Deck 10: Externalities

Question 1

If the marginal private cost of running a car is $0.30 a kilometre and the marginal external cost is $0.10, what is the marginal social cost?

A) $0.40
B) $0.20
C) $3.00
D) $0.03
E) None of the above answers is correct.

Answer 1

$0.40

Question 2

When logging in Tasmania destroys forests that hikers would have used for eco-tourism, the destruction of the trails is an example of

A) a government cost.
B) an external cost.
C) a private cost.
D) an external benefit.
E) None of the above answers is correct.

Answer 2

an external cost.

Question 3

Zoe, the owner of a beauty salon, hires a new hair stylist. The wages paid to the new stylist are

A) neither a private cost nor an external cost.
B) a private cost and not an external cost.
C) both a private cost and an external cost.
D) an external cost and not a private cost.
E) only a private benefit because people want their hair styled.

Answer 3

a private cost and not an external cost.

Question 4

An example of someone bearing the burden of a negative production externality would be

A) Jess's roommate smokes and she doesn't.
B) Taylor living downwind from a smelly feedlot where pigs are raised.
C) Lyn's neighbours play loud music late at night.
D) All of these are examples of a negative production externality.
E) None of these is an example of a negative production externality.

Question 5

An example of someone bearing the burden of a negative consumption externality would be

A) Zoe grows beautiful roses in her garden.
B) Taylor living downwind from a feedlot.
C) Jess's roommate smokes and she doesn't.
D) All of these are examples of a negative consumption externality.
E) None of these is an example of a negative consumption externality.

Question 6

A landfill site produces an obnoxious odour. Homes downwind of the site rent for $1,000 per month while homes upwind of the site rent for $1,500 per month. If the odour is the only detectable difference between the two neighbourhoods, the difference in the rent is the ________ of the odour.

A) marginal cost-benefit
B) private cost
C) private benefit
D) external cost
E) social cost

Question 7

The cost of producing an additional unit of a good or service that falls on people other than the producer is the marginal

A) private cost.
B) social benefit.
C) external cost.
D) social cost.
E) None of the above answers is correct.

Question 8

Marginal private cost

A) is the cost of producing an additional unit of a good or service that is paid by the producer of that good or service.
B) is always zero if there is an external cost.
C) equals the marginal social cost only if the marginal external cost is positive.
D) is the cost of producing an additional unit of a good or service that falls on people other than the producer of that good or service.
E) the cost of producing an additional unit of a good or service that is paid by the entire society.

Question 9

Marginal social cost is equal to

A) the amount people who buy a product pay for another unit.
B) whatever producers have to pay to produce output.
C) the average of marginal private cost and marginal external cost.
D) the sum of marginal private cost and marginal external cost.
E) None of the above answers is correct.

Question 10

A cost that arises from production or consumption that falls on someone other than the producer or consumer is called

A) a negative externality.
B) a private good.
C) a negative benefit.
D) a public choice impact.
E) a positive externality.

Question 11

Which of the following equations is correct?

A) MSC = MC ÷ marginal external cost
B) MSC = MC + marginal external cost
C) MC = marginal external cost - MSC
D) MC = MSC + marginal external cost
E) MSC = MC × marginal external cost

Question 12

For a product with an external cost, the supply curve

A) is the same as the marginal private cost curve.
B) is undefined.
C) represents the various quantities people can buy.
D) is the same as the marginal social cost curve.
E) is the same as the marginal external cost curve.

Question 13

If a product has zero external costs, then

A) marginal social cost equals zero.
B) marginal social cost is less than marginal private cost.
C) marginal social cost equals marginal private cost.
D) marginal social cost is greater than marginal private cost.
E) We need more information to determine the relationship between marginal private cost and marginal social cost.

Question 14

A marginal external cost of a product is equal to

A) the cost someone other than the producer incurs when another unit is produced.
B) what the producer has to pay to hire resources to produce another unit.
C) what the consumer must pay when he or she buys the good or service.
D) the cost the producer incurs to produce another unit.
E) None of these answers describes a marginal external cost.

Question 15

To ensure all students are protected from getting the flu this year, your school offers free flu shots. What type of externality exists in this example?

A) Positive production externality
B) Positive consumption externality
C) Neutral externality.
D) Negative production externality
E) Negative consumption externality

Question 16

Suppose two neighbourhoods with 10 homes each in Sydney are identical except one of them is near a toxic waste dump. If homes near the dump sell for an average of $40,000 and the other homes sell for $90,000, the external cost of the dump is

A) $1,300,000.
B) $400,000.
C) $900,000.
D) $90,000.
E) $500,000.

Question 17

The cost of producing an additional unit of a good or service that is borne by the producer of that good or service is the marginal

A) private cost.
B) public cost.
C) external cost.
D) social cost.
E) None of the above answers is correct.

Question 18

Pollution is an example of a ________ externality.

A) negative consumption
B) positive production
C) positive consumption
D) negative production
E) Coasian

Question 19

A firm dumps raw sewerage in a river, thereby severely polluting the river. The cost of the water pollution is i. zero for the firm.
Ii) an external cost.
Iii) part of the marginal social cost.

A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii and iii

Question 20

If there is no external cost, then marginal social cost

A) increases as output increases.
B) is unrelated to output levels.
C) is constant regardless of the level of output.
D) first increases and then decreases as output increases.
E) decreases as output increases.

Question 21

If producing a good or a service creates pollution, then

A) the industry's supply curve includes the extra cost of pollution.
B) at the unregulated, competitive market equilibrium quantity, marginal social benefit is less than the equilibrium price.
C) at the unregulated, competitive market equilibrium quantity, marginal social benefit and marginal social cost are equal.
D) at the unregulated, competitive market equilibrium quantity, marginal social cost is greater than the equilibrium price.
E) an unregulated competitive market produces an efficient output.

Question 22

The deadweight loss associated with producing a product that has an external cost occurs because

A) too little output is produced.
B) too much output is produced.
C) the marginal social cost does not equal zero.
D) not enough resources are allocated to producing the good.
E) the price that firms charge for the good is too high.

Question 23

The figure above shows the costs and benefits associated with producing paper. What is the marginal external cost when output is 6 tonnes?

A) $1,600
B) $600
C) $1,200
D) $400
E) $1,000

Question 24

The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost borne by producers when 100 billion kilowatt hours are produced is

A) 10 cents per kilowatt hour.
B) 15 cents per kilowatt hour.
C) 5 cents per kilowatt hour.
D) 0 cents per kilowatt hour.
E) 20 cents per kilowatt hour.

Question 25

The figure above shows the costs and benefits associated with producing paper. What is the efficient level of output?

A) More than 6 tonnes
B) 6 tonnes
C) 4 tonnes
D) 0
E) None of the above answers is correct.

Question 26

The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal external cost when 200 billion kilowatt hours are produced is

A) 0 cents per kilowatt hour.
B) 5 cents per kilowatt hour.
C) 20 cents per kilowatt hour.
D) 10 cents per kilowatt hour.
E) 15 cents per kilowatt hour.

Question 27

The figure above represents the relationship between output and cost in an industry with an external cost. Which line represents the marginal private cost (MC) curve?

A) Curve 2
B) The dotted line BC
C) The dotted line AB
D) The y-axis
E) Curve 1

Question 28

The basic reason that a competitive unregulated market produces an inefficient amount of a good with an external cost is because

A) external costs are not a political issue.
B) the general public does not care about external costs.
C) producers cannot measure marginal social cost.
D) the external cost is paid by consumers rather than producers.
E) producers do not pay the external cost.

Question 29

One reason why property rights help achieve an efficient level of pollution is because property rights

A) eliminate marginal private costs.
B) force the marginal social cost to zero.
C) change the marginal external cost so that it is equal to the marginal social benefit.
D) force the marginal private cost to equal the marginal social cost.
E) force the marginal external cost to a lower level than marginal private cost.

Question 30

If the marginal social cost of producing a tonne of cement is $4,000 and the marginal private cost is $3,500, then the

A) marginal external cost of producing a tonne of cement is $500.
B) marginal benefit of a tonne of cement will equal $4,000.
C) marginal external cost of producing a tonne of cement is $4,000.
D) marginal external cost of producing a tonne of cement is $7,500.
E) total cost of producing a tonne of cement is $7,500.

Question 31

The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost borne by producers when 200 billion kilowatt hours are produced is

A) 5 cents per kilowatt hour.
B) 10 cents per kilowatt hour.
C) 20 cents per kilowatt hour.
D) 15 cents per kilowatt hour.
E) 0 cents per kilowatt hour.

Question 32

If the production of a good causes an external cost, then the efficient quantity is

A) more than the quantity at which the marginal benefit equals the marginal cost.
B) the quantity at which the marginal private benefit is greater than the marginal social benefit.
C) equal to the quantity at which the marginal benefit equals the marginal cost.
D) less than the quantity at which the marginal benefit equals the marginal cost.
E) None of the above answers is correct.

Question 33

For a good whose production creates an external cost, the efficient quantity of output is

A) where the market demand curve and the market supply curve intersect.
B) zero.
C) where the marginal social cost curve and marginal benefit curve intersect.
D) the amount of production so that the marginal social benefit exceeds the marginal social cost by as much as possible.
E) as low as possible.

Question 34

The figure above illustrates the marginal private cost and the marginal social cost to the city of Geelong for each rock concert that is offered. It also illustrates the marginal private benefit. There is no external benefit. The efficient number of concerts in Geelong is

A) 5.
B) 15.
C) 10.
D) 0.
E) 20.

Question 35

The figure above illustrates the marginal private cost and the marginal social cost to the city of Geelong for each rock concert that is offered. Suppose the marginal private cost of the 5th concert is $10,000. Then, for the 5th concert, the

A) marginal external cost equals the marginal private cost.
B) marginal external cost equals $30,000.
C) marginal external cost equals $40,000.
D) marginal social cost equals $30,000.
E) marginal external cost equals $10,000.

Question 36

The figure above illustrates the marginal private cost and the marginal social cost to the city of Geelong for each rock concert that is offered. It also illustrates the marginal benefit. There is no external benefit. If the city of Geelong puts on 5 concerts per year, then the marginal benefit will

A) equal the marginal private cost.
B) equal the marginal social cost.
C) exceed the marginal social cost.
D) be less than the marginal social cost.
E) None of the above answers is correct.

Question 37

The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve. The marginal cost paid by the producers and everyone else in society when 100 billion kilowatt hours are produced is

A) 10 cents per kilowatt hour.
B) 5 cents per kilowatt hour.
C) 15 cents per kilowatt hour.
D) 0 cents per kilowatt hour.
E) 20 cents per kilowatt hour.

Question 38

The figure above shows the marginal social cost of generating electricity and the marginal private cost. For 4 billion kilowatts, what is the marginal external cost?

A) $0.04
B) $0.00
C) $0.12
D) $0.08
E) $0.20

Question 39

The figure above illustrates the marginal private cost and the marginal social cost to the city of Geelong for each rock concert that is offered. If 5 concerts are put on, then the

A) marginal external cost will equal zero.
B) marginal external cost will be greater than the marginal social cost.
C) marginal external cost will equal the marginal private cost.
D) marginal external cost will be greater than the marginal private cost.
E) marginal social cost will equal the marginal external cost.

Question 40

Legally established titles to ownership, use and disposal of factors of production and goods and services are called ________ rights.

A) government
B) property
C) pollution
D) inefficient
E) private

Question 41

The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the government imposes a pollution tax to achieve the efficient level of production, the tax equals ________ per kilowatt hour.

A) 2.5 cents
B) 0 cents
C) 15 cents
D) 7.5 cents
E) 10 cents

Question 42

The figure above illustrates the petrol market. There is no external benefit from petrol. If a pollution tax equal to the marginal external cost is imposed on petrol, then the quantity of petrol produced and consumed equals

A) 5 million litres.
B) 20 million litres.
C) 10 million litres.
D) 0 litres.
E) None of the above answers is correct.

Question 43

Cap-and-trade refers to

A) capping emissions and issuing tradeable emissions permits.
B) countries trading fishing rights in international waters.
C) capping the benefits gained from pollution controls.
D) capping taxes on firms that engage in international trade.
E) capping revenue from selling emissions permits.

Question 44

Which of the following is the best example of a transactions cost?

A) The price of a new set of tyres.
B) The price of labour and materials used to produce a house.
C) The value of the time spent negotiating a contract.
D) The cost associated with producing a golf club.
E) The price of food.

Question 45

The Coase theorem deals with the problem of pollution by

A) making all polluters stop polluting.
B) giving the government regulatory power over polluters.
C) having the government take over ownership of all polluting processes.
D) establishing and enforcing private property rights.
E) allowing the government to set the proper emissions charge.

Question 46

In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution, the pollution tax must be set equal to the

A) price of the good.
B) marginal private cost.
C) marginal external cost.
D) marginal benefit of polluting.
E) marginal social cost.

Question 47

The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the Coase theorem can be used in this market, output equals ________ kilowatt hours per day.

A) more than 200 billion
B) 200 billion
C) 0
D) 100 billion
E) 150 billion

Question 48

The figure above shows a tax imposed on a good with an external cost. The area of the rectangle abcd equals

A) the MC.
B) the total tax revenue collected by the government.
C) the amount of pollution tax per tonne.
D) the MSB.
E) the deadweight loss.

Question 49

Transactions costs are the

A) external costs when a firm pollutes.
B) reason why taxes cannot affect the inefficiency resulting from an external cost.
C) costs of using the Coase theorem.
D) external marginal costs of the externality.
E) opportunity costs of conducting a transaction.

Question 50

Which of the following is a common method used by governments to cope with the situation in which the production of a good creates an external cost?

A) Subsidising production
B) Removing property rights
C) Vouchers
D) Marketable permits
E) Lottery

Question 51

The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the market is competitive and unregulated, the equilibrium price is ________ per kilowatt hour and the equilibrium quantity is ________ billion kilowatt hours per day.

A) 10 cents; 200
B) 20 cents; 100
C) 7.5 cents; 150
D) 15 cents; 150
E) 20 cents; 200

Question 52

Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. In the absence of any government regulation, how many tonnes of leather will be produced?

A) 300 tonnes
B) 0 tonnes
C) 200 tonnes
D) More than 300 tonnes
E) None of the above answers is correct.

Question 53

If a pollution tax in a market with an external cost changes the market so that it produces the efficient level of output, which of the following occurs? i. The supply curve shifts leftward.
Ii) The price increases.
Iii) The quantity produced decreases.

A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii and iii

Question 54

The figure above illustrates the petrol market. There is no external benefit from petrol. If a tax on petrol is imposed as shown in the figure, then the total tax revenue earned by the government equals

A) $16 million.
B) less than $8 million.
C) $24 million.
D) more than $24 million.
E) $8 million.

Question 55

Producing leather creates external costs in the form of water pollution. The figure above illustrates the market for leather. If the government sets a pollution limit that achieves efficiency, how many tonnes of leather are produced?

A) 300 tonnes
B) 0 tonnes
C) 200 tonnes
D) More than 300 tonnes
E) More than 0 tonnes and less than 200 tonnes

Question 56

Which of the following is true regarding pollution charges? i. They force a polluter to pay a price for its pollution.
Ii) They are based on the marginal external cost of pollution.
Iii) The fee that produces the efficient amount of pollution is easily determined.

A) i and ii
B) ii and iii
C) i and iii
D) i, ii and iii
E) i only

Question 57

The figure above illustrates the petrol market. There is no external benefit from petrol. If this market is left unregulated and no pollution tax is imposed, the equilibrium quantity of petrol is

A) 10 million litres.
B) 15 million litres.
C) 0 litres.
D) 5 million litres.
E) 20 million litres.

Question 58

The figure above shows the marginal social cost curve of generating electricity, the marginal private cost curve, and the demand curve. If the market is competitive and unregulated, the equilibrium quantity is ________ billion kilowatt hours per day and the efficient quantity is ________ billion kilowatt hours per day

A) 250; 0
B) 150; 150
C) 0; 150
D) 150; 200
E) 200; 150

Question 59

If the government taxes producers that create pollution, the government's policy

A) forbids the firms from passing along higher costs.
B) results in less production because the producers' costs have risen.
C) eliminates pollution entirely by shifting the supply curve leftward.
D) allows the firms to pass along higher costs but doesn't cut pollution.
E) allows the producers to pollute more by increasing their costs.

Question 60

A problem with pollution charges or taxes as a solution to pollution is that

A) taxes are already too high.
B) the necessary information about the polluting industry is costly and usually unavailable.
C) the producers do not want the property right to their pollution.
D) people don't want the government to regulate industry.
E) pollution would still continue.

Question 61

Education leads to external benefits because

A) better educated people are less lazy.
B) the people who become better educated get better jobs.
C) better educated people commit fewer crimes.
D) better educated people are more productive.
E) little pollution is created when educating people.

Question 62

Which of the following is true?

A) MSB = MB + Marginal external benefit
B) MB = Marginal external benefit - MSB
C) MB = Marginal external benefit + MSC
D) MSB = MB + Marginal external benefit - Marginal external cost
E) MSB = Marginal external cost - marginal external benefit

Question 63

The figure above shows the market for university education. Left to itself without any government intervention, a competitive market would create a deadweight loss equal to

A) the area d.
B) the area b + c.
C) the area a + c.
D) zero.
E) the area b + d.

Question 64

Firm A and Firm B emit 300 tonnes of pollution each and each have marketable permits that allow each to emit 100 tonnes of pollution. If it costs $5,000 for Firm A to eliminate 100 tonnes of pollution and it costs Firm B $6,000 to eliminate 100 tonnes of pollution, then

A) Firm A sells its permits to Firm B for a price above $6,000.
B) Firm A sells its permits to Firm B for a price below $6,000.
C) Firm B sells its permits to Firm A for a price below $6,000.
D) Firm B sells its permits to Firm A for a price above $6,000.
E) neither Firm A nor Firm B sells permits because neither has extra permits.

Question 65

If a product has an external benefit, how does its marginal private benefit compare to its marginal social benefit?

A) Marginal private benefit is greater than marginal social benefit.
B) At low quantities, marginal private benefit is less than marginal social benefit, but at high quantities marginal private benefit is greater than marginal social benefit.
C) At low quantities, marginal private benefit is greater than marginal social benefit, but at high quantities marginal private benefit is less than marginal social benefit.
D) Marginal private benefit cannot be compared to marginal social benefit.
E) Marginal private benefit is less than marginal social benefit.

Question 66

When a person receives a flu vaccination, the ________ is the additional benefit the person receives from getting the shot.

A) marginal external cost
B) marginal external benefit
C) marginal private benefit
D) marginal social cost
E) marginal social benefit

Question 67

The cost of producing an additional unit of a good or service that is borne by the producer of that good or service

A) equals the cost borne by people other than the producer.
B) is the external cost.
C) is the marginal social cost.
D) is the marginal private cost.
E) always equals the benefit the consumer derives from that good or service.

Question 68

If a polluting producer is forced to pay a pollution charge, what is the effect on the supply and/or demand curves for the product?

A) The firm's supply curve shifts rightward.
B) The firm's demand curve shifts leftward.
C) The firm's supply curve shifts leftward.
D) The quantity supplied along the firm's supply curve increases.
E) BOTH the supply curve and the demand curve shift leftward.

Question 69

For a product with external benefits that is produced in a competitive, unregulated market, how can the resulting market output be described?

A) Underproduction and overproduction are both possible depending on whether the external benefit is to consumption or production.
B) There is overproduction compared to the efficient level.
C) Production equals the efficient level.
D) There is underproduction compared to the efficient level.
E) None of the above is correct.

Question 70

The figure above shows the market for private school education in Adelaide. There is no external cost of private education. If the government does not intervene in this market, the deadweight loss equals

A) $800,000.
B) $1,600,000.
C) more than $800,000 and less than $1,600,000.
D) more than $1,600,000.
E) zero.

Question 71

Which of the following actions would most likely have an external benefit?

A) Developing a better marketing strategy for Honda
B) Attending university
C) Throwing rubbish out your car window as you drive to class
D) Eating a peanut butter sandwich
E) Sleeping

Question 72

The figure above shows the market for university education. The efficient quantity of education is

A) more than 4 million students and less than 6 million students.
B) more than 6 million students.
C) zero students.
D) 6 million students.
E) 4 million students.

Question 73

The figure above shows the market for private school education in Adelaide. There is no external cost of private education. If the marginal social benefit of private school education equalled the marginal social cost, the deadweight loss in Adelaide's private education market would equal

A) more than $800,000 and less than $1,600,000.
B) more than $1,600,000.
C) $800,000.
D) zero.
E) $1,600,000.

Question 74

If the marginal private benefit of attending college for Shelly is $40,000 and the marginal external benefit is $15,000, she will attend university if the cost of attendance is no more than

A) $55,000.
B) $45,000.
C) $40,000.
D) $15,000.
E) $25,000.

Question 75

Which of the following are devices that the government uses to achieve a more efficient allocation of resources in the presence of external benefits?

A) Regulations, public provision and vouchers
B) Public provision, taxes and private subsidies
C) Taxes, private subsidies and regulation
D) Public provision, taxes and vouchers
E) Vouchers, public provision and private subsidies

Question 76

Suppose scientific research generates external benefits. Without government intervention, the market for scientific research would

A) produce some research, but less than the efficient amount.
B) produce more than the efficient amount.
C) produce the efficient amount.
D) produce zero research.
E) either produce more than or less than the efficient amount depending on whether the external benefit is on the production or consumption of the research.

Question 77

When the benefits of producing a good or service spill over to other people, rather than just the buyer, the spillover is referred to as

A) a marginal cost.
B) a Coasian good.
C) an external benefit.
D) an equilibrium social output.
E) an external cost.

Question 78

The figure above shows the market for private school education in Adelaide. There is no external cost of private education. If the government does not intervene in this market, the equilibrium number of students being privately educated is ________ and the efficient quantity is ________.

A) 600 students; 600 students
B) 0 students; 400 students
C) 400 students; 400 students
D) 400 students; 600 students
E) 600 students; 400 students

Question 79

If the marginal private cost of producing one kilowatt of power in South Australia is ten cents and the marginal social cost of each kilowatt is fourteen cents, then the marginal external cost equals ________ per kilowatt.

A) ten cents
B) nineteen cents
C) fourteen cents
D) four cents
E) zero cents

Question 80

Which of the following is an example of an activity that creates an external cost? i. A smoker emitting second-hand smoke.
Ii) Sulfur emitting from a smoke stack.
Iii) Throwing garbage on the roadside.

A) ii and iii
B) iii only
C) i and ii
D) i only
E) i, ii and iii