Deck 10: Externalities

Question 1

A technology spillover is a type of negative externality.

Answer 1

False

Question 2

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

Answer 2

False

Question 3

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

Answer 3

False

Question 4

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.

Question 5

In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.

Question 6

If the social value of producing robots is greater than the private value of producing robots, the private market produces too few robots.

Question 7

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

Question 8

Markets sometimes fail to allocate resources efficiently.

Question 9

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Question 10

When firms internalize a negative externality, the market supply curve shifts to the left.

Question 11

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality.

Question 12

Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized.

Question 13

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Question 14

The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.

Question 15

Government intervention in the economy with the goal of promoting technology-producing industries is known as patent policy.

Question 16

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.

Question 17

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

Question 18

Research into new technologies conveys neither negative externalities nor positive externalities.

Question 19

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Question 20

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

Question 21

Even if possible, it would be inefficient to prohibit all polluting activity.

Question 22

The concept of external cost is associated with a negative externality, but not with a positive externality.

Question 23

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Question 24

Economists believe that the optimal level of pollution is zero.

Question 25

According to recent research, the gas tax in the United States is lower than the optimal level.

Question 26

To determine the optimal level of output in a market with negative externalities, a benevolent social planner would look for the level of output at which private cost equals private value.

Question 27

The Environmental Protection Agency (EPA) cannot reach a target level of pollution through the use of pollution permits.

Question 28

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Question 29

Laws that are passed that either require or forbid certain behaviors are examples of command-and-control policies.

Question 30

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Question 31

When correcting for an externality, command-and-control policies are always preferable to market-based policies.

Question 32

Suppose a certain good provides an external benefit. If the private cost of the last unit of the good that was produced is equal to the social value of that unit, then the sum of producer and consumer surplus is maximized.

Question 33

Patent protection is one way to deal with technology spillovers.

Question 34

Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the government.

Question 35

A corrective tax places a price on the right to pollute.

Question 36

Corrective taxes are more efficient than regulations for keeping the environment clean.

Question 37

The tax on gasoline causes deadweight losses, as is the case with all taxes.

Question 38

The concept of external benefit is associated with a negative externality, but not with a positive externality.

Question 39

Corrective taxes cause deadweight losses, reducing economic efficiency.

Question 40

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Question 41

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Question 42

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

Question 43

​Figure 10-20. ​
​Refer to Figure 10-20. The socially optimal price and quantity are $250 and 250 units, respectively.

Question 44

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Question 45

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

Question 46

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome.

Question 47

Many charities like the Sierra Club are established to deal with externalities.

Question 48

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

Question 49

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

Question 50

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

Question 51

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Question 52

​Figure 10-20. ​
​Refer to Figure 10-20. This market would benefit from a tax equal to $50 per unit.

Question 53

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

Question 54

Government can be used to solve externality problems that are too costly for private parties to solve.

Question 55

Firms that can reduce pollution easily would be willing to sell their pollution permits.

Question 56

All externalities impose a cost on others. ​

Question 57

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Question 58

In some circumstances, selling pollution permits may be better than levying a corrective tax.

Question 59

Government intervention is necessary to correct all externalities.

Question 60

​Figure 10-20. ​
​Refer to Figure 10-20. This market is characterized by a negative externality.

Question 61

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^th restored historic building entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
Refer to Scenario 10-2. Is there an externality associated with this market? If your answer is "Yes," is the externality positive or negative?

Question 62

At any given quantity, the cost of the marginal seller is the height of the __________.

Question 63

Scenario 10-3
Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied.
Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What are the socially optimal quantity and price?

Question 64

​The majority of economists believe that the social benefit of mandating measles vaccines for all Americans (except those with compelling medical reasons) would exceed the social cost.

Question 65

Sheryl sits on her patio and plays her guitar while her neighbors are outside. Sheryl neither pays nor receives any compensation for playing her guitar. Under what condition does her guitar-playing give rise to a positive externality?

Question 66

Bruce engages in an activity that diminishes the well-being of Shawna. Bruce pays no compensation to Shawna for her loss in well-being. What specific term do economists use to describe this situation?

Question 67

At any given quantity, the willingness to pay of the marginal buyer is the height of the __________.

Question 68

Briefly explain how research into new technologies gives rise to a positive externality.

Question 69

Scenario 10-3
Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied.
Refer to Scenario 10-3. What are the market equilibrium quantity and price?

Question 70

Does the phenomenon of externalities strengthen the argument that we should rely upon the "invisible hand" of the marketplace, or does it weaken that argument?

Question 71

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^th restored historic building entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
Refer to Scenario 10-2. Is there an external cost associated with the restoration of the 50^th historic building, or is there an external benefit? What is the amount of that external cost or external benefit?

Question 72

​Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $20. Assuming no transaction costs, an efficient solution would be for Sophia to pay Gabriel $15 to not recline his seat.
​

Question 73

Does the restoration of historic buildings create a positive externality or does it create a negative externality?

Question 74

Does research into new technologies create a positive externality or does it create a negative externality?

Question 75

Scenario 10-3
Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied.
Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the social cost of producing 30 units of the good?

Question 76

Scenario 10-3
Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied.
Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What particular tax or subsidy would move the market to the social optimum?

Question 77

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^th restored historic building entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
Refer to Scenario 10-2. Is the market equilibrium quantity of restored historic buildings less than, equal to, or greater than 50?

Question 78

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^th restored historic building entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
Refer to Scenario 10-2. Could the government impose a tax or provide a subsidy to move the market to the social optimum? If your answer is "Yes," should it be a tax or should it be a subsidy?

Question 79

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^th restored historic building entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
Refer to Scenario 10-2. Is the socially optimal quantity of restored historic buildings less than, equal to, or greater than 50?

Question 80

Scenario 10-3
Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied.
Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve?