Question 1

In a market economy, government intervention
A) will always improve market outcomes.
B) reduces efficiency in the presence of externalities.
C) may improve market outcomes in the presence of externalities.
D) is necessary to control individual greed.

Accepted Answer

In a market economy, externalities can result in market failure, as the market does not account for the costs or benefits imposed on third parties. In the presence of externalities, government intervention in the form of intervention or taxes can potentially improve market outcomes. However, government intervention is not always necessary or beneficial in all situations. It is a case-by-case decision whether government intervention is needed or not. Therefore, the correct answer is C: government intervention may improve market outcomes in the presence of externalities.

Question 2

Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by
A) making it illegal to "disturb the peace."
B) having a well-funded animal control department.
C) subsidizing local animal shelters.
D) encouraging people to adopt cats.

Accepted Answer

Making it illegal to "disturb the peace" is the most direct and effective way for local governments to address the problem of barking dogs. This way, dog owners will be encouraged to take more precautions and keep their dogs from creating excessive noise. A well-funded animal control department and subsidizing local animal shelters may help with the problem of stray or neglected animals, but they are not directly related to the issue of barking dogs. Encouraging people to adopt cats is also not relevant to the problem at hand.

Question 3

An externality arises when a person engages in an activity that influences the well-being of
A) buyers in the market for that activity and yet neither pays nor receives any compensation for that effect.
B) sellers in the market for that activity and yet neither pays nor receives any compensation for that effect.
C) bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect.
D) Both a) and b) are correct.

Accepted Answer

An externality is a cost or benefit that affects a third party who did not choose to incur that cost or benefit. In choice A and B, the externalities only affect the buyers or sellers in the market, respectively. In choice C, the externality affects bystanders who are not involved in the market and do not receive compensation for the effect. Therefore, choice C is the correct answer. Choice D is incorrect because choice A and B do not fully capture the definition of an externality.

Question 4

In the absence of externalities, the "invisible hand" leads a market to maximize
A) producer profit from that market.
B) total benefit to society from that market.
C) both equality and efficiency in that market.
D) output of goods or services in that market.

Accepted Answer

In the absence of externalities, the "invisible hand" leads a market to maximize the total benefit to society from that market. This is because in a well-functioning market, individuals and firms are motivated by their own self-interest to make decisions that lead to the greatest benefit to themselves, but in doing so, they also create value for others. As a result, the market price and quantity will reflect the preferences and values of all participants, leading to a socially optimal allocation of resources.

Question 5

A positive externality arises when a person engages in an activity that has
A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Accepted Answer

A positive externality occurs when a person's actions generate a benefit for a third party without any compensation. It is the opposite of a negative externality, which generates a cost for a third party without compensation. Therefore, the correct answer is D, which states that a positive externality entails a beneficial effect on a bystander who does not pay the person who causes the effect.

Question 6

The term market failure refers to
A) a market that fails to allocate resources efficiently.
B) an unsuccessful advertising campaign which reduces demand.
C) ruthless competition among firms.
D) a firm that is forced out of business because of losses.

Accepted Answer

Market failure occurs when a free market is unable to allocate goods and services in an efficient manner. This can be caused by externalities, public goods, natural monopolies, and asymmetric information, among other factors. Market failure can result in an underproduction or overproduction of goods and services, leading to a misallocation of resources.

Question 7

A cost imposed on someone who is neither the consumer nor the producer is called a
A) corrective tax.
B) command and control policy.
C) positive externality.
D) negative externality.

Accepted Answer

A negative externality is a cost imposed on someone who is not directly involved in a transaction or decision, such as pollution that harms bystanders. Corrective taxes and command and control policies are measures to address externalities, but do not describe the cost itself. Positive externalities are benefits received by someone not involved in a transaction or decision.

Question 8

Since restored historic buildings convey a positive externality, local governments may choose to
A) regulate the demolition of them.
B) provide tax breaks to owners who restore them.
C) increase property taxes in historic areas.
D) Both a and b are correct.

Accepted Answer

Local governments may choose to regulate the demolition of restored historic buildings to preserve their positive externality. They may also provide tax breaks to owners who restore them to incentivize preservation. Therefore, both options A and B are correct. However, increasing property taxes in historic areas may not be the best choice as it may discourage preservation efforts and may not necessarily guarantee the preservation of the building.

Question 9

A negative externality arises when a person engages in an activity that has
A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Accepted Answer

A negative externality occurs when the person's activity imposes costs on others who are not compensated for those costs. Therefore, choice A is the correct answer. Choices B, C, and D do not fit the definition of a negative externality.

Question 10

An externality is
A) the costs that parties incur in the process of agreeing and following through on a bargain.
B) the uncompensated impact of one person's actions on the well-being of a bystander.
C) the proposition that private parties can bargain without cost over the allocation of resources.
D) a market equilibrium tax.

Accepted Answer

An externality is an impact of one person's actions on the well-being of a bystander that is not reflected in the market price. For example, pollution from a factory may negatively affect the health and well-being of nearby residents without compensation. This creates a market failure, as the cost is not being accounted for in the price and leads to an inefficient allocation of resources.

Question 11

Market failure can be caused by
A) too much competition.
B) externalities.
C) low consumer demand.
D) scarcity.

Accepted Answer

Market failure is often caused by externalities, which are the costs or benefits of a transaction that are not factored into its price. This can result in either an overproduction or underproduction of goods or services, leading to a market failure. Too much competition, low consumer demand, and scarcity are not necessarily direct causes of market failure.

Question 12

All externalities
A) cause markets to fail to allocate resources efficiently.
B) cause equilibrium prices to be too high.
C) benefit producers at the expense of consumers.
D) cause equilibrium prices to be too low.

Accepted Answer

Externalities are not taken into account by the market, leading to a misallocation of resources. This means that the market fails to reach a socially optimal outcome.

Question 13

An externality is the impact of
A) society's decisions on the well-being of society.
B) a person's actions on that person's well-being.
C) one person's actions on the well-being of a bystander.
D) society's decisions on the poorest person in the society.

Accepted Answer

An externality is an impact that one person's actions have on the well-being of a bystander or third party who is not involved in the original action. This impact can be positive or negative, and can occur in various contexts, such as pollution or noise. A and D choices are incorrect because they do not involve the concept of third party impact, while B choice is incorrect because it only involves the impact on the individual, not a bystander.

Question 14

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?
A) A well-maintained yard conveys a positive externality because it increases the home's market value.
B) A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner.
C) A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
D) A well-maintained yard cannot provide any type of externality.

Accepted Answer

A well-maintained yard can provide a positive externality by increasing the value of adjacent properties in the neighborhood. This is because the overall appearance of the neighborhood is improved, which can attract more potential buyers and increase demand for properties. Additionally, it can also create a sense of pride and community among neighbors, leading to greater social benefits.

Question 15

An externality is an example of
A) a corrective tax.
B) a tradable pollution permit.
C) a market failure.
D) Both a and b are correct.

Accepted Answer

An externality is a form of market failure because it occurs when the production or consumption of a good or service affects parties not involved in the transaction. This market failure can lead to inefficient outcomes and the need for government intervention to correct it. Corrective taxes and tradable pollution permits are potential solutions to address externalities, but they are not examples of externalities themselves.

Question 16

In what sense do externalities cause the "invisible hand" of the marketplace to fail?
A) Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities.
B) Externalities result in prices that are too high for many consumers to pay.
C) Markets fail to produce the maximum total benefit to society when positive or negative externalities are present.
D) Markets produce too little of a good when positive or negative externalities are present.

Accepted Answer

Externalities cause the "invisible hand" of the marketplace to fail because they lead to a divergence between private costs and benefits and social costs and benefits. This divergence means that the market fails to produce the maximum total benefit to society, and there are inefficiencies in allocation. For example, in the case of pollution, a factory that pollutes the environment may only consider the private costs of production, such as labor and materials, and not take into account the social costs of pollution on surrounding communities. Therefore, the market may overproduce a good that generates negative externalities, and underproduce a good that generates positive externalities.

Question 17

The impact of one person's actions on the well-being of a bystander is called
A) an economic dilemma.
B) deadweight loss.
C) a multi-party problem.
D) an externality.

Accepted Answer

An externality is when one person's actions affect the well-being of others who are not involved in the transaction. This can have positive or negative effects, and often result in a market failure where resources are not allocated efficiently. Examples include pollution from factories or noise from construction sites.

Question 18

An externality
A) results in an equilibrium that does not maximize the total benefits to society.
B) causes demand to exceed supply.
C) strengthens the role of the "invisible hand" in the marketplace.
D) affects buyers but not sellers.

Accepted Answer

An externality is a cost or benefit that is imposed on or gained by individuals who are not involved in an economic transaction. This means that the market equilibrium will not take into account these costs or benefits, resulting in an outcome that does not maximize the total benefits to society.

Question 19

An externality exists whenever
A) the economy cannot benefit from government intervention.
B) markets are not able to reach equilibrium.
C) a firm sells its product in a foreign market.
D) Bobbi engages in an activity that influences the well-being of Rosa and yet Bobbi neither pays nor receives payment for that influence.

Accepted Answer

An externality exists when an individual's or firm's actions have an impact on the well-being of others, but the individual or firm does not pay nor receive payment for this impact. This is commonly seen in pollution and noise pollution. Choices A, B, and C do not accurately describe the definition of an externality.

Question 20

When externalities are present in a market, the well-being of market participants
A) and market bystanders are both directly affected.
B) and market bystanders are both indirectly affected.
C) is directly affected, and market bystanders are indirectly affected.
D) is indirectly affected, and market bystanders are directly affected.

Accepted Answer

Externalities directly affect the well-being of market participants, but they also indirectly affect the well-being of market bystanders who are not directly involved in the transaction. Therefore, choice C is the most appropriate option.

Quiz 10: Externalities

In a market economy, government intervention

Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by

An externality arises when a person engages in an activity that influences the well-being of

In the absence of externalities, the "invisible hand" leads a market to maximize

A positive externality arises when a person engages in an activity that has

The term market failure refers to

A cost imposed on someone who is neither the consumer nor the producer is called a

Since restored historic buildings convey a positive externality, local governments may choose to

A negative externality arises when a person engages in an activity that has

An externality is

Market failure can be caused by

All externalities

An externality is the impact of

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

An externality is an example of

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

The impact of one person's actions on the well-being of a bystander is called

An externality

An externality exists whenever

When externalities are present in a market, the well-being of market participants