Deck 9: Externalities and Public Goods

Question 1

The following figure shows the private cost and social cost of producing Good X.

Refer to the figure above.Which of the following statements is true in this case?

A) P₁ is the socially optimal price for Good X.
B) P₂ is the price of Good X in a free market.
C) Q₂ units is the efficient level of output of Good X.
D) Q₂ units is the quantity supplied of Good X in a free market.

Answer 1

Q₂ units is the efficient level of output of Good X.

Question 2

The social cost of producing a good that generates negative externalities is the sum of the ________.

A) average variable cost and the average fixed cost of production
B) average total cost and the marginal cost of production
C) private cost and external costs of production
D) total fixed cost and the total variable cost of production

Answer 2

private cost and external costs of production

Question 3

Scenario: In Brazil, more than 60 percent of sugar cane grown is harvested by hand. In São Paulo state, nearly 300,000 workers are employed in sugar cane harvesting. Manual harvesting requires burning the cane fields prior to harvest to remove the cane's sharp leaves and drive snakes from the fields. Burning the cane fields, however, gives off large quantities of ammonia and nitrogen oxide, which lead to ozone creation. In São Paulo state, a layer of ash covers cars, and nitrogen oxide levels double during the harvest period. The nitrogen oxide produced from burning the cane fields can lead to acid rain and changes in water quality.
Refer to the scenario above.In the graph below,the socially optimal level of production occurs at which point?

A) Q₀
B) Q₁
C) Q₂
D) Q₃

Answer 3

Q₂

Question 4

Deadweight loss refers to the loss in ________.

A) producer surplus due to a fall in the market price of a good
B) consumer surplus due to an increase in the market price of a good
C) total surplus due to a market distortion, such as an externality
D) total surplus due to a change in consumers' preferences

Question 5

In a market,social surplus is maximized when consumers' willingness to pay for a good equals the ________.

A) marginal private cost of producing the good
B) average variable cost of producing the good
C) marginal social cost of producing the good
D) opportunity cost of producing the good

Question 6

If the production of a good involves negative externalities,________.

A) the quantity of the good supplied in the market is lower than the efficient level
B) the optimal price of the good is higher than the market price of the good
C) total welfare can be increased by increasing the production of the good
D) the average cost of production can be reduced by increasing output above the optimal level

Question 7

When the production of a good generates negative externalities,________.

A) the fixed cost of production is zero
B) the variable cost of production is zero
C) the private cost of production exceeds the social cost of production
D) the social cost of production exceeds the private cost of production

Question 8

Externalities essentially create ________.

A) non-excludability in consumption
B) non-rivalry in consumption
C) a divergence between private and social costs
D) a free-rider problem

Question 9

Which of the following is not true regarding externalities?

A) Externalities have no effect on market efficiency.
B) Externalities are imposed on agents other than the parties to an economic exchange.
C) Externalities can be either positive or negative.
D) Externalities can occur in either consumption or production.

Question 10

Which of the following is the best definition of an externality?

A) When firms sell products at a price greater than marginal cost
B) When government intervention in a market reduces consumer surplus
C) When an economic activity imposes spillover costs or benefits on a third party
D) When a worker takes a job "off the books" to avoid paying taxes

Question 11

The following figure shows the private cost and social cost of producing Good X.

Refer to the figure above.What does the region EFG represent?

A) Consumer surplus
B) Producer surplus
C) Deadweight loss
D) Economic profit

Question 12

A ________ occurs when an economic activity has a spillover cost that does not affect those directly engaged in the activity.

A) positive externality
B) negative externality
C) gain in producer surplus
D) gain in consumer surplus

Question 13

The following figure shows the private cost and social cost of producing Good X.

Refer to the figure above.Total welfare can be increased by ________.

A) increasing output above Q₁ units
B) reducing output below Q₁ units
C) lowering the market price below P₁
D) increasing the market price above P₂

Question 14

When the production of a good involves negative externalities,the marginal social cost curve will most likely ________.

A) be parallel to the horizontal axis
B) be parallel to the demand curve
C) lie above the supply curve
D) lie to the right of the supply curve

Question 15

Traffic congestion is an example of a ________.

A) positive externality
B) negative externality
C) pecuniary externality
D) free-rider problem

Question 16

An externality occurs when ________.

A) the quantity demanded of a good exceeds the quantity supplied
B) the quantity supplied of a good exceeds the quantity demanded
C) the government regulates production and consumption decisions
D) an economic activity affects third parties not engaged in the activity

Question 17

Scenario: In Brazil, more than 60 percent of sugar cane grown is harvested by hand. In São Paulo state, nearly 300,000 workers are employed in sugar cane harvesting. Manual harvesting requires burning the cane fields prior to harvest to remove the cane's sharp leaves and drive snakes from the fields. Burning the cane fields, however, gives off large quantities of ammonia and nitrogen oxide, which lead to ozone creation. In São Paulo state, a layer of ash covers cars, and nitrogen oxide levels double during the harvest period. The nitrogen oxide produced from burning the cane fields can lead to acid rain and changes in water quality.
Refer to the scenario above.The deadweight loss arising from hand-harvesting is represented by area in the graph below.

A) A
B) B
C) C
D) D

Question 18

The market demand curve for a good shows ________,and the market supply curve shows ________.

A) consumers' willingness to pay for the good; producers' marginal cost of producing the good
B) producers' marginal cost of producing the good; consumers' willingness to pay for the good
C) consumers' willingness to pay for the good; the opportunity cost of producing the good
D) consumers' willingness to pay for the good; producers' total cost of producing the good

Question 19

The following figure shows the private cost and social cost of producing Good X.

Refer to the figure above.Social surplus will be maximized when the quantity supplied of Good X is ________.

A) Q₁ units
B) Q₂ units
C) greater than Q₁ units
D) greater than Q₂ units

Question 20

If negative externalities are present in a market,________.

A) the market price is higher than the socially optimal price
B) the quantity supplied in the market is larger than the socially optimal level
C) the marginal social cost of production is lower than the marginal private cost
D) the average cost of production exceeds the marginal cost of production at all output levels

Question 21

The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.

Refer to the figure above.The socially optimal quantity of this good should be ________ units.

A) 60
B) 70
C) 80
D) 100

Question 22

If positive externalities are present in a free market,________ at any output level.

A) the marginal cost of production equals the average cost of production
B) the marginal social cost of production exceeds the marginal private cost
C) the marginal private benefit from production equals the marginal social benefit
D) the marginal social benefit of production exceeds the marginal private benefit

Question 23

The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.

Refer to the figure above.The socially optimal price for this good should be ________.

A) $6
B) $4
C) $8
D) $7

Question 24

The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.

Refer to the figure above.A total of ________ units of this good will be traded in this market,at the price of ________.

A) 80; $6
B) 20; $2
C) 60; $8
D) 40; $4

Question 25

The drainage of chemical fertilizers used on agricultural plots along the banks of the Blue River has led to the formation of a dead zone in the river that cannot support aquatic life.Without any government intervention,will the market for fertilizers produce a socially optimal quantity? Why or why not? Explain your answer with the help of suitable diagrams.

Question 26

Why does the presence of negative externalities in the production of a good lead to an overproduction of the good?

Question 27

The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.

Refer to the figure above.The total cost of this externality to the society is equal to ________.

A) $2
B) $10
C) $20
D) $40

Question 28

Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity?

A) A negative externality
B) A positive externality
C) A gain in producer surplus
D) A gain in consumer surplus

Question 29

Which of the following occurs if the production of a good gives rise to positive externalities?

A) The marginal social cost curve lies to the right of the supply curve.
B) The marginal social cost curve lies to the left of the supply curve.
C) The marginal social benefit curve lies to the right of the demand curve.
D) The marginal social benefit curve lies to the left of the demand curve.

Question 30

The marginal social cost of producing the last unit of a good is $1.10,while the consumers' willingness to pay for the last unit is $0.80.The deadweight loss from the production of the last unit of the good is ________.

A) $1.10
B) $1.90
C) $0.50
D) $0.30

Question 31

A positive externality ________.

A) gives rise to external benefits
B) leads to increasing returns to scale
C) imposes an additional cost on society
D) leads to a higher economic profit

Question 32

When does the marginal social cost of producing a good exceed the marginal private cost of producing it?

Question 33

Which of the following is likely to generate a negative externality?

A) Smoking a cigarette
B) Planting a tree
C) Consuming vegetarian food
D) Working for long hours

Question 34

Due to ongoing budget shortfalls,the city of Detroit has suspended services,such as street cleaning and maintenance of city-owned properties in several neighborhoods.In response,some homeowners in these neighborhoods sweep the streets,replace street lights,and mow the grass on city-owned lots.These actions by homeowners represent ________.

A) a positive externality in consumption
B) a positive externality in production
C) deadweight loss
D) a pecuniary externality

Question 35

If a ton of newspaper costs $350 to produce and in the process causes $10 worth of pollution damage to the environment,then ________.

A) the private cost is $360 per ton
B) the social cost is $10 per ton and the private cost is $350 per ton
C) the private cost is $360 per ton and the social cost is $340 per ton
D) the social cost is $360 per ton and the private cost is $350 per ton

Question 36

Which of the following is likely to give rise to a negative externality?

A) A sudden increase in the price of wheat due to a fall in supply
B) A sudden increase in the demand for diamonds, leading to an increase in their prices
C) Deforestation, leading to the extinction of many species
D) Globalization, leading to creation of many new job opportunities

Question 37

The presence of external benefits associated with production implies that ________.

A) private output exceeds the socially optimal output
B) private output is less than the socially optimal output
C) private output corresponds to the socially optimal output
D) any of the above, depending on the relative magnitude of social and private benefits

Question 38

A chemical factory releases its by-products into a nearby river,which harms aquatic flora and fauna.This is an example of a ________.

A) free-rider problem
B) negative externality
C) pecuniary externality
D) positive externality

Question 39

If there are costly negative externalities associated with an economic activity and that activity is carried out until the (private)marginal benefit equals the (private)marginal cost,then ________.

A) this activity should be subsidized
B) the social marginal net benefit is positive
C) the private cost exceeds social costs
D) too many resources are being allocated to this activity

Question 40

Suppose only dues-paying members of a private outdoor sports club can access a lake.Club members who are operating their jet skis on the lake disrupt the bass fishing of other club members.This example describes a ________.

A) positive externality in production
B) negative externality in production
C) positive externality in consumption
D) negative externality in consumption

Question 41

The local community of the town of Montesia decides to plant trees every month as part of its green initiative.Which of the following is true?

A) The marginal social cost of planting trees is lower than the marginal private cost of planting trees.
B) The marginal private benefit from planting trees is higher than the marginal social benefit of planting trees.
C) There is an external benefit from planting trees.
D) There is a deadweight loss in planting trees.

Question 42

The presence of a positive externality in a market leads to a(n)________.

A) underproduction of a good
B) overproduction of a good
C) gain in producer surplus
D) fall in consumer surplus

Question 43

The following figure shows the market supply and demand of a good whose consumption entails a $2 positive external benefit per unit.

Refer to the figure above.The socially optimal price for this good should be ________.

A) $6
B) $4
C) $8
D) $7

Question 44

The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

Refer to the figure above.How many units of Good Y will be supplied when the market is free?

A) 9 million
B) 16 million
C) 13 million
D) 20 million

Question 45

The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

Refer to the figure above.Social surplus can be increased by ________.

A) increasing output above 13 million units
B) reducing output below 13 million units
C) charging a price of $10
D) charging a price of $22

Question 46

Which of the following is true if the production of a good gives rise to a positive externality?

A) The marginal social benefit from each level of output exceeds the consumers' willingness to pay.
B) The marginal private benefit from production exceeds the marginal social benefit.
C) The demand curve for the good shifts to the left in the presence of positive externalities.
D) The demand curve for the good shifts to the right in the presence of positive externalities.

Question 47

If the production of a good involves positive externalities,________.

A) the market price of the good is higher than its optimal price
B) the market price of the good is lower than its optimal price
C) the average cost of production of the good in the long run is zero
D) the variable cost of production of the good is zero

Question 48

The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

Refer to the figure above.The MSB curve lies to the right of the demand curve because the production of Good Y involves ________.

A) positive externalities
B) negative externalities
C) increasing returns to scale
D) decreasing returns to scale

Question 49

Which of the following results in a positive externality?

A) Going to the beach
B) Recycling waste
C) Buying a room heater
D) Following a healthy lifestyle

Question 50

The following figure shows the market supply and demand of a good whose consumption entails a $2 positive external benefit per unit.

Refer to the figure above.________ units of this good will be traded in this market,at the price of ________.

A) 8; $6
B) 2; $2
C) 6; $8
D) 4; $4

Question 51

The marginal social benefit from the production of the last unit of a good is $4,800.If the willingness to pay for that unit is $3,900,what is the external benefit from its production?

A) $900
B) $8,700
C) $3,800
D) $4,100

Question 52

Which of the following activities is most likely to give rise to a positive externality?

A) Jogging every morning
B) Getting a flu vaccination
C) Consuming organic products
D) Buying a pair of gloves

Question 53

The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community.This is an example of ________.

A) a positive externality
B) absolute advantage
C) a pecuniary externality
D) comparative advantage

Question 54

The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

Refer to the figure above.Social welfare will be maximized if ________ units of Good Y are produced.

A) 9 million
B) 20 million
C) 13 million
D) 16 million

Question 55

The following figure shows the market supply and demand of a good whose consumption entails a $2 positive external benefit per unit.

Refer to the figure above.The socially optimal quantity of this good should be ________ units.

A) 6
B) 7
C) 8
D) 10

Question 56

The consumption of a good entails a $2 positive external benefit per unit.The following graph shows the market supply and demand of this good.Which of the dashed lines represents the marginal social benefit curve?

A) Line 1
B) Line 2
C) Line 3
D) Line 4

Question 57

The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

Refer to the figure above.The market price of Good Y is ________.

A) $10
B) $17
C) $22
D) $20

Question 58

Which of the following is most likely to give rise to a positive externality?

A) A sudden increase in the price of oil due to a supply shock
B) A decrease in the price of barley due to a good harvest
C) Deforestation leading to the extinction of many species
D) The consumption of a drug to cure a communicable disease

Question 59

If too little of a good is being produced in the free market,the production of the good is likely to have a ________.

A) positive externality
B) negative externality
C) low per-unit cost of production
D) high opportunity cost of production

Question 60

The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

Refer to the figure above.The triangular region ABC represents the ________.

A) deadweight loss due to the presence of a pecuniary externality
B) deadweight loss due to the presence of a negative externality
C) economic loss of not recognizing a positive externality
D) inefficiency created by not recognizing a negative externality

Question 61

Cleanliness experts say that cleaning a house hygienically helps prevent the spread of germs in the area.What is the inefficiency created by not recognizing the linkage between cleaning the house and preventing the spread of germs? Explain with a suitable diagram.

Question 62

Scenario: Ron plays loud music, which prevents his neighbor from studying. He knows that his neighbor values studying at $5,000, while the cost of soundproofing Ron's room is $3,000.
Refer to the scenario above.Which of the following problems is likely to occur?

A) The tragedy of commons
B) A free-rider problem
C) A pecuniary externality
D) A negative externality

Question 63

Jack wants to buy a new house.But the surge in housing demand over the past few months has led to a sharp increase in housing prices,making it impossible for him to buy one on his current income.This is an example of a ________.

A) positive externality
B) negative externality
C) pecuniary externality
D) conspicuous externality

Question 64

Which of the following is necessary for markets to operate efficiently?

A) A positive externality
B) A negative externality
C) A pecuniary externality
D) Free-riding

Question 65

Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality.

Refer to the scenario above.What is the value of the negative externality imposed on Bob when the firm produces to maximize its private net benefits?

A) (b d) e
B) (a c) f
C) d e
D) c f

Question 66

Which of the following gives rise to a pecuniary externality?

A) Excessive consumption of alcohol leading to bad health
B) A sudden increase in the demand for diamonds, leading to an increase in their prices
C) Deforestation, leading to the extinction of many species
D) Globalization, leading to the displacement of indigenous workers

Question 67

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

Refer to the scenario above.Use of polycarbonate panels to board up vacant houses has a ________.

A) negative externality
B) positive externality
C) gain in producer surplus
D) gain in consumer surplus

Question 68

An economic agent ________ when he accounts for the full costs and benefits of his actions.

A) is called a free rider
B) internalizes an externality
C) maximizes his profit
D) is called a rent seeker

Question 69

The increasing popularity of hot dogs in a food joint has pushed up their prices,making it unaffordable for many students living in the surrounding areas.This is an example of a ________.

A) positive externality
B) negative externality
C) pecuniary externality
D) free-rider problem

Question 70

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

Refer to the scenario above.If only the private marginal benefits are taken into account,then ________ panels will be bought at ________ per panel.Use the equations for the demand and the supply curves.

A) 70; $70
B) 60; $60
C) 50; $60
D) 60; $70

Question 71

Scenario: Ron plays loud music, which prevents his neighbor from studying. He knows that his neighbor values studying at $5,000, while the cost of soundproofing Ron's room is $3,000.
Refer to the scenario above.If Ron has the right to listen to music at night,how much does his neighbor need to pay him to stop playing music?

A) Any amount above $5,000
B) Any amount below $3,000
C) Any amount between $3,000 and $5,000
D) Any amount between $5,000 and $8,000

Question 72

When does a private solution to a negative externality fail to allocate resources efficiently?

Question 73

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

Refer to the scenario above.The deadweight loss associated with ignoring external benefits is ________.Use the equations of the demand and the supply curves.

A) $900
B) $1,000
C) $1,150
D) $1,275

Question 74

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

Refer to the scenario above.If the private marginal benefits as well as external benefits are taken into account,then ________ panels will be bought at ________ per panel.Use the equations of the demand and the supply curves.

A) 90; $90
B) 100; $80
C) 80; $100
D) 100; $100

Question 75

Beth can earn $7,500 renting out her house.However,her neighbor has a pet dog that chases anybody who comes to look at the house.Because her neighbor has the right to keep his pet untied,Beth is unable to find a tenant.If her neighbor values keeping his pet untied at $1,500,what will the efficient outcome be in this case?

Question 76

Which of the following will lead to an efficient private solution if negative externalities are present in a market?

A) The government paying a subsidy to the parties involved in generating externalities
B) The party creating the externality having legal property rights
C) The party suffering from the externality having legal property rights
D) The parties involved negotiating with each other and reaching an agreement

Question 77

A ________ externality occurs when a market transaction affects others through market prices.

A) positive
B) negative production
C) negative consumption
D) pecuniary

Question 78

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

Refer to the scenario above.For each additional polycarbonate panel generates ________ worth of social benefit beyond the private marginal benefit.

A) $100
B) $75
C) $60
D) $0

Question 79

Which of the following occurs when an externality is internalized?

A) An increase in social well-being
B) An increase in private benefit
C) An increase in deadweight loss
D) An increase in returns to scale

Question 80

What are pecuniary externalities? Explain with the help of an example.