Deck 7: Market Inefficiencies: Externalities and Public Goods

Question 1

Which of the following is true?

A)social costs = internal costs - external costs
B)social costs = internal costs + external costs
C)internal costs = social costs + external costs
D)external costs = social costs + internal costs
E)internal costs - social costs = external costs

Answer 1

B

Question 2

An external cost is best defined as the cost of an activity paid for by:

A)the individual who is engaged in the activity.
B)the government.
C)a third party.
D)a free-rider.
E)the individual and the third party.

Answer 2

C

Question 3

The costs of a market activity paid for by an individual engaged in the market activity are:

A)external costs.
B)internal costs.
C)free-rider costs.
D)social costs.
E)common costs.

Answer 3

B

Question 4

You share a house with two other people.You are a concert pianist and often practice at home.One roommate enjoys listening to you practice,but the other does not.For the roommate who enjoys listening to you play,this is an example of __________; for the other roommate,it is an example of __________.

A)the tragedy of the commons; the third-party problem
B)a positive externality; a negative externality
C)a positive externality; the free-rider problem
D)the free-rider problem; the tragedy of the commons
E)a negative externality; the tragedy of the commons

Question 5

The amount you pay for insurance on your car is an example of a(n):

A)internal cost.
B)social cost.
C)external cost.
D)third-party cost.
E)public-good cost.

Question 6

External costs are the result of the actions of:

A)firms.
B)consumers.
C)firms and consumers.
D)the government.
E)firms,consumers,and the government.

Question 7

The personal decisions of consumers and firms are based on:

A)external costs.
B)social cost.
C)internal costs.
D)third-party costs.
E)public-good costs.

Question 8

The amount you pay for gasoline for your car is an example of a(n):

A)internal cost.
B)social cost.
C)external cost.
D)third-party cost.
E)public-good cost.

Question 9

The pollution emitted by your car is an example of a(n):

A)internal cost.
B)social cost.
C)external cost.
D)production cost.
E)public-good cost.

Question 10

For a market to work efficiently:

A)the external costs must be paid.
B)all external costs must be eliminated.
C)all internal costs must be eliminated.
D)the social costs must be equal to the internal costs.
E)all pollution must be eliminated.

Question 11

Which of the following is true of a negative externality?

A)Some costs are borne by a third party.
B)The government can use subsidies to encourage firms to internalize the externality.
C)The government must take over the production of this good so that the externality can be internalized.
D)Some benefits accrue to a third party.
E)Its existence always requires corrective measures by the government.

Question 12

The costs or benefits of a market activity that affect a third party are called:

A)externalities.
B)public goods.
C)club goods.
D)internal costs.
E)common-resource goods.

Question 13

The cost of an activity paid for by the individual and the third party is defined as a(n):

A)internal cost.
B)social cost.
C)external cost.
D)third-party cost.
E)public-good cost.

Question 14

The costs of a market activity paid for by an individual NOT engaged in the market activity are:

A)external costs.
B)internal costs.
C)free-rider costs.
D)social costs.
E)common costs.

Question 15

A negative externality exists whenever:

A)there are no internal costs.
B)production of a good creates an external cost.
C)production of a good creates an external benefit.
D)production of a good has no social cost.
E)production of a good has no social benefit.

Question 16

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

A)overproduce; external benefit
B)under-produce; external benefit
C)overproduce; external cost
D)under-produce; external cost
E)overproduce; internal benefit

Question 17

Negative externalities have __________ for third parties.

A)internal costs
B)internal benefits
C)external costs
D)external benefits
E)social costs

Question 18

You drive to work each day.The best example of an internal cost is the:

A)amount of pollution emitted by your car.
B)congestion created by your car being on the road.
C)amount the government paid to build the road.
D)amount you pay to maintain your car.
E)amount of money you save each day by avoiding the toll roads.

Question 19

An internal cost is best defined as the cost of an activity paid for by:

A)the individual who is engaged in the activity.
B)the government.
C)a third party.
D)a free-rider.
E)the individual and the third party.

Question 20

Refer to the accompanying table,where Q represents the quantity produced,internal cost and social cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities. The external cost is equal to __________ per unit.

A)$60
B)$70
C)$20
D)$50
E)$30

Question 21

When pollution (a negative externality)is created by firms,which of the following is NOT a valid way for the government to restore the social optimum?

A)require firms to install pollution-abatement equipment
B)require firms to change production techniques to reduce emissions
C)levy a tax on the production of the good
D)require firms to pay for the environmental damage they create
E)offer a subsidy to firms to reduce their production cost

Question 22

Refer to the accompanying figure to answer the questions that follow.

The figure best illustrates what type of market?

A)The good produced creates a positive externality.
B)The good produced creates a negative externality.
C)The good produced is a club good.
D)The good produced is a public good.
E)Firms in this industry have been given a subsidy to encourage more production.

Question 23

Which of the following is a cost of internalizing a negative externality?

A)Less output is produced.
B)The deadweight loss is larger.
C)The level of pollution rises.
D)Taxes must increase to cover the external cost.
E)The government must pay firms to encourage them to change production techniques.

Question 24

Refer to the accompanying figure to answer the questions that follow.

At the market equilibrium,price is equal to __________ units of the good are produced.

A)$18 and 70
B)$14 and 70
C)$12 and 50
D)$14 and 50
E)$18 and 50

Question 25

Your roommate is studying to be a drummer in a rock band.She practices in your apartment every evening for three hours and the noise makes it difficult for you to concentrate.This is an example of:

A)the third-party problem.
B)the tragedy of the commons.
C)an internal cost.
D)the free-rider problem.
E)a positive externality.

Question 26

Consider a market where production of a good generates a negative externality.In the market equilibrium,

A)too much of the good is being produced.
B)too little of the good is being produced.
C)there is no deadweight loss.
D)the external costs have been internalized.
E)firms are not maximizing profit.

Question 27

Refer to the accompanying figure to answer the questions that follow.

Refer to the accompanying table,where Q represents the quantity produced,internal cost and social cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities. The social optimum occurs where price is __________ and quantity is __________.

A)$70; 200
B)$50; 200
C)$60; 300
D)$80; 300
E)$60; 100

Question 28

Which of the following is a benefit of internalizing a negative externality?

A)All pollution is eliminated.
B)More output is produced.
C)The deadweight loss is eliminated.
D)The good is sold for a lower price.
E)Output increases and prices are lower.

Question 29

Your neighbor likes to mow his grass each Saturday at 7 A.M.and the noise invariably wakes you up.This is an example of:

A)the third-party problem.
B)the tragedy of the commons.
C)an internal cost.
D)the free-rider problem.
E)a positive externality.

Question 30

If government regulation forces firms in an industry to internalize the externality,then we can expect the equilibrium price of the good to __________ and the equilibrium quantity to __________.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase
E)increase; remain unchanged

Question 31

Consider the market for refined oil.In the market equilibrium,

A)the internal supply equals the internal demand.
B)the internal supply equals the social supply.
C)the social supply equals the internal demand.
D)there is too little of the good being produced.
E)there is no deadweight loss.

Question 32

Refer to the accompanying figure to answer the questions that follow.

To achieve the social optimum,the government could set a tax equal to __________ per unit sold.

A)$6
B)$4
C)$2
D)$3
E)$5

Question 33

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

A)A
B)B
C)A + B
D)C
E)A + B + C

Question 34

Consider a market where production of the good is creating a negative externality.In the market equilibrium,there is a deadweight loss because the:

A)internal cost is not equal to the external cost.
B)internal cost is not equal to the internal benefit.
C)internal benefit is not equal to the external benefit.
D)social cost is greater than the internal benefit.
E)internal benefit is less than the internal cost.

Question 35

Refer to the accompanying figure to answer the questions that follow.

Refer to the accompanying figure.When a negative externality exists and the government does not intervene,which point best identifies the market equilibrium?

A)A
B)B
C)C
D)D
E)either C or D

Question 36

Your neighbor is an avid gardener who changes his flower displays four times per year and who was given the "best yard on the block" award last year.While you personally enjoy these changing flower displays,some of your neighbors have said they do not like some of the flowers your neighbor chooses to plant.For you,this is an example of:

A)a positive externality.
B)the tragedy of the commons.
C)an internal cost.
D)internalizing the external cost.
E)a negative externality.

Question 37

Refer to the accompanying figure to answer the questions that follow.

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities. The market equilibrium occurs where price is __________ and quantity is __________.

A)$4; 2
B)$8; 4
C)$10; 3
D)$10; 5
E)$12; 6

Question 38

The third-party problem:

A)occurs when a market activity leads to a negative externality.
B)occurs when a market activity leads to a positive externality.
C)occurs when a market activity leads to a negative or a positive externality.
D)is the same as the free-rider problem.
E)is associated with the production of private goods but not public goods.

Question 39

If government regulation forces firms in an industry to internalize the externality,then the:

A)supply curve shifts to the left.
B)supply curve shifts to the right.
C)demand curve shifts to the left.
D)demand curve shifts to the right.
E)supply curve and the demand curve shift to the left.

Question 40

Refer to the accompanying figure to answer the questions that follow.

Refer to the accompanying table,where Q represents the quantity produced,internal cost and social cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities. The market equilibrium occurs where price is __________ and quantity is __________.

A)$70; 200
B)$50; 200
C)$60; 300
D)$80; 300
E)$60; 100

Question 41

Which activity is most likely to create a positive externality?

A)You drive downtown each day.
B)An oil refinery operates for 16 hours each day.
C)A new airport is built in a big city.
D)A person receives a flu shot.
E)The government offers reduced-cost financing toward the purchase of a new car.

Question 42

Which of the following is true of a positive externality?

A)Some costs are borne by a third party.
B)The government can use taxes to move the market to the social optimum.
C)There are no internal benefits.
D)Some benefits accrue to a third party.
E)Its existence always requires corrective measures by the government.

Question 43

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.

A)overproduce; external benefit
B)under-produce; internal benefit
C)overproduce; external cost
D)under-produce; external cost
E)under-produce; external benefit

Question 44

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:

A)in all such cases.
B)if the benefits of doing so outweigh the costs.
C)as long as it will not increase the price of the good being produced.
D)as long as it will not create unemployment in this industry.
E)as long as there are positive health benefits associated with this policy.

Question 45

Positive externalities exist because:

A)internal benefits are less than external benefits.
B)internal benefits are greater than external benefits.
C)external benefits are greater than social benefits.
D)internal benefits are greater than social benefits.
E)internal benefits are less than social benefits.

Question 46

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

A)the law of supply.
B)the public-good problem.
C)the free-rider problem.
D)the common-resource problem.
E)internalizing the externality.

Question 47

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

A)rise; rise
B)rise; fall
C)fall; fall
D)fall; rise
E)remain unchanged; remain unchanged

Question 48

Refer to the accompanying table,where Q represents the quantity produced,internal cost and external cost are given for various quantities,and P represents the price consumers are willing to pay for various quantities. The social optimum occurs where price is __________ and quantity is __________.

A)$4; 2
B)$8; 4
C)$10; 3
D)$10; 5
E)$12; 6

Question 49

A positive externality exists whenever:

A)there are no internal costs.
B)production of a good creates an external cost.
C)production of a good creates an external benefit.
D)production of a good has no social cost.
E)production of a good has no social benefit.

Question 50

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,you would expect:

A)the same amount to be sold and the price to be $4 higher.
B)the same amount to be sold and the price to increase by less than $4.
C)less to be sold and the price to increase by $4.
D)less to be sold and the price to increase by less than $4.
E)less to be sold and the price to increase by more than $4.

Question 51

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

A)supply curve shifts to the left.
B)supply curve shifts to the right.
C)demand curve shifts to the left.
D)demand curve shifts to the right.
E)supply curve and the demand curve shift to the left.

Question 52

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

A)a positive externality.
B)internalizing the externality.
C)the third-party problem.
D)an external cost.
E)the Coase theorem.

Question 53

When production of a good creates an external benefit:

A)there is a negative externality.
B)too much of the good is being produced.
C)there is a positive externality.
D)it results in the tragedy of the commons.
E)a club good is being produced.

Question 54

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

A)negative; internal costs
B)negative; external costs
C)positive; external benefits
D)positive; external costs
E)positive; internal benefits

Question 55

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:

A)supply curve shifts to the left.
B)supply curve shifts to the right.
C)demand curve shifts to the left.
D)demand curve shifts to the right.
E)the supply curve and the demand curve shift to the left.

Question 56

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:

A)impose a tax on the sale of this good.
B)pass a law preventing the production of this good.
C)subsidize the cost of producing the good.
D)pass a law preventing the consumption of this good.
E)ignore the problem.

Question 57

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

A)high; high
B)low; low
C)low; high
D)high; low
E)expensive; inefficient

Question 58

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:

A)B.
B)C.
C)E.
D)F.
E)G.

Question 59

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

A)increase; increase
B)increase; decrease
C)increase; remain unchanged
D)decrease; increase
E)decrease; decrease

Question 60

Positive externalities have __________ for third parties.

A)internal costs
B)internal benefits
C)external costs
D)external benefits
E)social costs

Question 61

Consider the accompanying figure to answer the questions that follow.

A positive externality exists and the government does not intervene.Which point best identifies the market equilibrium?

A)A
B)B
C)C
D)D
E)either C or D

Question 62

Consider the following scenario when answering the questions that follow:
Jones owns a factory that is dumping toxic waste into a river where Smith owns a resort.At present,Jones is not filtering the water that he dumps into the river.There is a filter he could install that would remove a significant amount of the toxic elements from the water before it is dumped in the river.Jones and Smith have each assessed the situation and come up with the following data:

If property rights over the river are assigned to Smith,then:

A)Smith will force Jones to close the factory.
B)Smith will pay Jones up to $75 per day to install the filter.
C)Smith will pay Jones up to $125 to install the filter.
D)Jones will install a filter and pay Smith at least $75 per day.
E)Jones will install a filter.

Question 63

Consider the accompanying figure to answer the questions that follow.

Refer to the accompanying figure.The market for college degrees is currently in equilibrium at point A,and the government decides to subsidize the cost of a college education by offering grants to students.The new socially optimal equilibrium will be at point:

A)R.
B)W.
C)T.
D)U.
E)V.

Question 64

Your 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:

A)the third-party problem.
B)the tragedy of the commons.
C)an internal cost.
D)the free-rider problem.
E)a positive externality.

Question 65

Consider the following scenario when answering the questions that follow:
Jones owns a factory that is dumping toxic waste into a river where Smith owns a resort.At present,Jones is not filtering the water that he dumps into the river.There is a filter he could install that would remove a significant amount of the toxic elements from the water before it is dumped in the river.Jones and Smith have each assessed the situation and come up with the following data:

A cattle rancher and a wheat farmer own adjacent properties that may or may not be separated by a fence.The accompanying table identifies the annual profit received by each party in the event there is,or there is not,a fence.If there is no fence,one can be installed and maintained at an annual cost of $25,000. If legal rights are assigned to the wheat farmer so that the cattle rancher is liable for any damage caused by his cattle to the wheat crop,then the:

A)rancher will choose to close his ranch.
B)farmer will not allow the rancher to stay in business.
C)rancher will pay to build the fence.
D)rancher will choose to compensate the farmer for damages.
E)rancher will be indifferent toward neither building the fence nor compensating the farmer for damages.

Question 66

Consider the accompanying figure to answer the questions that follow.

Refer to the accompanying figure.Which area represents the deadweight loss associated with producing at the market equilibrium instead of the social optimum?

A)A
B)B
C)A + B
D)C
E)A + B + C

Question 67

Clean air becomes polluted because:

A)it is a private good.
B)no one owns the air.
C)it is a club good.
D)the air is owned by private corporations.
E)the air is owned by the government.

Question 68

Consider the following scenario when answering the questions that follow:
Jones owns a factory that is dumping toxic waste into a river where Smith owns a resort.At present,Jones is not filtering the water that he dumps into the river.There is a filter he could install that would remove a significant amount of the toxic elements from the water before it is dumped in the river.Jones and Smith have each assessed the situation and come up with the following data:

If property rights over the river are assigned to Jones,then:

A)Jones will force Smith to close his resort.
B)Smith will pay Jones up to $75 per day to install the filter.
C)Smith will pay Jones up to $125 to install the filter.
D)Jones will install a filter and pay Smith at least $75 per day.
E)Jones will not install a filter.

Question 69

Consider the following scenario when answering the questions that follow:
Jones owns a factory that is dumping toxic waste into a river where Smith owns a resort.At present,Jones is not filtering the water that he dumps into the river.There is a filter he could install that would remove a significant amount of the toxic elements from the water before it is dumped in the river.Jones and Smith have each assessed the situation and come up with the following data:

A cattle rancher and a wheat farmer own adjacent properties that may or may not be separated by a fence.The accompanying table identifies the annual profit received by each party in the event there is,or there is not,a fence.If there is no fence,one can be installed and maintained at an annual cost of $25,000. If legal rights are assigned to the wheat farmer so that the cattle rancher is liable for any damage caused by his cattle to the wheat crop,then the:

A)rancher will choose to close his ranch.
B)farmer will not allow the rancher to stay in business.
C)rancher will pay to build the fence.
D)rancher will choose to compensate the farmer for damages.
E)rancher is indifferent toward building the fence or compensating the farmer for damages.

Question 70

According to the Coase theorem,negative externalities can be internalized if:

A)property rights are assigned to either party.
B)property rights are assigned to the party who is being damaged.
C)property rights are assigned to the party who is doing the damage.
D)the party causing the damage is forced out of business.
E)the government takes action to solve the problem.

Question 71

Consider the following scenario when answering the questions that follow:
Jones owns a factory that is dumping toxic waste into a river where Smith owns a resort.At present,Jones is not filtering the water that he dumps into the river.There is a filter he could install that would remove a significant amount of the toxic elements from the water before it is dumped in the river.Jones and Smith have each assessed the situation and come up with the following data:

A cattle rancher and a wheat farmer own adjacent properties that may or may not be separated by a fence.The accompanying table identifies the annual profit received by each party in the event there is,or there is not,a fence.If there is no fence,one can be installed and maintained at an annual cost of $25,000. If legal rights are assigned to the wheat farmer so that the cattle rancher is liable for any damage caused by his cattle to the wheat crop,then the:

A)rancher will choose to close his ranch.
B)farmer will not allow the rancher to stay in business.
C)rancher will pay to build the fence.
D)rancher will choose to compensate the farmer for damages.
E)rancher will be indifferent toward neither building the fence nor compensating the farmer for damages.

Question 72

A free-rider problem exists when:

A)people receive a benefit they do not need to pay for.
B)firms impose a cost on third parties.
C)negative externalities exist.
D)a private good is produced.
E)any market is in equilibrium.

Question 73

The Coase theorem suggests that private parties:

A)will never be able to negotiate to correct a negative externality.
B)can always negotiate to correct a negative externality.
C)can negotiate to correct a negative externality if barriers to negotiation are low.
D)can negotiate to correct a negative externality if the government passes a law allowing them to do so.
E)can never negotiate to correct a negative externality if there are more than two parties involved.

Question 74

Consider the accompanying figure to answer the questions that follow.

When a positive externality exists,which point best identifies the social optimum?

A)A
B)B
C)C
D)D
E)either A or D

Question 75

Which good has well-defined property rights?

A)wild animals
B)the ocean
C)a country club golf course
D)the air
E)a street performance

Question 76

A major reason why the market equilibrium for a manufactured good may not be efficient is:

A)there is too much government regulation.
B)property rights are not well defined.
C)there is likely to be a positive externality associated with production.
D)the industry is likely to be a monopoly.
E)the industry is producing too little output.

Question 77

Externalities exist because:

A)owners of private property have an incentive to maintain their property.
B)owners of private property have little incentive to protect their property.
C)owners of private property are not able to trade with others.
D)property rights are not clearly defined.
E)there is too much private ownership of property.

Question 78

Consider the accompanying figure to answer the questions that follow.

Which of the following is true?

A)social benefits = internal benefits - external benefits
B)social benefits = internal benefits + external benefits
C)internal benefits = social benefits + external benefits
D)external benefits = social benefits + internal benefits
E)internal benefits - social benefits = external benefits

Question 79

Externalities are minimized if:

A)private property rights are well established.
B)the government owns all of the productive resources.
C)there are no private goods.
D)there are no public goods.
E)there are no free-riders.

Question 80

Consider the accompanying figure to answer the questions that follow.

External benefits arise from the actions of:

A)firms.
B)consumers.
C)firms and consumers.
D)the government.
E)firms,consumers,and the government.