Question 1

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 or business undertaking an activity causes benefits to a third party who is not compensated for those benefits. Therefore, option D best describes a positive externality as it states that the bystander receives a beneficial effect from the activity without paying the person who caused the effect.

Question 2

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?
A)The impact of William's activity on the bystander is adverse, and William compensates the bystander accordingly.
B)The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander.
C)The impact of William's activity on the bystander is beneficial and the bystander compensates William accordingly.
D)Externalities arise in all of the above cases.

Accepted Answer

An externality arises when an activity of an individual or entity (such as a firm) has an impact on the well-being of a third-party bystander, and the individual/entity does not bear the full cost or receive the full benefit of that impact. In this case, William's activity has an adverse impact on the bystander, but William fails to compensate the bystander for that impact, therefore creating a negative externality. The other choices do not result in an externality, as in A William compensates the bystander, and in C the impact is beneficial and compensated for by the bystander.

Question 3

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 market. Therefore, choice C is the most accurate.

Question 4

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 cost imposed on someone who is neither the consumer nor the producer is a negative externality. This refers to a cost that is not reflected in the market price but affects a third party, such as pollution or noise from a factory that disrupts the neighborhood. Corrective taxes and command and control policies are tools used to address negative externalities. A positive externality is a benefit received by a third party not reflected in the market transactions, such as a vaccination program that benefits the wider community beyond those vaccinated.

Question 5

Dioxin emission that results from the production of paper is a good example of a negative externality because
A)self-interested paper firms are generally unaware of environmental regulations.
B)there are fines for producing too much dioxin.
C)self-interested paper producers will not consider the full cost of the dioxin pollution they create.
D)toxic emissions are the best example of an externality.

Accepted Answer

A negative externality occurs when a cost is imposed on a third party that is not accounted for by the self-interested parties. In this case, paper producers only consider their own costs and benefits while ignoring the cost of dioxin pollution to society. Therefore, the correct choice is C because self-interested paper producers will not consider the full cost of the dioxin pollution they create.

Question 6

Which of the following represents a way that a government can help the private market to internalize an externality?
A)taxing goods that have negative externalities
B)subsidizing goods that have positive externalities
C)The government cannot improve upon the outcomes of private markets.
D)Both a and b are correct.

Accepted Answer

By taxing goods that have negative externalities, the government can make it more expensive to produce or consume those goods, which will lead to a decrease in their use and a reduction in the negative externality. Subsidizing goods that have positive externalities can encourage their production and consumption and lead to more of the positive externality being created. Therefore, both options can help the private market internalize externalities.

Question 7

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 refers to a situation where the actions of one party have harmful effects on third parties who are not parties to the transaction and who are not compensated for those effects. Therefore, option A is the best choice as it describes a situation where an adverse effect is imposed on a bystander who is not compensated by the person who causes the effect.

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

Both options A and B are correct. Regulating the demolition of historic buildings helps to preserve the cultural and historical character of a community while providing tax breaks to owners who restore them incentivizes the upkeep of historic properties. Increasing property taxes in historic areas may not be the most effective method and could potentially discourage restoration efforts.

Question 9

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 one person's actions affect the well-being of others, and yet those others do not receive compensation or pay for that impact. Choices A, B, and C do not accurately describe the concept of externality.

Question 10

When an externality is present, the market equilibrium is
A)efficient, and the equilibrium maximizes the total benefit to society as a whole.
B)efficient, but the equilibrium does not maximize the total benefit to society as a whole.
C)inefficient, but the equilibrium maximizes the total benefit to society as a whole.
D)inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Accepted Answer

Externalities cause the market to produce a quantity that is different from the socially optimal quantity. This means that the market equilibrium is inefficient and does not maximize the total benefit to society as a whole. As a result, government intervention may be necessary to correct the market failure and achieve the socially optimal outcome.

Question 11

Which of the following statements is not correct?
A)Government policies may improve the market's allocation of resources when negative externalities are present.
B)Government policies may improve the market's allocation of resources when positive externalities are present.
C)A positive externality is an example of a market failure.
D)Without government intervention, the market will tend to undersupply products that produce negative externalities.

Accepted Answer

The answer of Which of the following statements is not...

Question 12

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 arises when the production or consumption of a good or service affects a third party who is not involved in the transaction and neither pays nor receives any compensation for that effect, creating a market failure. Bystanders are those third parties, who are not buyers or sellers in the market for that activity. Thus, choice (C) is the best answer.

Question 13

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will
A)emit a lower level of smoke than is socially efficient.
B)emit a higher level of smoke than is socially efficient.
C)emit an acceptable level of smoke.
D)not emit any smoke in an attempt to avoid paying the entire cost.

Accepted Answer

If the aluminum manufacturer does not bear the entire cost of the smoke it emits, it will not face the full consequences of its actions. This means that it will have less incentive to reduce its emissions, and may emit more smoke than is socially efficient. As a result, answer B is the best choice.

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 provides a positive externality because it increases the value and desirability of adjacent properties in the neighborhood. This is known as a "spillover effect" where the benefits of the well-maintained yard spill over to other properties in the area. This can lead to a positive feedback loop where the increased property values incentivize other homeowners to also maintain their yards, further increasing property values in the neighborhood.

Question 15

Which of the following is not correct?
A)Markets allocate scarce resources with the forces of supply and demand.
B)The equilibrium of supply and demand is typically an efficient allocation of resources.
C)Governments can sometimes improve market outcomes.
D)Externalities cannot be positive.

Accepted Answer

Externalities can be positive or negative. Positive externalities occur when the actions of a producer or consumer result in benefits to third parties who are not directly involved in the transaction.

Question 16

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 provides a clear legal framework for enforcement and allows for fines or other penalties to be imposed on dog owners who do not take necessary precautions to prevent excessive barking. Having a well-funded animal control department and subsidizing local animal shelters may help with managing animals overall, but they do not specifically address the issue of barking dogs. Encouraging people to adopt cats is also irrelevant to the problem at hand.

Question 17

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 costs or benefits that are not taken into account by the market. Since the market only considers private costs and benefits, externalities cause market failures and inefficient allocation of resources. Therefore, option A is the best choice.

Question 18

When externalities exist, buyers and sellers
A)neglect the external effects of their actions, but the market equilibrium is still efficient.
B)do not neglect the external effects of their actions, and the market equilibrium is efficient.
C)neglect the external effects of their actions, and the market equilibrium is not efficient.
D)do not neglect the external effects of their actions, and the market equilibrium is not efficient.

Accepted Answer

Externalities occur when there are costs or benefits of a transaction that affect third parties who are not involved in the transaction. In the presence of externalities, buyers and sellers neglect the external effects of their actions and only consider their private costs and benefits. This results in a market equilibrium that is not efficient as it does not take into account the full social costs and benefits. Therefore, choice C is the correct answer.

Question 19

Which of the following is an example of an externality?
A)cigarette smoke that permeates an entire restaurant
B)a flu shot that prevents a student from transmitting the virus to her roommate
C)a beautiful flower garden outside of the local post office
D)All of the above are correct.

Accepted Answer

The answer of Which of the following is an example...

Question 20

Research into new technologies provides a
A)negative externality, and too few resources are devoted to research as a result.
B)negative externality, and too many resources are devoted to research as a result.
C)positive externality, and too few resources are devoted to research as a result.
D)positive externality, and too many resources are devoted to research as a result.

Accepted Answer

Research into new technologies provides a positive externality as the benefits extend beyond the innovator or firm investing in the research. However, due to the free-rider problem, where other firms can benefit from the research without contributing towards it, too few resources may be devoted to research. Therefore, governments often provide funding or other incentives to encourage research and development.

Quiz 10: Externalities

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

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

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

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

Dioxin emission that results from the production of paper is a good example of a negative externality because

Which of the following represents a way that a government can help the private market to internalize an externality?

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

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

An externality exists whenever

When an externality is present, the market equilibrium is

Which of the following statements is not correct?

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

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will

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

Which of the following is not correct?

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

All externalities

When externalities exist, buyers and sellers

Which of the following is an example of an externality?

Research into new technologies provides a