Deck 10: Externalities

Question 1

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.

Answer 1

C

Question 2

An externality

A)is a type of market failure.
B)causes markets to allocate resources efficiently.
C)strengthens the role of the "invisible hand" in the marketplace.
D)affects producers but not consumers.

Answer 2

A

Question 3

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 equity and efficiency in that market.
D)output of goods or services in that market.

Answer 3

B

Question 4

One advantage market economies have over other types of economies is that market economies

A)provide an equal distribution of goods and services to consumers.
B)establish government economic control.
C)solve the problem of scarcity.
D)are more efficient.

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

One of the Ten Principles of Economics is that "markets are usually a good way to organize market behavior." This statement does not imply which of the following?

A)Some markets produce negative externalities.
B)The invisible hand of the marketplace does not always lead buyers and sellers to maximize total benefit to society.
C)Some markets are characterized by market failure.
D)Other types of economies are more efficient than market economies.

Question 10

Market failure can be caused by

A)too much competition.
B)externalities.
C)low consumer demand.
D)scarcity.

Question 11

An externality exists whenever

A)the economy can benefit from government intervention.
B)markets are not able to reach equilibrium.
C)a firm sells its product in a foreign market.
D)a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.

Question 12

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.

Question 13

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

A)regulation 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.

Question 14

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.

Question 15

If a paper manufacturer does not bear the entire cost of the dioxin it emits,it will

A)emit a lower level of dioxin than is socially efficient.
B)emit a higher level of dioxin than is socially efficient.
C)emit an acceptable level of dioxin.
D)not emit any dioxin in an attempt to avoid paying the entire cost.

Question 16

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.

Question 17

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.

Question 18

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.

Question 19

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.

Question 20

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.

Question 21

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.

Question 22

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.

Question 23

At any given quantity,the willingness to pay in the market for gasoline is reflected in the

A)height of the demand curve at that quantity.
B)height of the supply curve at that quantity.
C)value to the producer of the last unit of gasoline sold.
D)total quantity of gasoline exchanged in the market.

Question 24

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.The industry creates

A)positive externalities.
B)negative externalities.
C)no externalities.
D)no equilibrium in the market.

Question 25

When externalities are present in a market,

A)the market equilibrium maximizes the total benefit to society as a whole.
B)participants lose some market benefits to bystanders.
C)firms produce too much output.
D)the market fails to allocate resources efficiently.

Question 26

If a sawmill creates too much noise for local residents,

A)noise restrictions will force residents to move out of the area.
B)a sense of social responsibility will cause owners of the mill to reduce noise levels.
C)the government can raise economic well-being through noise-control regulations.
D)the government should avoid intervening because the market will allocate resources efficiently.

Question 27

If an externality is present in a market,economic efficiency may be enhanced by

A)increased competition.
B)weakening property rights.
C)better informed market participants.
D)government intervention.

Question 28

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.If the government uses a pollution tax,how much of a tax must be imposed on each unit of production?

A)$1.90
B)$1.80
C)$1.60
D)$0.30

Question 29

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.The socially optimal price and quantity are

A)$1.90 and 38 units, respectively.
B)$1.80 and 35 units, respectively.
C)$1.60 and 42 units, respectively.
D)$1.35 and 58 units, respectively.

Question 30

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.Without any government intervention,the equilibrium price and quantity are

A)$1.90 and 38 units, respectively.
B)$1.80 and 35 units, respectively.
C)$1.60 and 42 units, respectively.
D)$1.35 and 58 units, respectively.

Question 31

Private markets fail to account for externalities because

A)externalities don't occur in private markets.
B)sellers include costs associated with externalities in the price of their product.
C)decisionmakers in the market fail to include the costs of their behavior to third parties.
D)the government cannot easily estimate the optimal quantity of pollution.

Question 32

Since air pollution creates a negative externality,

A)social welfare will be enhanced when some, but not all air pollution is eliminated.
B)social welfare is optimal when all air pollution is eliminated.
C)governments should encourage private firms to consider only private costs.
D)the free market result maximizes social welfare.

Question 33

When a market is characterized by an externality,the government

A)can correct the market failure only in the case of positive externalities.
B)can correct the market failure only in the case of negative externalities.
C)can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality.
D)cannot correct for externalities due to the existence of patents.

Question 34

Which of the following statements is correct?

A)Government should tax goods with either positive or negative externalities.
B)Government should tax goods with negative externalities and subsidize goods with positive externalities.
C)Government should subsidize goods with either positive or negative externalities.
D)Government should tax goods with positive externalities and subsidize goods with negative externalities.

Question 35

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.

Question 36

Without government intervention,the market equilibrium for oranges will

A)maximize the sum of producer and consumer surplus in the market.
B)be both efficient and equitable.
C)be equitable but not efficient.
D)be neither efficient nor equitable.

Question 37

Research into new technologies

A)provides positive externalities because it creates knowledge others can use.
B)results in negative externalities because government funding for research causes less government spending in other areas.
C)is protected by patent laws, which eliminates the need for government intervention.
D)should only be funded by the corporations that will receive the profits from the research.

Question 38

The supply curve for a product reflects the

A)willingness to pay of the marginal buyer.
B)quantity buyers will ultimately purchase of the product.
C)cost to sellers of producing the product.
D)seller's profit from producing the product.

Question 39

The difference between social cost and private cost is a measure of the

A)loss in profit to the seller as the result of a negative externality.
B)cost of an externality.
C)cost reduction when the negative externality is eliminated.
D)cost incurred by the government when it intervenes in the market.

Question 40

When the government intervenes in markets with externalities,it does so in order to

A)increase production when negative externalities are present.
B)protect the interests of bystanders.
C)make certain all benefits are received by market participants.
D)reduce production when positive externalities are present.

Question 41

Figure 10-4

Refer to Figure 10-4.Externalities in this market could be internalized if

A)there were a tax on the product.
B)there were a subsidy for the product.
C)production were stopped.
D)the Coase theorem failed.

Question 42

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3

Refer to Figure 10-3.Assume that the concert organizers must purchase a concert permit before organizing the concert and that the cost for the permit is included in the private cost curve.What criteria should the city use in determining whether or not to issue a permit?

A)The majority vote of the residents in surrounding neighborhoods should determine whether a permit is issued.
B)As long as the value to consumers of concerts exceeds the cost of concerts, including the external costs, the permit should be issued.
C)As long as concert organizers are willing to return the park to its original condition after the concert, the permit should be issued.
D)The permit should not be issued as long as there are identifiable external costs imposed on residents in surrounding neighborhoods.

Question 43

Figure 10-4

Refer to Figure 10-4.If this market is currently producing at Q₄,then total economic well-being would increase if output

A)increased beyond Q₄.
B)decreased to Q₂.
C)decreased to zero.
D)stayed at Q₄.

Question 44

Figure 10-2

Refer to Figure 10-2.Assume the production of the product shown by the graph imposes a cost on society of $7.00 per unit.If the free market equilibrium output is 50 units,the government should

A)impose a tax of $2.50 per unit.
B)increase the output of the firm by 25 units.
C)impose a lump-sum tax of $350 per period.
D)impose a tax of $7.00 per unit.

Question 45

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3

Refer to Figure 10-3.The social cost curve is above the supply curve because

A)it takes into account the external costs imposed on society by the concert.
B)it takes into account the effect of local noise restrictions on concerts in parks surrounded by residential neighborhoods.
C)concert tickets are likely to cost more than the concert actually costs the organizers.
D)residents in the surrounding neighborhoods get to listen to the concert for free.

Question 46

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3

Refer to Figure 10-3.The difference between the social cost curve and the supply curve reflects the

A)profit margin of each concert.
B)cost of spillover effects from the concert (e.g., noise and traffic).
C)value of concerts to society as a whole.
D)amount by which the city should subsidize the concert organizers.

Question 47

Figure 10-2

Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.Without any government regulation,how many soccer balls will be produced?

A)3
B)10
C)25
D)50

Question 48

Figure 10-4

Refer to Figure 10-4.Without government intervention,the equilibrium quantity would be

A)Q₁.
B)Q₂.
C)Q₃.
D)Q₄.

Question 49

Figure 10-2

Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.Without any government regulation,what price will the firm charge per soccer ball?

A)$3
B)$5.50
C)$7.50
D)$10

Question 50

Figure 10-4

Refer to Figure 10-4.The socially optimal quantity would be

A)Q₁.
B)Q₂.
C)Q₃.
D)Q₄.

Question 51

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3

Refer to Figure 10-3.What price and quantity combination best represents the optimum price and number of concerts that should be organized?

A)P₁, Q₁
B)P₂, Q₀
C)P₂, Q₁
D)The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected by noise and congestion.

Question 52

Figure 10-4

Refer to Figure 10-4.If this market is currently producing at Q₁,then total economic well-being would increase if output

A)increased to Q₂.
B)increased to Q₃.
C)increased to Q₄.
D)stayed at Q₁.

Question 53

Figure 10-4

Refer to Figure 10-4.This market

A)has no need for government intervention.
B)would benefit from a tax on the product.
C)would benefit from a subsidy for the product.
D)would maximize total well-being at Q₃.

Question 54

Figure 10-4

Refer to Figure 10-4.If all external costs were internalized,then the market's equilibrium output would be

A)Q₁.
B)Q₂.
C)Q₃.
D)Q₄.

Question 55

Figure 10-4

Refer to Figure 10-4.If this market currently produces Q₂,total economic well-being would be maximized if

A)production decreased to Q₁.
B)production increased to Q₃.
C)this product were no longer produced.
D)output stayed at Q₂.

Question 56

Figure 10-2

Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?

A)Impose a tax of $7.50 per soccer ball.
B)Impose a tax of $7 per soccer ball.
C)Offer a subsidy of $3 per soccer ball.
D)Offer a subsidy of $2.50 per soccer ball.

Question 57

Figure 10-4

Refer to Figure 10-4.This market is characterized by

A)government intervention.
B)a positive externality.
C)a negative externality.
D)None of the above is correct.

Question 58

Figure 10-1

Refer to Figure 10-1.This graph represents the tobacco industry.If the government uses a pollution tax,how much tax revenue will the government receive?

A)$7.00
B)$10.50
C)$63.00
D)$67.20

Question 59

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3

Refer to Figure 10-3.At the private market outcome,the equilibrium price will be

A)P₀.
B)P₁.
C)P₂.
D)None of the above is correct.

Question 60

Figure 10-4

Refer to Figure 10-4.At Q₃

A)the marginal consumer values this product less than the social cost of producing it.
B)every consumer values this product less than the social cost of producing it.
C)the cost to society is equal to the value to society.
D)the marginal consumer values this product more than the private cost.

Question 61

Which of the following statements is correct?

A)Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced.
B)Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced.
C)Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced.
D)Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.

Question 62

A negative externality will cause a private market to produce

A)less than is socially desirable.
B)more than is socially desirable.
C)exactly the quantity that is socially desirable.
D)less than the same market would produce in the presence of a positive externality.

Question 63

Figure 10-5

Refer to Figure 10-5.Which price and quantity combination represents the social optimum?

A)P₀ and Q₁.
B)P₂ and Q₁.
C)P₁ and Q₀.
D)P₂ and Q₀.

Question 64

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 is undesirable for society.

Question 65

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 party to the action.

Question 66

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.

A)m.
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
D)A janitor eats a hamburger during his lunch break.

Question 67

Figure 10-4

Refer to Figure 10-4.If this market currently produces Q₃,total economic well-being would be increased if

A)production decreased to Q₂.
B)production increased to Q₄.
C)this product were no longer produced.
D)output stayed at Q₃.

Question 68

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.

Question 69

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.

Question 70

Which of the following would not be considered a negative externality?

A)Smelter, Inc.creates steel and pollution.
B)Your friend buys a new puppy that barks every night.
C)You have an adverse reaction to a medication your doctor prescribed for you.
D)Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.

Question 71

When negative externalities are present in a market,

A)producers will be affected but consumers will not.
B)producers will supply too much of the product.
C)demand will be too high.
D)the market will still maximize total benefits.

Question 72

A positive externality

A)causes the product to be overproduced.
B)provides an additional benefit to market participants.
C)benefits consumers because it results in a lower equilibrium price.
D)is a benefit to a market bystander.

Question 73

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.

Question 74

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.

Question 75

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.

Question 76

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

A)social costs equal private costs at the private market solution.
B)private costs exceed social costs at the private market solution.
C)social costs exceed private costs at the private market solution.
D)they internalize externalities.

Question 77

Figure 10-5

Refer to Figure 10-5.Which of the following statements is correct?

A)The marginal benefit of the positive externality is measured by P₃ - P₁.
B)The marginal cost of the negative externality is measured by P₃ - P₂.
C)The marginal cost of the negative externality is measured by P₃ - P₁.
D)The marginal cost of the negative externality is measured by P₃ - P₀.

Question 78

An optimal tax on pollution would result in which of the following?

A)Producers will choose not to produce any pollution.
B)Producers will internalize the cost of the pollution.
C)Producers will maximize production.
D)The value to consumers at market equilibrium will exceed the social cost of production.

Question 79

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.

Question 80

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.