account the external harm caused by their actions. Boaters who use the recreational waterway experience a decrease in value due to the radioactive waste, which means that the community is not receiving an external benefit from the production of electricity. Therefore, D is the correct choice.

Question 5

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

Accepted Answer

If consumption of education creates an external benefit, then producing more education will lead to an increase in the overall benefit to society. This is because individuals may not take into account the positive impact their education has on others when making their decision to invest in education. Therefore, producing more education will ensure that the external benefit is also realized, resulting in a more efficient outcome overall.

Question 6

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

Accepted Answer

If pollution costs are external, firms do not take into account the social costs of their production, and will therefore produce too much of a polluting good. This is because the firm only considers their private costs and profits, and not the negative externalities imposed on society.

Question 7

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 8

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

Accepted Answer

When a firm generates external benefits, the social benefit of the good is greater than the private benefit received by consumers. This means that the demand curve understates the true value of the good to society. Therefore, to achieve an efficient outcome, the firm should produce a larger output level that reflects the true social value of the good. This will result in a higher price and a higher level of output than would be produced if the firm only considered the private benefits.

Question 9

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

If there are no government subsidies, then the price that students pay for an MBA will be the cost of providing it. Since the externality is zero, the marginal social benefit is equal to the marginal private benefit. Therefore, the equilibrium quantity will be where the marginal cost equals the marginal private benefit, which is the efficient quantity.

Question 10

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

In the presence of external costs, the actual market output will be greater than the efficient output level. So, the efficient outcome would be less than 800 units. Therefore, the best choice is B.

Question 11

If government taxes a firm which pollutes this will

Accepted Answer

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

Question 12

Externalities are fundamentally the result of

Accepted Answer

Externalities occur when the actions of one economic agent have an unintended effect on the well-being of another agent not involved in the transaction. This can arise when property rights are not well-defined or enforced, leading to a situation where costs or benefits are not fully internalized by those making the decisions. For example, a factory may emit pollution into the air or water, imposing costs on nearby residents or businesses without compensating them. Alternatively, a farmer may plant trees that improve the air quality in the surrounding area, generating spillover benefits for others without receiving any payment. In either case, the externality arises because the property rights involved are not clearly assigned, leading to inefficient outcomes. The other answer choices are not directly related to the concept of externalities.

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

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

The selling of transferable rights to emit pollution creates a market for pollution rights, and those who are most willing to pay for the right to pollute will buy the rights. This allows the government to control the amount of overall pollution while still allowing for economic freedom.

Question 16

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

Since there are external benefits present, the actual market outcome will be less than the efficient outcome. This means that the efficient outcome would result in a greater output than 126 units. Therefore, choice A is correct.

Question 17

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

Accepted Answer

When production of a good provides external benefits, there are positive externalities or spillover benefits that are not reflected in the market price. Therefore, producers do not take these benefits into account when making production decisions, resulting in a market failure. As a result, too few resources will be devoted to its production because the marginal social benefit (including the external benefits) is greater than the marginal private benefit (only considers the producer's benefit). Hence, external benefits can lead to an underproduction of the good in the absence of government intervention.

Question 18

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 19

If education creates external benefits,

Accepted Answer

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

Question 20

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

The answer of Suppose the actions of the producers of...

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