Question 1

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?
A)The groundwater pollution reduces the cost of large-scale pork production.
B)The economic impact of a large-scale pork production facility is localized in a small geographic area.
C)The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.
D)Consumers will not reap the benefits of lower production cost from large-scale pork production.

Accepted Answer

The answer of Suppose that large-scale pork production has the...

Question 2

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market. 
-Refer to Table 10-1. Which of the following statements is correct?
A)If the external cost per unit of output were $0 instead of $2, then the socially efficient quantity of output would be 4 units.
B)A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to the socially optimal level of output.
C)Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed.
D)The market for flu shots is a market to which the concepts in this table apply very well.

Accepted Answer

Total surplus in the market declines when the external cost is taken into account from the 3rd unit of output onwards. At the 3rd unit, the external cost is $6, which exceeds the private value of the output. This means that society overall is worse off by consuming and producing the 3rd unit and beyond, as the cost of the negative externality outweighs the benefits gained from its production and consumption. This shows a market failure, where the market equilibrium results in a suboptimal level of output. A tax of $4 per unit would not necessarily bring the market to the socially optimal level of output, as it would only take into account the external cost of $2 per unit, not the full external cost of $6 per unit.

Question 3

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market. 
-Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?
A)$2
B)$3
C)$9
D)$10

Accepted Answer

The answer of Table 10-1
The following table shows the private...

Question 4

A negative externality
A)is an adverse impact on a bystander.
B)causes the product in a market to be under-produced.
C)is an adverse impact on market participants.
D)is present in markets where the good or service does not have any impact on bystanders.

Accepted Answer

A negative externality is an adverse impact on a bystander. This means that a third party who is not involved in the transaction between the buyer and the seller is negatively affected by the production or consumption of a good or service. For example, pollution from a factory can negatively impact the health of people living nearby, who are not a party to the transaction between the factory and its customers. If the negative externality is not accounted for, the market will produce more of the good than is socially optimal, because the negative impact on the bystander is not reflected in the price of the good.

Question 5

When a policy succeeds in giving buyers and sellers in a market an incentive to take into account the external effects of their actions, the policy is said to
A)equalize private value and private cost.
B)equalize private cost and external cost.
C)externalize the actions of the buyers and sellers.
D)internalize the externality.

Accepted Answer

When a policy succeeds in giving buyers and sellers in a market an incentive to take into account the external effects of their actions, the policy is said to internalize the externality. This means that the external cost is now factored into the private cost of the transaction, which gives buyers and sellers a reason to consider the impact of their actions on third parties. The outcome is more socially efficient as external costs are reduced.

Question 6

When a negative externality exists in a market, the cost to producers
A)is greater than the cost to society.
B)will be the same as the cost to society.
C)will be less than the cost to society.
D)will differ from the cost to society, regardless of whether an externality is present.

Accepted Answer

The answer of When a negative externality exists in a...

Question 7

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market. 
-Refer to Table 10-1. What is the equilibrium quantity of output in the market?
A)2 units
B)3 units
C)4 units
D)5 units

Accepted Answer

The equilibrium quantity is where the total supply equals the total demand. At a quantity of 3 units, the total private value is $18, the total private cost is $15, and the total external cost is $3. At a quantity of 2 units, the total private value is $16, the total private cost is $12, and the total external cost is $4. At a quantity of 4 units, the total private value is $20, the total private cost is $18, and the total external cost is $2. At a quantity of 5 units, the total private value is $22, the total private cost is $25, and the total external cost is -$3. Thus, the only option that results in a positive external cost and a total surplus-maximizing quantity is 3 units.

Question 8

Suppose the government imposes a tax in a certain market in order to internalize an externality. This type of policy is based on which of the Ten Principles of Economics?
A)People face trade-offs.
B)People respond to incentives.
C)Markets are usually a good way to organize economic activity.
D)The cost of something is what you give up to get it.

Accepted Answer

The principle of People respond to incentives suggests that taxes can be used to change the behavior of individuals and firms in response to the incentive of paying more for activities that generate negative externalities. By imposing a tax, the government makes it more expensive to engage in the activity that generates the externality, thereby reducing the quantity demanded and shifting the market back to a socially optimal equilibrium.

Question 9

Which of the following illustrates the concept of a negative externality?
A)A college professor plays a vigorous game of racquet ball with the racquet he recently purchased.
B)A flood wipes out a farmer's corn crop.
C)A college student plays loud music on his new stereo system at 2:00 a.m.
D) A janitor eats a hamburger during his lunch break.

Accepted Answer

The college student playing loud music at 2:00 a.m. is causing a negative externality because their actions are imposing a cost on others (i.e. disturbing their sleep) without compensating them for it.

Question 10

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,
A)the supply curve would adequately reflect the marginal social cost of production.
B)consumers will be required to pay a higher price for steel than they would have if the externality were internalized.
C)the market equilibrium quantity will not be the socially optimal quantity.
D)producers will produce less steel than they otherwise would if the externality were internalized.

Accepted Answer

Without internalizing the cost of pollution, the market will not consider the negative impact on society caused by the pollution. As a result, the market equilibrium quantity will not be the socially optimal quantity, meaning that too much pollution will be produced and too much steel will be consumed relative to what would be socially optimal.

Question 11

When the social cost curve is above a product's supply curve,
A)the government has intervened in the market.
B)a negative externality exists in the market.
C)a positive externality exists in the market.
D)the distribution of resources is unfair.

Accepted Answer

When the social cost curve is above a product's supply curve, it indicates that the production of the product generates negative externalities, meaning the costs to society are greater than what is reflected in the producer's costs. This is a market failure where the market does not efficiently allocate resources and the government intervention may be necessary to correct it.

Question 12

When negative externalities are present in a market
A)private costs will be greater than social costs.
B)social costs will be greater than private costs.
C)only government regulation will solve the problem.
D)the market will not be able to reach any equilibrium.

Accepted Answer

Negative externalities occur when the cost of production or consumption of a good or service is borne by society as a whole, rather than just the producer or consumer. This means that social costs (which include both private costs and the costs imposed on society) will be greater than private costs. As a result, the market will not reach an efficient equilibrium, as it will not take into account the external costs. This can be corrected through government intervention, such as taxes or regulations, which can internalize the external costs and move the market towards a more socially efficient outcome.

Question 13

Negative externalities lead markets to produce
A)greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.
B)smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels.
C)greater than efficient output levels and positive externalities lead markets to produce efficient output levels.
D)efficient output levels and positive externalities lead markets to produce greater than efficient output levels.

Accepted Answer

Negative externalities cause the social cost of production to exceed the private cost, leading firms to produce more than the efficient level of output. On the other hand, positive externalities cause the social benefit of production to exceed the private benefit, leading firms to produce less than the efficient level of output. Therefore, option A is the correct answer.

Question 14

Markets are often inefficient when negative externalities are present because
A)private costs exceed social costs at the private market solution.
B)externalities cannot be corrected without government regulation.
C)social costs exceed private costs at the private market solution.
D)production externalities lead to consumption externalities.

Accepted Answer

When negative externalities are present, such as pollution or health hazards, social costs exceed private costs at the private market solution. This means that the price and quantity determined by the market do not account for the full costs to society, resulting in an inefficient outcome. Therefore, government intervention is often necessary to internalize the external costs and restore efficiency.

Question 15

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market. 
-Refer to Table 10-1. What is the socially-optimal quantity of output in this market?
A)1 unit
B)2 units
C)3 units
D)4 units

Accepted Answer

The answer of Table 10-1
The following table shows the private...

Question 16

A negative externality
A)is a cost to a bystander.
B)is a cost to the buyer.
C)is a cost to the seller.
D)exists with all market transactions.

Accepted Answer

A negative externality is a cost imposed on a third party as a result of the economic activity of others, and it is not accounted for in the market price. This cost is a burden to the bystander who is not directly involved in the transaction. Therefore, choice A is the correct option. Choices B and C are incorrect because they refer to costs that are borne by the buyer and the seller, respectively, and not the bystander. D is incorrect because not all market transactions involve negative externalities.

Question 17

Figure 10-6 
-Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?
A)P
B)P'
C)Either P or P'. It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price.
D)Some price between P and P'. The equilibrium price depends on the negotiating skills of the interested parties.

Accepted Answer

The equilibrium price is the intersection of the supply and demand curves, which occurs at point E where the price is P. P' represents the socially optimal price when considering the negative externality, but in terms of market equilibrium, the price is P.

Question 18

Figure 10-6 
-Refer to Figure 10-6. Which quantity represents the socially-optimal quantity of output in this market?
A)Q
B)Q'
C)Either Q or Q'. It is necessary to know whether the externality is positive or negative to determine the socially-optimal quantity.
D)Some quantity between Q and Q'. The socially-optimal quantity depends on the negotiating skills of the interested parties.

Accepted Answer

The socially-optimal quantity of output in this market is represented by Q', which is where the marginal social benefit (MSB) curve intersects with the marginal social cost (MSC) curve. At this point, the total net benefits to society are maximized.

Question 19

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will
A)give sellers the incentive to account for the external effects of their actions.
B)increase demand.
C)increase the amount of the commodity exchanged in market equilibrium.
D)restrict the producers' ability to take the costs of the externality into account when deciding how much to supply.

Accepted Answer

A tax on producers that forces them to internalize the negative externality will give them an incentive to account for the external effects of their actions. This is because the tax raises the cost of production for the producers and they are now incentivized to reduce their production levels to avoid paying the tax. By reducing their production levels, they can reduce the negative externalities they generate and lower their tax liability. As a result, the tax encourages producers to take into account the external effects of their actions and adjust their behavior accordingly.

Question 20

Negative externalities occur when one person's actions
A)cause another person to lose money in a stock market transaction.
B)cause his or her employer to lose business.
C)reveal his or her preference for foreign-produced goods.
D)adversely affect the well-being of a bystander who is not a party to the action.

Accepted Answer

Negative externalities occur when one person's actions harm or impact the well-being of a bystander who is not a party to the action. This could be pollution from a factory affecting the health of nearby residents or noise pollution from construction disturbing residents nearby. It is a type of market failure where the costs of an action are borne by someone other than the person or entity taking the action.

Quiz 10: Externalities

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. Which of the following statements is correct?

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

A negative externality

When a policy succeeds in giving buyers and sellers in a market an incentive to take into account the external effects of their actions, the policy is said to

When a negative externality exists in a market, the cost to producers

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. What is the equilibrium quantity of output in the market?

Suppose the government imposes a tax in a certain market in order to internalize an externality. This type of policy is based on which of the Ten Principles of Economics?

Which of the following illustrates the concept of a negative externality?

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,

When the social cost curve is above a product's supply curve,

When negative externalities are present in a market

Negative externalities lead markets to produce

Markets are often inefficient when negative externalities are present because

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

A negative externality

Figure 10-6 -Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?

Figure 10-6 -Refer to Figure 10-6. Which quantity represents the socially-optimal quantity of output in this market?

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

Negative externalities occur when one person's actions