Question 1

If production of a good creates external benefits, a competitive market will likely produce

Accepted Answer

A competitive market will produce less output than is efficient because it does not account for the external benefits, leading to underproduction relative to the socially optimal level.

Question 2

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

Subsidies would lead to more students pursuing MBAs than the efficient quantity, as the private benefit is already fully captured without externalities.

Question 3

Externalities are fundamentally the result of

Accepted Answer

Externalities occur when property rights are not well-defined or enforced, leading to costs or benefits affecting third parties not involved in the transaction.

Question 4

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

Accepted Answer

The firm's cost of producing electricity is lower because it does not account for the negative externality of dumping waste, which imposes a cost on the community by reducing the waterway's value.

Question 5

As a general rule, if pollution costs are external, firms will produce

Accepted Answer

When pollution costs are external, firms do not bear the full cost of production, leading them to produce more than the socially optimal amount of the polluting good.

Question 6

Suppose external benefits are present in a market which results in the actual market price of $14 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When external benefits are present, the market tends to underproduce because the full social benefits are not reflected in the market demand. Therefore, the efficient outcome would involve a greater quantity than the market outcome of 150 units.

Question 7

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When external costs are present, the market price is too low and the quantity is too high compared to the efficient equilibrium. The efficient price would include the external cost, making it higher, and the efficient output would be lower to account for the externality.

Question 8

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $30 and market output of 220 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When there is an external benefit, the efficient outcome requires a higher price and greater output to account for the positive externalities, leading to a higher social value.

Question 9

If government taxes a firm which pollutes this will

Accepted Answer

Taxing a polluting firm increases production costs, leading to a decrease in supply.

Question 10

When production of a good provides external benefits, there will be

Accepted Answer

When production of a good provides external benefits, it means that the social benefits exceed the private benefits. As a result, the market tends to underproduce the good, leading to too few resources being devoted to its production compared to the socially optimal level.

Question 11

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

Accepted Answer

Pollution is an externality because the costs of pollution are not reflected in the costs borne by the firms or the consumers, meaning that the negative effects are imposed on third parties not involved in the transaction.

Question 12

Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?

Accepted Answer

When external costs are present, the market tends to overproduce compared to the efficient outcome. Therefore, the efficient quantity would be less than 325 units.

Question 13

When a firm generates external benefits, a more efficient outcome would result if

Accepted Answer

When a firm generates external benefits, it means that its activities have positive effects on third parties. Producing a larger output level would increase these benefits, leading to a more efficient allocation of resources.

Question 14

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

Accepted Answer

The answer of Consider two goods - one that generates...

Question 15

If education creates external benefits,

Accepted Answer

When education creates external benefits, the market tends to underprovide it because individuals do not consider the external benefits to society in their private decision-making. Therefore, the actual market outcome is less than the efficient quantity.

Question 16

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

Accepted Answer

When the true marginal cost exceeds the firm's marginal cost, it indicates a negative externality, as the firm is not accounting for the external costs imposed on society.

Question 17

Markets fail when externalities are present

Accepted Answer

Externalities cause market failure because they result in costs or benefits that are not captured in the market price, leading to overproduction or underproduction.

Question 18

If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,

Accepted Answer

When education creates an external benefit, it means that the social benefit is greater than the private benefit. To increase efficiency, more education should be produced to align the social benefit with the social cost.

Question 19

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

Accepted Answer

The system of selling transferable rights to pollute ensures that those who value the ability to pollute the most (i.e., those most willing and able to pay for the rights) will purchase the rights, thus creating pollution.

Question 20

Externalities cause the market mechanism to allocate goods and resources inefficiently because

Accepted Answer

Externalities lead to market failure because they cause a divergence between private and social costs or benefits, resulting in incorrect price signals in competitive markets.

Quiz 5: Difficult Cases for the Market, and the Role of Government