Question 1

The government has identified a situation where the production of a good is creating a negative externality.The government should enact legislation to require firms to internalize the externality

Accepted Answer

Enacting legislation to internalize externalities may come with costs, such as compliance costs or potential reduction in production. Therefore, the benefits of doing so must outweigh the costs. The government should consider the magnitude of the externality, the feasibility of internalizing it, and the costs and benefits of the intervention before enacting the legislation.

Question 2

The government imposes a tax on the sale of a good whose production is creating a negative externality.The value of the tax is $4 per unit sold.In the new equilibrium,we would expect

Accepted Answer

The tax increases the cost of production for producers and decreases their willingness to supply the good. This causes the supply curve to shift to the left, resulting in a higher price for the consumers. However, since the demand curve is downward sloping, the quantity demanded decreases as the price increases. The new equilibrium will have a lower quantity sold and a higher price, but the increase in price will be less than $4 because the burden of the tax is shared between producers and consumers. Therefore, choice D is the best answer.

Question 3

Which activity is most likely to create a positive externality?

Accepted Answer

When a person receives a flu shot, not only are they protecting themselves from getting sick, but they are also reducing the likelihood of spreading the flu to others, which creates a positive externality.

Question 4

Christopher's roommate is studying to be a chef and likes to try new recipes.He leaves his delicious creations in the refrigerator for anyone who wants to eat them.The food he leaves is always gone within a day.This is an example of

Accepted Answer

The answer of Christopher's roommate is studying to be a...

Question 5

Which of the following is true of a positive externality?

Accepted Answer

A positive externality occurs when there are benefits to a third party that are not reflected in the market price. For example, if a person plants trees around their property, it can enhance the beauty of the neighborhood and increase property values for their neighbors. These benefits accrue to the neighbors without them paying for it. Therefore, D is the correct answer, as some benefits do accrue to a third party. A is partially correct as some costs can be borne by a third party, but it is not a defining characteristic of a positive externality. B and E are incorrect, as the government may or may not need to intervene to correct a positive externality, and there are no internal benefits (C) because those are included in the market price.

Question 6

If the government decides to adopt a carbon tax,the price of goods whose production generates carbon emissions will ________ and the quantity produced will ________.

Accepted Answer

When a carbon tax is implemented, firms will face higher costs of production due to the added tax on carbon emissions. This will increase the price of goods that generate carbon emissions. As a result, consumers may choose to reduce their demand for these goods, leading to a decrease in quantity produced. Therefore, the correct answer is B, which states that the price of goods will increase and the quantity produced will decrease.

Question 7

Positive externalities have ________ for third parties.

Accepted Answer

Positive externalities have external benefits for third parties, meaning that they receive benefits without paying for them. For example, if someone plants a garden in their front yard, it not only benefits them but also their neighbors who get to enjoy the beauty of the garden without paying for it.

Question 8

The government imposes a tax on each plastic bag sold such that the producer of the plastic bags must pay the tax to the government.In the market for plastic bags,the

Accepted Answer

The tax increases the cost of production for plastic bags, which lowers the profit margins for producers, resulting in a decrease in supply. This means that the supply curve shifts to the left.

Question 9

Positive externalities exist because ________ benefits are ________ than ________ benefits.

Accepted Answer

The answer of Positive externalities exist because ________ benefits are...

Question 10

The government identifies a situation where production of a good is generating a negative externality.A reasonable option for the government to consider is to

Accepted Answer

Imposing a tax on the sale of the good will increase the cost of production for the producers, which will reduce the supply of the good and encourage consumers to seek other alternatives. This will help to internalize the negative externality by making producers pay for the costs they impose on society. This option is more efficient than passing a law preventing the production or consumption of the good, as it allows the market to adjust and find the optimal level of production and consumption. Subsidizing the cost of producing the good would only exacerbate the negative externality, while rationing the good would be a more extreme and less effective measure.

Question 11

A positive externality exists whenever

Accepted Answer

A positive externality exists when the production or consumption of a good or service creates a benefit for a third party not involved in the transaction. For example, if a person gets vaccinated, they not only receive a personal benefit of being protected from a disease, but they also create a positive externality by reducing the risk of disease spreading to others around them. This creates a social benefit that is not taken into account by the individual making the decision to get vaccinated.

Question 12

When production of a good creates an external benefit

Accepted Answer

When production of a good creates an external benefit, it means that there is a positive external effect on third parties who are not involved in the production or consumption of the good. This can include things like reduced air pollution or increased education levels in a community. As a result, there is a positive externality associated with the production of the good.

Question 13

If the government imposes a tax on each aluminum can sold,payable by consumers when they purchase the item,then,in the market for goods sold in aluminum cans,the

Accepted Answer

When the government imposes a tax on each aluminum can sold, payable by consumers when they purchase the item, the price of the good increases for the consumer. This increase in price reduces the quantity demanded and shifts the demand curve to the left. The supply curve remains unaffected. Therefore, the correct answer is C) demand curve shifts to the left.

Question 14

When a negative externality is not internalized,then the equilibrium price of the good produced is too ________ and the equilibrium quantity produced is too ________.

Accepted Answer

When a negative externality (such as pollution) is not internalized, it means the social costs are not reflected in the market costs. As a result, the price of the good is lower than it should be if those externalities were accounted for, leading to overproduction and consumption. This makes the equilibrium quantity too high because the market does not account for the external costs imposed on society.

Question 15

Refer to the accompanying figure.The market for dry-cleaning services is currently in equilibrium at point A,and the government decides to tax the stores that offer dry-cleaning services in order to improve the air quality.The new equilibrium will be at point

Accepted Answer

The answer of Refer to the accompanying figure.The market for...

Question 16

Consider a market with a positive externality.The market will tend to ________ the good because the market participants tend to ignore the ________ of their decision.

Accepted Answer

In the presence of a positive externality, the market tends to underproduce the good because the benefits to third parties (external benefits) are not taken into account by the producers or consumers of the good. This leads to a lower production level than what would be socially optimal.

Question 17

A government decision to impose a tax on the sale of plastic disposable water bottles is an example of

Accepted Answer

By imposing a tax on the sale of plastic disposable water bottles, the government is trying to internalize the externality that arises from the production and disposal of plastic bottles. This tax will force producers and consumers to take into account the negative externalities created by the use and disposal of these bottles, such as pollution and environmental damage. By internalizing the externality, the government is shifting the costs of the negative externalities back to the producers and consumers, which should lead to a more efficient and sustainable use of resources.

Question 18

Congestion charges cause the price of driving to ________.Therefore,the number of cars on the road will ________.

Accepted Answer

Congestion charges increase the cost of driving, which makes it less attractive to people, leading to a decrease in the number of cars on the road. Therefore, the correct answer is B - rise in the price of driving will cause a fall in the number of cars on the road.

Question 19

When people elect to spend more years in school,this results in a ________ externality because there are ________ associated with this decision.

Accepted Answer

When individuals choose to spend more years in school, the positive externality is that it results in external benefits. These external benefits can include a better educated workforce, higher earning potential and a higher standard of living for society as a whole.

Question 20

Congestion charges effectively decrease the number of cars on the road.This is an example of

Accepted Answer

Congestion charges internalize the externality of traffic congestion by making drivers pay for the negative effects they impose on others. This leads to a reduction in the number of cars on the road as drivers will be incentivized to use alternative modes of transportation or drive during off-peak hours.

Quiz 7: Market Inefficiencies: Externalities and Public Goods