Question 1

Many beach-goers leave plastic bottles on beaches instead of putting them in trash cans. This is an example of a
A) public good.
B) positive externality.
C) neutral externality.
D) negative externality.

Accepted Answer

Leaving plastic bottles on beaches creates a negative externality because it harms the environment and wildlife. It imposes the cost of cleanup and damage onto others who share the beach and ecosystem.

Question 2

Which of the following is an example of a positive externality?
A) a neighbor's flower garden that you enjoy seeing
B) traffic congestion
C) an increased supply of chocolate lowers chocolate prices for all consumers
D) pollution

Accepted Answer

A neighbor's flower garden that you enjoy seeing is an example of a positive externality because you benefit from their actions without paying for it. The flower garden beautifies the neighborhood and is a source of enjoyment for you without any cost.

Question 3

Markets tend to underallocate resources to the production of a good when
A) there are negative externalities.
B) there are positive externalities.
C) there are public goods produced.
D) equilibrium occurs.

Accepted Answer

Markets tend to underallocate resources to goods with positive externalities because the social benefit of consuming the good exceeds the private benefit, leading to less production and consumption than is socially optimal.

Question 4

Which of the following is an example of a negative externality?
A) A person buys a car that is a lemon.
B) A worker is injured on the job.
C) A new restaurant's success causes another to go out of business.
D) A large wind turbine in a house's backyard ruins the view of other homeowners.

Accepted Answer

The large wind turbine in a house's backyard ruins the view of other homeowners, which is a cost that is externalized to those homeowners and not taken into account by the owner of the wind turbine. This is a negative externality.

Question 5

A subsidy is sometimes used by government to correct the problems associated with
A) negative externalities.
B) positive externalities.
C) internal benefits.
D) external benefits.

Accepted Answer

Subsidies are used to encourage activities that have positive externalities, where the social benefits exceed the private benefits, to increase their occurrence.

Question 6

Markets tend to overallocate resources to the production of a good when
A) there are negative externalities.
B) there are positive externalities.
C) there are public goods produced.
D) equilibrium occurs.

Accepted Answer

When there are negative externalities associated with the production of a good, the market tends to overallocate resources because the cost of the externality is not reflected in the price of the good. This means that consumers will buy more of the good than they would if they knew the true cost of its production, leading to an overallocation of resources towards its production.

Question 7

The funds that polluters pay that gives them the right to discharge into the air or water a certain amount of pollution are
A) special subsidies.
B) regulation fees.
C) external costs.
D) effluent fees.

Accepted Answer

The funds that polluters pay that gives them the right to discharge into the air or water a certain amount of pollution are effluent fees. These fees are a type of pollution control regulation that charges polluters based on the amount of pollutants they discharge into the environment. This mechanism creates a financial incentive for polluters to reduce their emissions by making it more expensive for them to pollute, and it also generates revenue that can be used to fund environmental protection and cleanup programs.

Question 8

To correct for positive externalities the government
A) should allow the price system to do the correction.
B) can impose a tax.
C) can give a subsidy.
D) should create a public good.

Accepted Answer

To correct for positive externalities, the government can give a subsidy to encourage more of the beneficial activity that leads to positive externalities. This helps align private costs with social benefits.

Question 9

Which of the following statements is NOT true of external benefits?
A) External benefits lead to an underallocation of resources to the production of the good that has the external benefit.
B) External benefits lead to a price in the market that is too high.
C) External benefits lead to too few of the goods that have the external benefit being produced.
D) External benefits are a good thing for the allocation of resources because people are getting something at no cost.

Accepted Answer

External benefits, while beneficial to some, can lead to market inefficiencies such as underproduction and misallocation of resources, as the market fails to account for the full social benefits.

Question 10

When positive externalities exist, the private market equilibrium represents a
A) market price which is too low and a market quantity which is too low.
B) market price which is too low and a market quantity which is too high.
C) market price which is too high and a market quantity which is too low.
D) market price which is too high and a market quantity which is too high.

Accepted Answer

The answer of When positive externalities exist, the private market...

Question 11

A tax is sometimes used by government to correct the problems associated with
A) negative externalities.
B) positive externalities.
C) internal benefits.
D) external benefits.

Accepted Answer

A tax can be used to correct the negative externalities associated with certain goods or services. Negative externalities occur when the production or consumption of a good or service imposes a cost on a third party that is not accounted for in the market price. By implementing a tax, the government can increase the cost of producing or consuming the good, incentivizing producers and consumers to reduce their use or find alternative solutions that account for the cost of the negative externality. This can lead to more efficient allocation of resources and reduced negative impact on society.

Question 12

Safe Bank has an outside display which has the time and temperature that is always correct. This is an example of
A) an interference in the workings of the price system.
B) a breakdown in communication between the bank and its customers.
C) a negative externality.
D) a positive externality.

Accepted Answer

The outside display that shows the correct time and temperature benefits not only the customers of Safe Bank but also people passing by. This creates a positive spillover effect or positive externality for society as a whole, which is a characteristic of a public good.

Question 13

When negative externalities exist, the private market equilibrium represents a
A) market price which is too low and a market quantity which is too low.
B) market price which is too low and a market quantity which is too high.
C) market price which is too high and a market quantity which is too low.
D) market price which is too high and a market quantity which is too high.

Accepted Answer

Negative externalities lead to overproduction, meaning the market quantity is too high, and the market price is too low because not all costs (externalities) are accounted for in the market price.

Question 14

To correct for negative externalities, the government
A) should allow the price system do the correction.
B) can impose a tax.
C) can provide a subsidy to consumers.
D) should create a public good.

Accepted Answer

Imposing a tax on the production or consumption of goods that create negative externalities is an effective way to reduce their output and encourage the production and consumption of alternative goods that do not have negative externalities. This tax creates an additional cost for producers and consumers that reflects the social costs of the externality, making the price of the good more accurately reflect its true cost to society as a whole. This can help reduce inefficiencies, improve resource allocation, and protect the environment or public health. The other options may be useful in other circumstances, but they are less effective at correcting negative externalities.

Question 15

The purpose of an effluent fee is to
A) reduce the amount produced of a good and to raise the market price.
B) correct for pollution while keeping the price of the good the same as before the correction.
C) reward people producing externalities.
D) encourage producers to keep the quantity produced the same while lowering the price.

Accepted Answer

Effluent fees are designed to reduce the production of goods that cause pollution, thereby also affecting the market price by potentially raising it due to reduced supply or increased production costs.

Question 16

Orchards provide services to beekeepers because the bees use the pollen to make honey. This is an example of
A) a positive externality, and too many orchards exist in society.
B) a positive externality, and too few orchards exist in society.
C) a negative externality, and too many orchards exist in society.
D) a negative externality, and too few orchards exist in society.

Accepted Answer

This is a classic example of a positive externality, where the beekeepers benefit from the presence of orchards, even though they do not pay for the service. In this case, too few orchards may be present in society as they are not being incentivized to exist due to the lack of direct financial gain for the orchard farmers.

Question 17

Which of the following statements is TRUE of external costs?
A) External costs should not be corrected since people will bear the costs whether they are corrected or not.
B) There are no good ways to correct for the external costs.
C) When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources.
D) External costs should only be corrected for if the correction will not increase the market price.

Accepted Answer

External costs refer to costs that are not directly borne by the producer or consumer of a good or service, but rather by society as a whole. When external costs exist, the price of the good will be deceptively low, leading to an overallocation of resources. This means that too many resources will be devoted to producing the good relative to its true social value. It is therefore important to correct for external costs in order to ensure that resources are allocated efficiently. Choices A, B, and D are all incorrect as they do not accurately describe the nature of external costs and the importance of correcting for them.

Question 18

Which of the following is NOT an example of an externality?
A) A cookie company emits a wonderful aroma in the air that makes people smile.
B) The neighbor's wind chimes interfere with your sleep.
C) A firm lays off 100 workers.
D) Cancer-causing chemicals are dumped into the drinking water supply of a city.

Accepted Answer

An externality is an unintended and uncompensated impact of an economic activity on third parties. Option C is not an example of an externality because the layoff of workers only affects the firm and its employees, not any third parties outside of the firm.

Question 19

The purpose of an effluent fee imposed on a firm is
A) to increase output of its product by increasing the resources allocated to production.
B) to increase output of its product by reducing the resources allocated to production.
C) to reduce output by increasing production costs thereby reducing resources used.
D) none of the above

Accepted Answer

The purpose of an effluent fee is to deter firms from polluting the environment by imposing a penalty for the release of effluent into the environment. This penalty increases the production cost of the firm, which reduces its profitability and may cause it to reduce output in order to maintain its profitability. Therefore, the effluent fee reduces the resources used by the firm and, consequently, it reduces the level of output.

Question 20

An effluent fee is more effective when imposed on
A) the firm or producer of the product which generates pollution.
B) the consumer of the product.
C) neither the producer nor the consumer of the product.
D) the supplier of the raw material used by the firm.

Accepted Answer

An effluent fee is a form of pollution tax that aims to control the amount of pollution that firms release into the environment. Therefore, it is more effective when imposed on the firm or producer of the product which generates pollution as it provides an incentive for the firm to reduce their pollution output. Imposing the fee on the consumer or the supplier of raw materials may not be as effective in reducing pollution levels.

Quiz 5: Public Spending and Public Choice

Many beach-goers leave plastic bottles on beaches instead of putting them in trash cans. This is an example of a

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

Markets tend to underallocate resources to the production of a good when

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

A subsidy is sometimes used by government to correct the problems associated with

Markets tend to overallocate resources to the production of a good when

The funds that polluters pay that gives them the right to discharge into the air or water a certain amount of pollution are

To correct for positive externalities the government

Which of the following statements is NOT true of external benefits?

When positive externalities exist, the private market equilibrium represents a

A tax is sometimes used by government to correct the problems associated with

Safe Bank has an outside display which has the time and temperature that is always correct. This is an example of

When negative externalities exist, the private market equilibrium represents a

To correct for negative externalities, the government

The purpose of an effluent fee is to

Orchards provide services to beekeepers because the bees use the pollen to make honey. This is an example of

Which of the following statements is TRUE of external costs?

Which of the following is NOT an example of an externality?

The purpose of an effluent fee imposed on a firm is

An effluent fee is more effective when imposed on