Deck 13: Positive Externalities and Public Goods

Question 1

In the case of technology, it can sometimes be quite difficult for _______ to earn a _______
Rate of return from their inventions.

A) individuals; high
B) public investors; low
C) private investors; reasonable
D) the whole of society; high

Answer 1

private investors; reasonable

Question 2

It is commonly understood that every invention

A) has its own story of discovery and development.
B) often involved a parade of characters and firms.
C) has a unique story that develops over years or decades.
D) often results in new technology and all of the above.

Answer 2

often results in new technology and all of the above.

Question 3

Generally, market competition and technology can

A) support each other.
B) oppose each other.
C) compliment each other.
D) sometimes a or b.

Answer 3

sometimes a or b.

Question 4

On average, it can cost _______ and take _______ to discover a new drug, perform the necessary safety tests, and bring the drug to market.

A) $500 million; five years
B) $100 million; a year
C) $800 million; more than a decade
D) $300 million; less than a decade

Question 5

The term "applied research" refers to research that is focused on a particular product that promises

A) to offer commercial applications in the short-term.
B) to offer commercial applications in the long-term.
C) an economic payoff in the short or medium-term.
D) an economic payoff in the medium or long-term.

Question 6

Market competition can provide _______ for _______,

A) unsustained profits; firms with marketable patents
B) the needed incentive; discovering new technologies
C) time; competitors to catch up with other's inventions
D) an opportunity; competitors seeking out innovations

Question 7

A public good is a good that is _______, and thus is difficult for market producers to sell to individual consumers.

A) excludable or rivalrous
B) nonexcludable and nonrivalrous
C) excludable and rivalrous
D) unexcludable or unrivaled

Question 8

When it is costly or impossible to exclude someone who hasn't paid to use a particular good from using it, then that good is classified as being

A) unexcludable
B) free rider
C) public good
D) nonexcludable

Question 9

The term "basic research" applies specifically to research pertaining to fundamental scientific breakthroughs that may offer commercial applications in the _______.

A) distant future
B) near future
C) immediate future
D) short run

Question 10

A highly innovative firm operating in a competitive market will usually have

A) a permanent edge over its competitors.
B) a lack of ability to earn reasonable profits.
C) vast numbers of competitors catching up to its innovations.
D) some time before competitors catch up to its innovations.

Question 11

In order for a good to be classified as _______, when one person uses the good, others are also able to use it.

A) nonrivalrous
B) unrivalrous
C) unexcludable
D) nonexcludable

Question 12

If I'MSmartCo's research and development project succeeds, then

A) market competition will ultimately discourage commercialization of the new technology.
B) competitors may find a way to adapt and copy the underlying idea without incurring R&D costs.
C) their success will be temporary because they will inevitably fall behind other innovative competitors.
D) they will need to find a less expensive way to add even more desirable characteristics.

Question 13

Market competition may sometimes encourage a firm to innovate out of fear because of the perception that

A) they will inevitably fall behind other competitors seeking out innovations.
B) the firm will only have a very temporary edge over its competitors.
C) the ability to earn above-normal profits is also available to its competition.
D) higher profits can only be earned by finding less expensive ways to produce.

Question 14

If the research and development efforts of a firm have ended in failure, then

A) the firm could be driven out of business.
B) the firm will suffer losses.
C) R & D projects rarely end in total failure.
D) the firm could experience a and/or b.

Question 15

Many economists would view market competition as supporting the invention of new technology because it

A) provides an competitive edge over competitors for the long-term.
B) encourages methods of producing existing products at less cost.
C) encourages creation of products with desirable characteristics.
D) provides short-term above-normal profits, and b and c as well.

Question 16

The difference between playing a board game and a playing a video game is the

A) elimination of free riders
B) involvement of fewer rivals
C) involvement of free riders
D) technology of the video game

Question 17

Government has a variety of policies that allow inventors to _______, such as the granting patents and _______.

A) receive an increased rate of return; subsidization of research and development
B) protect their inventions; limited copyrights during the inventor's lifetime
C) register their inventions; unlimited copyrights during the inventor's lifetime
D) receive a reasonable rate of return; lifetime intellectual property rights.

Question 18

Which of the following would most likely be identified as being the ultimate goal of public policies that pertain to technology?

A) to help inventors earn higher rates of return
B) to help inventors earn reasonable returns
C) to encourage a stream of inventions that monetarily benefit the inventor.
D) to encourage a stream of invention that benefits the whole of society.

Question 19

If large numbers of individuals choose to behave as free riders,

A) more of the public good will be available for paying riders.
B) the public good may never be provided.
C) public goods will quickly be privatized.
D) public domain technologies become more difficult to obtain.

Question 20

An individual who wants others to pay for public goods, but plans to use those goods for their own purposes, is often referred to as a _______.

A) tax evader
B) excludable
C) free rider
D) nonexcludable

Question 21

Raven Farms raises a substantial number of bees and uses the honey to produce its own skin healing cream. Raven Farms is situated next to the Oakcreek Apple Orchard. The bees from Raven Farms pollinate Oakcreek's apple trees. In this instance, Raven Farms

A) derives more private benefits and provides less social benefit.
B) provides more social benefits than it derives in private benefits.
C) provides a marginal social benefit and derives a complete private benefit.
D) provides a complete social benefit and derives a marginal private benefit.

Question 22

How does the cost of financial capital influence innovative research and development activities in a competitive market?

A) at a high cost, firms demand a large quantity, as R&D projects return high rates.
B) at a low cost, firms demand a large quantity, as R&D projects will likely return a higher rate.
C) financial capital at a high cost means more projects are likely to pay a much higher return rate.
D) at a low cost, the firm receives only small private benefits from investing in R&D.

Question 23

Which of the following mechanisms will increase the rate of return that can be earned by inventors of new technology?

A) intellectual property rights
B) government research and development grants
C) cooperative research ventures between companies
D) patents, copyrights, and each of the above

Question 24

Why did Gordon Gould have to endure a lengthy legal battle in order to receive a patent for his innovative laser idea concocted in 1957?

A) by 1957, several other scientists had filed patents ahead of him, but none of their laser inventions worked
B) he delayed applying to patent his idea, mistakenly believing he needed to have a working laser to apply
C) by 1957, his laser was no longer the inspiration of a single person.
D) by 1957, his laser technology overlapped previous laser patents.

Question 25

Some studies done by economists have found that the original inventor receives _______
From innovations, while other businesses and new product users receive the rest of the benefit.

A) one-quarter to one-half of the social and economic benefits
B) one-quarter to one-third of social and economic benefits
C) one-third to one-half of the total economic benefits
D) one-quarter to one-third of the total economic benefits

Question 26

If a firm's efforts to be technologically innovative will create a positive externality, then that firm will likely

A) have more incentive to innovate to the extent that the whole of society desires.
B) invest significantly more in its research and development activities.
C) have less incentive to innovate to the extent that the whole of society desires.
D) demand more financial capital investment to expand its R&D activities.

Question 27

If some of the products developed by I'mASoftwareCo. must face market competition that can very quickly produce either an identical product or a close substitute for it, then

A) it may decide against R&D projects of this sort.
B) it will have to figure out innovative ways to prevent adaptation and copying of its products.
C) the other firms will all save on their R&D costs.
D) it must charge more for its products to quickly compensate for the research and development costs.

Question 28

Which of the following would be classified as a positive externality?

A) a surcharge for ambulance service is shifted to property taxes
B) reselling outdated textbooks to under-funded public schools
C) removing government education subsidies for public schools
D) converting a derelict empty lot to a public vegetable garden

Question 29

Which of the following is the most appropriate response of public policy to a negative externality like pollution?

A) modernize, update, and restore homes in run down neighborhoods to decrease littering
B) find ways to account for the social costs of the negative externality in economic decisions
C) encourage high standards of public education to increase innovation capability of youth
D) assist the private party creating the negative externality to receive more social benefits

Question 30

Why did Thomas Edison vow that he would work only on ideas for things that people would buy?

A) only things that people will buy produce a social benefit.
B) only ideas that people will pay a high price for are protected by patents.
C) he wanted to hold the record for registering the most patents.
D) no government would buy his first patented invention.

Question 31

I'mAComputerCo. would likely be more willing to undertake an innovative research project to reduce the amount of electricity required to run its computers if there were some form of guarantee that if it succeeded,

A) it will enjoy a small temporary advantage over the competition.
B) it would be able to set price to compensate for development costs.
C) it could sell the new computers as a monopoly for at least a few years.
D) it would receive a government bailout if losses could drive it out of business.

Question 32

Which of the following would some economists be likely to perceive as the most appropriate public policy response to a positive externality created by the development of a highly innovative new technology?

A) not taking into account the negative externality associated with social benefit
B) not taking into account the positive externality associated with social benefit
C) have reasonable rates of return not based on a notion of unearned social benefits
D) develop ways to provide a greater share of the social benefits to the innovator

Question 33

One reason some economists doubt that patent protection encourages innovation is that economic studies show that inventors receive only _______ of the total economic value of their inventions in countries that _______.

A) one-half to two-thirds; previously had few patents
B) one-third to one-half; already had patents
C) one-third to one-half; previously had no patents
D) one-half to two-thirds; had existing patents

Question 34

When a firm invests in new technology, the _______ that the firm receives are _______.

A) private benefits; only a portion of the overall social benefits
B) social benefits; only a portion of the overall private benefits
C) private benefits; about three-quarters of the economic benefits
D) social benefits; about one-third of the overall private benefits

Question 35

In economic terms, when I'mASoftwareCo. invests in new technology innovations,

A) competitive externalities arise.
B) potential externalities arise.
C) negative externalities arise.
D) positive externalities arise.

Question 36

Which of the following circumstances would encourage I'MaPharmaCo. to increase research and development activities?

A) cost of financial capital is high
B) patent term expires in 20 years
C) cost of financial capital is low
D) a low rate of return is likely

Question 37

For a positive externality, _______ than the social benefits.

A) private benefits of an action are more
B) social benefits of an action are more
C) private benefits of an action are less
D) social costs of an action are less

Question 38

Once it's patent application has been accepted, a firm is able to earn _______ on its product, which _______.

A) an increased rate of return for investors; raises doubts further R&D activities
B) more profit; will allow it to recover the biggest slice of the social value created
C) monopoly profits; offers an incentive for research and development to take place
D) competitive profits; creates incentive for continuing innovative R&D projects

Question 39

For a negative externality, the _______ than the costs imposed on society as a whole.

A) private costs of an action are less
B) social costs of an action are less
C) private benefits of an action are more
D) social benefits of an action are more

Question 40

If a small electric automobile manufacturer is able to gain the social return generated by its electric motor, its demand for financial capital would

A) shift to the left.
B) shift to the right.
C) decrease substantially.
D) increase slightly.

Question 41

If an alternative policy could encourage both _______, instead of _______ , consumers would benefit.

A) invention and competition; invention and monopoly
B) invention and monopoly; invention and public funding
C) invention and monopoly; invention and competition
D) invention and competition; invention and public funding

Question 42

The federal government funds _______ of the nation's basic research, much of which _______.

A) more than half; carried out by private firms
B) less than half; conducted in the labs of private firms
C) about half; conducted at colleges and universities
D) more than half; conducted a government run facilities

Question 43

If the government altered its invention patent policy from a monopolistic policy to a competitive policy, then consumers

A) would face higher prices and less quantity in the long-run.
B) would face lower prices and less quantity in the short-run
C) would benefit from the lower price and greater quantity sold.
D) would benefit from lower prices due to increased public investments

Question 44

Under current U.S. copyright legislation, works produced on a for-hire basis and owned by firms enjoy monopoly protection for

A) 50 years after date of publication.
B) 70 years after date of publication.
C) 75 years from the date of publication.
D) 95 years from the date of publication.

Question 45

While the majority of economists acknowledge that intellectual property rights do provide a method for increasing the rate of return for inventors, some have suggested there are number of reasons to doubt whether patents provide

A) sufficient benefits for society as a whole.
B) completely appropriate benefits for the whole of society.
C) completely appropriate incentives for innovation.
D) sufficient incentives for innovation, as well as c.

Question 46

There is a skating rink in your city that is open to anybody to use at any time. They even provide skates for people who don't own any. This is an example of a good that is

A) rivalrous and nonexcludable
B) nonrivalrous and excludable
C) rivalrous and excludable
D) nonrivalrous and nonexcludable

Question 47

Ideally, a patent should cover a long enough period of time for the inventor to _______
, but that period should not be so long that it allows the inventor to _______.

A) earn a hearty return; charge a high monopoly price permanently
B) contribute to the social interest; only receive a slice of the social benefits
C) earn a rate of return; prevent broad public access to classic works
D) contribute to the social interest; prevent broad public access to inventions

Question 48

Which of the following represents one of the methods that the government uses to promote technology?

A) protection of intellectual property
B) provision of a greater number of public goods
C) maintenance of stable regulated financial markets
D) creation of public colleges and universities

Question 49

Cathy can take either of two separate roads to drive to work. The first is a lightly used new toll road that is rarely congested. The second road is a local road with no tolls, but it is often congested and has many potholes. In this instance, the toll road is

A) nonrivalrous and excludable
B) rivalrous and nonexcludable
C) nonrivalrous and nonexcludable
D) rivalrous and excludable

Question 50

When technology is advancing so quickly, even a patent from, say, two years ago may be _______
, because _______.

A) somewhat outdated; few firms are relying on the technology
B) completely outdated; no firm is relying on that technology any longer
C) irrelevant; inventors are only receiving a slice of the social value.
D) irrelevant; not every idea can remain under patent protection forever.

Question 51

One difficulty with direct government support of R&D is that it inevitably involves government decisions about _______.

A) whether it can agree on the amount of social benefit conferred to private firms
B) which of the vast number of proposed projects are worthwhile
C) the location of the congressional district receiving the research funding.
D) quantifying the social benefit conferred on a private firm by an R&D tax reduction.

Question 52

Because of the legal protection for intellectual property, such as patents, a firm has a better chance of recouping the costs of research if it pursues

A) basic technological research
B) technologically innovative research
C) applied technological research
D) technologically positive research

Question 53

A complementary approach to supporting R&D that does not involve the government's close scrutiny of particular R&D projects is to give firms

A) a permanent monopoly over all their inventions that never expires.
B) the option to fund all R&D projects through colleges or universities.
C) a reduction in corporate taxes based on amount of R&D performed.
D) assurance that antitrust authorities challenge cooperative R&D efforts.

Question 54

If the maintenance fees for a lighthouse are paid in full each year by charging port fees, then the lighthouse is

A) rivalrous and excludable
B) nonrivalrous and excludable
C) rivalrous and nonexcludable
D) nonrivalrous and nonexcludable

Question 55

A drug company is deciding how much to invest in Research and Development into finding a cure stomach cancer. The table below shows the company's demand for financial capital for R&D of this drug, based on its expected rates of return from selling the drug. Every investment has an additional 4% social return: that is, an investment that pays at least a 5% return to the drug company will create at least a 9% return for society as a whole.

If the opportunity cost of financial capital for the drug company falls from 7% to 5%, the drug company will invest _______ more in R&D if it receives only the private benefits of this investment.

A) $14
B) $16
C) $24
D) $30

Question 56

Which of the following would most likely be recognized as a defining characteristic of a public good?

A) the good is nonrivalrous item
B) the good is nonexcludable item
C) the good is both a and b above
D) the good is a separate and identifiable item

Question 57

CleanAir Motors Inc. wants to build electric cars with no emissions. However, electric motors require innovative battery technology for adequate energy storage to meet basic daily commuting needs. The company has several possibilities for alternative battery technology, along with estimates of how these approaches would affect their costs of producing the cars and their sales of the cars. Based on these estimates, the table below shows the value of R&D projects that provide at least a certain private rate of return. Every investment would have an additional 2% social return: that is, an investment that pays at least a 6% return to the car company will pay at least an 8% return for society as a whole.

If the opportunity cost of financial capital for CleanAir Motors Inc. is 10%, CleanAir Motors Inc. will
Invest _______ in R&D if it receives both the private and social benefits of this investment.

A) $2000
B) $1500
C) $1000
D) $500

Question 58

If the government determines that the private sector does not have sufficient incentive to carry out research and development, which of the following is likely to be a reasonable response?

A) government can use public funds to pay for the R&D activities directly.
B) setting up government-run laboratories to ensure public benefits arise from public funding.
C) direct all public R&D funding to colleges and universities to ensure public benefits arise from public funding.
D) ensure that firms are not entering cooperative ventures to lessen competition, as well as b and c above.

Question 59

The SaferGlass Co. makes windshields for the automotive industry. It wants to develop a new product with shatterproof glass to increase safety. The development of the new glass requires them to change their production process significantly. The company has developed a list of possible ways of implementing the production process changes, along with estimates of how each would affect the production and sales costs. Based on these estimates, the table below shows the value of R&D projects that provide at least a certain social rate of return. Every investment in R&D would have an additional 3% social return: that is, an investment that pays at least a 4% return to the glass company will pay at least 7% return for society as a whole.

If the opportunity cost of financial capital for SaferGlass Co. is 9%, the company will invest _______
In R&D if it receives only the private benefits of this investment.

A) $400
B) $450
C) $500
D) $550

Question 60

Which of the following legislation was enacted in 1998 to allow copyright to be extended from 50 to 70 years after an author's death?

A) Thomas Edison Patent Restoration Act
B) Sonny Bono Copyright Term Extension Act
C) Sonny Bono Patent Restoration Act
D) Thomas Edison Copyright Term Extension Act

Question 61

List the variety of policy tools available to government for increasing the rate of return for new technology and encouraging its development.

Question 62

YummyCandiesCo. has developed a new candy bar that contains a full recommended daily allowance of vitamins and minerals. This invention will provide considerable spillover benefits to society. The table below shows the demand for the candy bars, the supply of candy bars if the company receives only the private benefits, and the supply of candy bars if the firm also receives the full social benefits.

If the firm's candy bars were sold on the basis of both private and social benefits, the equilibrium price and quantity would be

A) $4, 100,000
B) $3, 150,000
C) $2, 200,000
D) $1, 250,000

Question 63

ToasterOvensInc. is developing technology to make a toaster oven than uses less electricity. If successful, the technology will significantly reduce the amount of energy that is wasted due to product inefficiencies. If the firm sells only in response to the market price, the quantity shown in the third column of the table below is supplied. If the firm were also to receive the broader social benefits of the new technology, the willingness to supply is shown in the fourth column.

If the firm were to receive a price based only on private benefits, the equilibrium price and quantity would be

A) $16, 740
B) $17, 680
C) $18, 620
D) $19, 660

Question 64

Briefly explain what is meant by the term "nonrivalrous".

Question 65

ToasterOvensInc. is developing technology to make a toaster oven than uses less electricity. If successful, the technology will significantly reduce the amount of energy that is wasted due to product inefficiencies. If the firm sells only in response to the market price, the quantity shown in the third column is supplied. If the firm were also to receive the broader social benefits of the new technology, the willingness to supply is shown in the fourth column.

If the firm were to receive a price based on both private and social benefits, the equilibrium price and quantity would be

A) $16, 740
B) $17, 770
C) $18, 800
D) $19, 830

Question 66

Identify all of the characteristics of a public good.

Question 67

Briefly discuss the pros and cons of market competition as same relates to research and development of new technologies.

Question 68

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. If both states clean the lake, the payoffs will be

A) Wisconsin gains 100, Illinois gains 200
B) Wisconsin gains 200, Illinois gains 300
C) Wisconsin gains 200, Illinois loses 100
D) Wisconsin gains 100, Illinois loses 100

Question 69

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost
1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. If Wisconsin does not clean the lake and Michigan does then the payoffs will be

A) Wisconsin gains 200, Illinois gains 100
B) Wisconsin gains 200, Illinois loses 100
C) Wisconsin gains 300, Illinois loses 100
D) Wisconsin gains 300, Illinois gains 100

Question 70

Briefly explain what is meant by the term "nonexcludable".

Question 71

Many residents of a particular town enjoy taking their dogs with them when they go to their local park for recreation and picnics. Everybody enjoys the park more when each group cleans up after themselves and their pets, but nobody enjoys the act of cleaning up after themselves or their dogs. We can expect the park to be _______, due to a _______.

A) dirty, prisoner's dilemma
B) clean, prisoner's dilemma
C) dirty, positive externality
D) clean, positive externality

Question 72

Paddy and Mick are the only two inhabitants of a small island off the coast of Ireland. They burn coal to keep their houses warm at night. However, this coal burning is harming the air quality on their island. Both Paddy and Mick could install air filters on their chimneys. These filters cost 50 each. Each filter provides a social benefit of 80, but those benefits are divided equally among Paddy and Mick. If both Paddy and Mick install the filters

A) both will gain 10
B) both will gain 0
C) both will lose 30
D) both will gain 30

Question 73

Discuss the difficulty government may experience direct support for R&D and explain a complimentary approach that is used as an alternative.

Question 74

In the context of both positive externalities and public goods, briefly explain why private firms or individuals might fail to make expenditures or investments that would produce broad social benefits.

Question 75

The SaferGlass Co. makes windshields for the automotive industry. It wants to develop a new product with shatterproof glass to increase safety. The development of the new glass requires them to change their production process significantly. The company has developed a list of possible ways of implementing the production process changes, along with estimates of how each would affect the production and sales costs. Based on these estimates, the table below shows the value of R&D projects that provide at least a certain social rate of return. Every
Investment in R&D would have an additional 3% social return: that is, an investment that pays at least a 4% return to the glass company will pay at least 7% return for society as a whole.

If the opportunity cost of financial capital for SaferGlass Co. is 9%, the company will invest _______
In R&D if it receives both the private and social benefits of this investment.

A) $400
B) $450
C) $500
D) $550

Question 76

YummyCandiesCo. has developed a new candy bar that contains a full recommended daily allowance of vitamins and minerals. This invention will provide considerable spillover benefits to society. The table below shows the demand for the candy bars, the supply of candy bars if the company receives only the private benefits, and the supply of candy bars if the firm also receives the full social benefits.


If the new candy bar were sold based only on private benefits, the equilibrium price and quantity would be

A) $4, 100,000
B) $3, 150,000
C) $2, 200,000
D) $1, 250,000

Question 77

Briefly explain why markets often have a difficult time producing public goods.

Question 78

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. In the absence of any agreement, the outcome of this game will be

A) neither state cleaning the lake
B) Wisconsin cleaning the lake, Illinois not cleaning the lake
C) Wisconsin not cleaning the lake, Illinois cleaning the lake
D) both states cleaning the lake

Question 79

Briefly explain whether a patent should be used to provide an incentive for investors? If your answer is positive, explain whether there should be any limits or conditions relating to same.

Question 80

Tom, Mary and Jill have apartments in the same building. A security system for their building costs $750. Tom is willing to pay $100 for the security system, Mary is willing to pay $300 and Jill is willing to pay $300. They have a meeting to vote on whether to pay $250 each for the security system. At least two of them must vote for the system to be installed before the vote is passed.
The efficient outcome is to have the security system installed. After the meeting the security system will _______, which illustrates _______.

A) be installed, the free rider problem
B) not be installed, the free rider problem
C) be installed, a negative externality
D) not be installed, a negative externality