Exam 10: Externalities: When the Price Is Not Right

The command-and-control method to solving an external cost problem usually involves:

The market for bathroom cleaners can be defined by this set of equations:

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

An external cost:

If you are a government official, under which of the following situations would you opt for a command-and-control solution to an externality problem? I. Lack of running water in part of the country is exacerbating the spread of cholera in the population. II. Foreign ships are dumping toxic wastes in the waters off your country's shores. III. A large number of banks fail due to excessive risk taking.

Which of the following suggests that private markets can be effective in dealing with external costs and benefits?

Which of the following statements is TRUE? I. Taxes may reduce consumption by exactly the same amount as government regulations. II. Taxes typically cost more than government regulations because taxes raise prices whereas regulations simply limit quantity. III. Command-and-control policies effectively reduce consumption; but may not be the lowest cost method for doing so.

Vaccines benefit the person who is vaccinated but they also create an external cost for others.

When patients or farmers choose whether to use more antibiotics, they compare:

External costs cause deadweight losses, whereas external benefits do not.

Figure: Market with External Cost Reference: Ref 10-2 (Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________.

Figure: Efficient Market Outcome Reference: Ref 10-3 (Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

Which of the following statements is TRUE? I. If an activity creates an external cost of $15, the government should subsidize the activity by $15. II. Social surplus is maximized when the private marginal benefit equals the social cost. III. External costs result in markets producing too much output. IV. Someone pays external costs other than the producer or consumer.

Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the external cost of the bathroom cleaner?

Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the efficient quantity in this market?

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.

Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is ________ and the efficient equilibrium quantity is ________.

Which of the following statements about vaccines is correct?

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

When significant externalities exist: I. the market equilibrium is no longer efficient. II. the market equilibrium is only efficient if the externality is an external benefit. III. social surplus is not maximized. IV. the government may increase efficiency by imposing a tax on the market.