Deck 18: Externalities

Question 1

If people took external benefits, suchas cleaner air, into consideration when deciding how much to consume of goods that cause externalities:they would consume less.they would act in a way that is optimal from a societal perspective.the markets for these goods would generate greater surplus.

A)I and III only
B)I and II only
C)II and III only
D)I, II, and III

Answer 1

I, II, and III

Question 2

Any cost that is imposed without compensation on someone other than the person who caused it is called a(n)_______ cost.

A)private
B)social
C)external
D)network

Answer 2

external

Question 3

External benefits accrue:

A)directly to the decision maker of a market exchange.
B)indirectly to the decision maker of a market exchange.
C)without compensation to someone other than the person who caused them.
D)to the government without its direct intervention.

Answer 3

without compensation to someone other than the person who caused them.

Question 4

Benefits that accrue directly to the decision maker of a market exchange are called _______ benefits.

A)private
B)network
C)external
D)social

Question 5

Costs that fall directly on an economic decision maker are called _______ costs.

A)social
B)private
C)external
D)network

Question 6

External costs:

A)fall directly on an economic decision maker.
B)fall indirectly on an economic decision maker.
C)are imposed without compensation on someone other than the person who caused them.
D)are both social costs and private costs.

Question 7

A benefit that accrues without compensation to someone other than the person who caused it is called a(n)_______ benefit.

A)external
B)network
C)social
D)private

Question 8

Markets fail to maximize total surplus when:

A)individual choices impose costs or benefits on others.
B)society's choices impose costs or benefits on other societies.
C)all costs and benefits are received by participants in transactions.
D)producer surplus is not exactly equal to consumer surplus.

Question 9

If people took external costs, such as pollution, into consideration when deciding how much to consume of goods that cause externalities, they would:

A)consume a socially non-optimal amount.
B)not change their consumption behavior.
C)consume more.
D)consume less.

Question 10

All externalities:

A)are harmful to society and create costs external to the decision maker.
B)are beneficial to society and create benefits external to the decision maker.
C)create either a cost or benefit to a person other than the person who caused them.
D)are addressed by the government through taxation.

Question 11

External costs and external benefits are collectively referred to as:

A)externalities.
B)network externalities.
C)social externalities.
D)social welfare.

Question 12

An external cost is typically referred to as a:

A)societal drain.
B)negative externality.
C)negative cost.
D)network externality.

Question 13

A network externality is:

A)a direct effect on an economic decision maker.
B)an indirect effect on an economic decision maker.
C)the effect that an additional participant in an activity has on the value of that activity for others.
D)an uncompensated effect on someone other than the person who caused it.

Question 14

The effect that an additional user of a good or participant in an activity has on the value of that good or activity for others is called a _______ externality.

A)network
B)social
C)negative
D)private

Question 15

When we add private benefits and external benefits together, the result is:

A)production benefits.
B)social benefits.
C)public costs.
D)network benefits.

Question 16

A positive externality is a(n):

A)external benefit.
B)external cost that affects the buyer.
C)external cost that affects the seller.
D)benefit that affects the buyer, but not the seller.

Question 17

Which of the following is a good or service that exhibits a negative network externality?

A)A telephone
B)A wireless internet connection
C)A social network website
D)All of these are goods or services that create negative network externalities.

Question 18

Social costs are:

A)private costs plus external costs.
B)network costs minus private costs.
C)external costs minus private costs.
D)costs imposed without compensation on someone other than the person who caused them.

Question 19

Which of the following is a good or service that exhibits a positive network externality?

A)A telephone
B)A social network website
C)A workers' union
D)All of these are goods or services that create positive network externalities.

Question 20

Private benefits accrue:

A)indirectly to the decision maker of a market exchange.
B)directly to the decision maker of a market exchange.
C)without compensation to someone other than the person who caused them.
D)to third parties without direct government intervention.

Question 21

When a negative externality is present in a market, consumers will purchase _______ the socially optimal quantity.

A)zero, unlike
B)more than
C)the same amount as
D)less than

Question 22

The graph shown displays a market with an externality. Which of the following statements is true?This shows a negative consumption externality.The efficient quantity is 7 units.The size of the externality is $12 per unit.

A)I and III only
B)III only
C)II only
D)I, II, and III

Question 23

A market with a negative externality has total surplus that is _______ total surplus in a market without a negative externality.

A)lower due to deadweight loss than
B)equal to
C)higher due to deadweight loss than
D)equal to, but redistributed differently, than

Question 24

When a negative production externality is present in a market:

A)private costs are less than social costs.
B)private costs are less than external costs.
C)social costs are less than external costs.
D)external costs are equal to social costs.

Question 25

If a production process causes pollution, then the social cost curve will be placed:

A)below the market supply curve.
B)on top of the original market supply curve.
C)above the market supply curve.
D)at zero.

Question 26

If the social cost is greater than the private cost in a particular market, the socially optimal equilibrium will exist at a quantity that is _______ the private level.

A)greater than
B)equal to
C)less than
D)either greater than or less than

Question 27

The net increase to total surplus when a negative externality is corrected or eliminated is due to:

A)the transfer of surplus from those affected by the externality to the consumer.
B)the reduced number of transactions in the market.
C)the transfer of surplus from consumer or producer to those affected by the externality.
D)None of these are true.

Question 28

The graph shown displays a market with an externality. Which areas represent deadweight loss?

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

Question 29

Suppose a company is forced to pay for the externality caused by its production. As a result, it chooses to supply less. What kind of externality does this company create?

A)Positive
B)Negative
C)Network
D)Social

Question 30

If the social cost is greater than the private cost in a particular market, the private equilibrium will exist at a quantity that is _______ the socially optimal level.

A)equal to
B)less than
C)greater than
D)either greater than or less than

Question 31

The graph shown displays a market with an externality. Which areas represent deadweight loss?

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

Question 32

If a negative consumption externality were present in a market, the social benefit curve would be:

A)above the private demand curve.
B)below the private demand curve.
C)identical to the private demand curve.
D)The social benefit curve's location cannot be determined without more information.

Question 33

When a negative consumption externality is present in a market, total surplus will be _______ if buyers only consider _______ costs.

A)higher; private
B)lower; private
C)lower; social
D)unchanged; social

Question 34

The graph shown displays a market with an externality. Which areas represent deadweight loss?

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

Question 35

Correcting the externality that is present in a market increases the efficiency of the market. What type of externality exists in this market?

A)Negative
B)Positive
C)Network
D)Either negative or positive

Question 36

The graph shown displays a market with an externality. Which of the following statements is true?The efficient quantity is 6 units.This shows a negative production externality.The size of the externality is $4 per unit.

A)I and III only
B)II only
C)I only
D)I, II, and III

Question 37

When private costs equal social costs:

A)negative production externalities are not present in the market.
B)positive consumption externalities are present in the market.
C)the external cost must be small relative to the private cost in the market.
D)no externality of any kind is present in the market.

Question 38

If a production process causes a negative externality, then the social cost of production will be _______ the private cost of production.

A)larger than
B)the same as
C)smaller than
D)zero, unlike

Question 39

When negative externalities are present in a market:

A)individuals are not taking into account all the costs associated with their market choices.
B)society bears part of the cost of private transactions.
C)production and consumption are above the socially optimal level.
D)All of these are true.

Question 40

If companies that are causing pollution were forced to pay the social cost of production, they would want to supply:

A)more at any given price.
B)less at any given price.
C)the same amount at the equilibrium price only.
D)the same amount at any given price.

Question 41

When positive consumption externalities are present in a market:

A)private benefits are less than social benefits.
B)private benefits are less than external benefits.
C)social benefits are less than external benefits.
D)external benefits are equal to social benefits.

Question 42

When a positive externality is present in a market, total surplus will be _______ if buyers only consider _______ costs.

A)higher; private
B)lower; private
C)lower; social
D)unchanged; social

Question 43

If the social benefit is greater than the private benefit in a particular market, the private equilibrium will exist at a quantity that is _______ the socially optimal level.

A)greater than
B)equal to
C)less than
D)either greater than or less than

Question 44

If it is possible to eliminate the problems created by externalities, why do they persist?

A)Correcting externalities always reduces total surplus.
B)It is difficult to measure external benefits and costs.
C)The costs of imposing taxes and subsidies generally exceed the benefits.
D)None of these are true.

Question 45

When a market is fully corrected for externalities, it:

A)is equitable.
B)maximizes surplus.
C)makes everyone in society better off.
D)All of these are true.

Question 46

The graph shown displays a market with an externality. Which areas represent deadweight loss?

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

Question 47

The graph shown displays a market with an externality. If the market quantity is 32 units, and the efficient quantity is 49 units, which of the following statements is true?Deadweight loss is represented by areas H + K.Line Y represents the social marginal benefit curve.This shows a positive externality.

A)III only
B)I and II only
C)II and III only
D)I only

Question 48

The net increase to total surplus when a positive externality is corrected is due to:

A)the transfer of surplus from those affected by the externality to the consumer.
B)the increased number of units bought and sold in the market.
C)the transfer of surplus from the consumer to those affected by the externality.
D)None of these are true.

Question 49

The graph shown displays a market with an externality. This is a _______ externality, and the optimal quantity is _______ units.

A)positive; 6
B)positive; 8
C)negative; 6
D)negative; 8

Question 50

The graph shown displays a market with an externality. Which of the following statements is true?The market quantity is 7 units.Total surplus could be increased if the government imposed a tax on this good.This shows a positive consumption externality.

A)I only
B)II and III only
C)I and II only
D)III only

Question 51

A market with a positive externality has total surplus that is _______ total surplus in a market without a negative externality.

A)lower due to deadweight loss than
B)equal to
C)higher due to deadweight loss than
D)equal to, but redistributed differently, than

Question 52

If a company who takes an externality into account wants to supply more at any given price compared to the original supply, it is addressing a _______ externality.

A)positive
B)negative
C)network
D)social

Question 53

When private benefits are less than social benefits:

A)positive externalities are present in the market.
B)positive externalities are not present in the market.
C)negative externalities are not present in the market.
D)no externality of any kind is present in the market.

Question 54

When private benefits equal social benefits:

A)positive consumption externalities are present in the market.
B)negative consumption externalities are present in the market.
C)positive consumption externalities are not present in the market.
D)no externality of any kind is present in the market.

Question 55

When a positive externality is present in a market, consumers will purchase _______ the socially optimal quantity.

A)more than
B)the same amount as
C)zero, unlike
D)less than

Question 56

If it's possible to eliminate the problems created by externalities, why do they persist?

A)It can be difficult to coordinate the millions of market participants.
B)Creating a more efficient solution does not guarantee a fair distribution of surplus.
C)Solutions can be diffuse, complex, and hard to control.
D)All of these are true.

Question 57

The graph shown displays a market with an externality. The external _______ is _______.

A)cost; $3
B)cost; $5
C)benefit; $3
D)benefit; $5

Question 58

When positive externalities are present in a market:

A)individuals don't take into account all the benefits associated with their market choices.
B)society bears part of the cost of private transactions.
C)individuals consume more than the socially optimal quantity.
D)All of these are true.

Question 59

If the social benefit is greater than the private benefit in a particular market, then the socially optimal equilibrium will exist at a quantity that is _______ the private level.

A)greater than
B)equal to
C)less than
D)either greater than or less than

Question 60

If a positive consumption externality were present in a market, the social benefit curve would be:

A)below the private demand curve.
B)above the private demand curve.
C)identical to the private demand curve.
D)The social benefit curve's location cannot be determined without more information.

Question 61

If the costs of coordination and enforcement are _______ the surplus lost to the externality, then a private solution will _______.

A)higher than; not work
B)lower than; not work
C)higher than; work
D)None of these are true.

Question 62

One way to make consumers take a positive externality into account when making demand decisions is to:

A)place a tax on the item.
B)subsidize the purchase of the item.
C)tax the producers of the item.
D)None of these are true.

Question 63

The Coase theorem reminds us that efficiency is all about _______ and says nothing about _______.

A)maximizing total surplus; the distribution of that surplus
B)equitably distributing surplus; maximizing that surplus
C)who gets the most surplus; whether a fair outcome is achieved
D)None of these are true.

Question 64

Latoya and Maggie are roommates. Maggie likes to play music in their dorm room every evening. Tonight, Latoya needs to study for her economics exam and would prefer that Maggie not play music. Latoya values silence at $50. Maggie values her music at $20. Assume the roommates can bargain with zero transactions costs. If the dorm rules are such that Maggie is allowed to play music whenever she likes, which of the following is true?

A)Maggie could offer to pay Latoya $20 in exchange for playing her music, an offer that Latoya would accept.
B)Maggie will not be able to offer any amount high enough to convince Latoya to allow music.
C)Maggie and Latoya will not be able to reach an agreement that results in Maggie turning off her music for the evening.
D)Latoya could offer to pay Maggie $25 in exchange for Maggie turning off her music, an offer that Maggie would accept.

Question 65

The distribution of surplus gained when private parties solve an externality problem on their own, under the Coase theorem, is dependent on:

A)which party has more power to enforce the solution.
B)which party has more negotiating power or wealth.
C)where the initial rights of the parties lie.
D)None of these are true.

Question 66

Under the Coase theorem, a private solution to an externality yields _______ amount of efficiency and _______ distribution of surplus as compared to a government solution.

A)the same; the same
B)the same; a different
C)a different; the same
D)a different; a different

Question 67

One way to make consumers take a negative externality into account when making demand decisions is to:

A)place a tax on the item.
B)subsidize the purchase of the item.
C)give suppliers a production credit.
D)None of these are true.

Question 68

The Coase theorem will hold only if: people can make enforceable agreements. there are very low or no transactions costs. people are altruistic.

A)I only
B)II and III only
C)I and II only
D)I, II, and III

Question 69

The idea that individuals can reach an efficient equilibrium through private trades, even in the presence of an externality, is called:

A)market failure.
B)trade quotas.
C)the Coase theorem.
D)the invisible hand.

Question 70

Which type of tax is intended to counter the effect of a negative externality?

A)Coase
B)Pigovian
C)External
D)Social benefit

Question 71

Efficient solutions to solving externality problems:

A)are always supported by the government.
B)increase surplus for everyone in society.
C)are not always supported in political arenas.
D)decrease surplus for everyone in society.

Question 72

The assumptions needed for the Coase theorem to work _______ in the real world.

A)are often observed
B)often do not hold true
C)never hold true
D)always hold true

Question 73

A Pigovian tax:

A)counters the effect of a negative externality.
B)increases efficiency in a market.
C)increases total surplus in a market.
D)All of these are true.

Question 74

Under the Coase theorem, a private solution to an externality yields a(n)_______ efficient outcome compared to a government solution.

A)more
B)less
C)equally
D)None of these are true.

Question 75

When a market is fully corrected for externalities, it:

A)is efficient and maximizes surplus.
B)is equitable and makes everyone better off.
C)must be maintained through government regulation.
D)All of these are true.

Question 76

Latoya and Maggie are roommates. Maggie likes to play music in their dorm room every evening. Tonight, Latoya needs to study for her economics exam and would prefer that Maggie not play music. Latoya values silence at $50. Maggie values her music at $20. Assume the roommates can bargain with zero transactions costs. Which of the following is true?

A)It is efficient for Maggie to play her music.
B)Maggie and Latoya will not be able to reach efficiency in this situation.
C)The university should offer a subsidy for noise-cancelling headphones.
D)It is efficient for Maggie to refrain from playing music tonight.

Question 77

Latoya and Maggie are roommates. Maggie likes to play music in their dorm room every evening. Tonight, Latoya needs to study for her economics exam and would prefer that Maggie not play music. Latoya values silence at $50. Maggie values her music at $20. Assume the roommates can bargain with zero transactions costs. If the dorm enforces quiet hours in the evening, when students are not supposed to play music, which of the following is true?

A)Maggie could offer to pay Latoya $20 in exchange for playing her music, an offer that Latoya would accept.
B)Maggie will not be able to offer any amount high enough to convince Latoya to allow music.
C)Maggie and Latoya will not be able to reach the efficient outcome.
D)Latoya could offer to pay Maggie $20 in exchange for Maggie turning off her music, an offer that Maggie would accept.

Question 78

The Coase theorem will hold only if:

A)transactions costs are clearly identified and assigned.
B)contracts are enforceable.
C)the government will provide free mediation.
D)None of these are true.

Question 79

The Coase theorem is the idea that:

A)individuals can reach an efficient equilibrium through private trades, even in the presence of an externality.
B)there are always mutually beneficial trades waiting to be exploited, which creates a clear role for government taxation.
C)the actions of private individuals and firms are insufficient to ensure efficient markets.
D)None of these are true.

Question 80

When there are significant costs involved with coordinating a private solution to an externality:

A)a leader will likely be elected to organize the coordination.
B)these costs can act as a motivating factor to solve the externality problem expediently.
C)a private solution likely will not occur.
D)None of these are true.