Deck 15: Externalities , Environmental Policy and Public Goods

Question 1

A negative externality exists if

A) there are price controls in a market.
B) there are quantity controls in a market.
C) the marginal social cost of producing a good or service exceeds the private cost.
D) the marginal private cost of producing a good or service exceeds the social cost.

Answer 1

C

Question 2

Refer to Figure 15-1. If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does S₂ represent?

A) the market supply curve reflecting private cost
B) the market supply curve reflecting social cost
C) the market supply curve reflecting external cost
D) the market supply curve reflecting implicit cost

Answer 2

B

Question 3

What are property rights?

A) the title to ownership of any physical asset
B) a legal document verifying ownership of intangible assets
C) the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
D) the right of the government to appropriate private assets for the good of society

Answer 3

C

Question 4

Refer to Figure 15-2. The deadweight loss due to the externality is represented by the area

A) abc.
B) abf.
C) abd.
D) ade.

Question 5

What is a market failure?

A) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.
B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost.
C) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event.
D) It refers to a breakdown in a market economy because of widespread corruption in government.

Question 6

What is a 'social cost' of production?

A) the cost of the natural resources used up in production
B) the total costs of producing a product, both implicit and explicit costs
C) the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product
D) the cost of the environmental damage created by production

Question 7

Which of the following is an example of a positive externality?

A) banning the sale of candy in elementary schools
B) planting trees along the pavement, which adds beauty and creates shade
C) forbidding the use of cell phones in public
D) prohibiting street parking in all residential neighbourhoods

Question 8

Refer to Figure 15-2. The private profit-maximising quantity for the firm is

A) Q_a.
B) Q_b.
C) Q_b - Q_d.
D) Q_d.

Question 9

Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle involvement in traffic accidents. In this sense, these mandatory helmet laws are reducing ________ of risky behaviour.

A) positive externalities
B) negative externalities
C) the private benefit
D) the social benefit

Question 10

A positive externality causes

A) the marginal social benefit to be equal to the marginal private cost of the last unit produced.
B) the marginal social benefit to be less than the marginal private cost of the last unit produced.
C) the marginal social benefit to exceed the marginal private cost of the last unit produced.
D) the marginal private benefit to exceed the marginal social cost of the last unit produced.

Question 11

Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

A) the private cost of production
B) the social cost of production
C) the external cost of production
D) the explicit cost of production

Question 12

Refer to Figure 15-2. The efficient output level is

A) Q_d.
B) Q_b.
C) Q_a.
D) Q_b - Q_d.

Question 13

If you burn your trash in the back yard in spite of regulations against it, then you are

A) acting economically irrationally and creating a social cost.
B) avoiding the private costs associated with disposing your trash some other way and creating a social cost.
C) acting rationally and creating a positive externality.
D) saving landfill space and creating a social benefit.

Question 14

Refer to Figure 15-1. If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does S₁ represent?

A) the market supply curve reflecting external cost
B) the market supply curve reflecting implicit cost
C) the market supply curve reflecting social cost
D) the market supply curve reflecting private cost

Question 15

Refer to Figure 15-1. Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality. The economically efficient output is Q₂. In that case, the diagram shows

A) the effect of a positive externality in the production of a good.
B) the effect of a negative externality in the production of a good.
C) the effect of an external cost imposed on a producer.
D) the effect of an external benefit such as a subsidy granted to consumers of a good.

Question 16

Private costs

A) are borne by producers of a good while social costs are borne by government.
B) are borne by consumers of a good while social costs are borne by government.
C) are borne by producers of a good while social costs are borne by society at large.
D) are borne by producers of a good while social costs are borne by those who cannot afford to purchase the good.

Question 17

When a negative externality exists, the private market produces

A) more than the economically efficient output level.
B) less than the economically efficient output level.
C) products at a low opportunity cost.
D) products at a high opportunity cost.

Question 18

An externality is

A) a benefit realised by the purchaser of a good or service.
B) a cost paid for by the producer of a good or service.
C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service.
D) anything that is external or not relevant to the production of a good or service.

Question 19

Which of the following is a source of market failure?

A) unforeseen circumstances which lead to the bankruptcy of many firms
B) a lack of government intervention in a market
C) incomplete property rights or inability to enforce property rights
D) an inequitable income distribution

Question 20

Which of the following activities creates a negative externality?

A) cleaning up the sidewalk on your block
B) graduating from university
C) repainting the house you live in to improve its appearance
D) keeping a junked car parked on your front lawn

Question 21

A market demand curve reflects the

A) private benefits of consuming a product.
B) external benefits of consuming a product.
C) social benefits of consuming a product.
D) the sum of private and social benefits of consuming a product.

Question 22

Which of the following describes how a positive externality affects a competitive market?

A) The externality causes a difference between the private benefit from consumption and the social benefit.
B) The externality causes a difference between the private benefit from production and the social cost of production.
C) The externality causes quantity demanded to exceed quantity supplied.
D) The externality causes a difference between the social cost of production and the social cost of consumption.

Question 23

Refer to Figure 15-3. The deadweight loss due to the externality is represented by the area

A) mso.
B) msn.
C) nso.
D) mtn.

Question 24

Refer to Figure 15-3. The efficient output level is

A) Q_m.
B) Q_n.
C) Q_o.
D) Q_o - Q_m.

Question 25

Refer to Figure 15-2. The marginal benefit of the last unit produced is represented by the price

A) P_a.
B) P_b.
C) P_c.
D) P_f.

Question 26

A market supply curve reflects the

A) external costs of producing a good or service.
B) external benefits of producing a good or service.
C) social costs of producing a good or service.
D) private costs of producing a good or service.

Question 27

Pollution is an example of a

A) public good.
B) positive externality.
C) private cost.
D) negative externality.

Question 28

Which of the following conditions holds in an economically efficient competitive market equilibrium?

A) The deadweight loss is positive but at a minimum.
B) Producer and consumer surplus are exactly equal in size.
C) There are no positive and no negative external effects from consumption and production.
D) The marginal benefit of the last unit produced and consumed is maximised.

Question 29

Which of the following could be evidence of a market failure?

A) Resources in an economy are not fully utilised.
B) The market price of a product is above the average cost of production.
C) There is only a handful of firms competing against each other in an industry.
D) Market prices do not reflect true production costs.

Question 30

A positive externality results when

A) economists are sure that a good or service provides benefits to consumers.
B) someone pays for a good or service even though she is not directly affected by the production or consumption of it.
C) when people who live in one country benefit from the production of a good or service that occurs in another country.
D) people who are not directly involved in producing or paying for a good or service benefit from it.

Question 31

'A competitive market achieves economic efficiency by maximising the sum of consumer surplus and producer surplus.' This statement

A) is true only if there are positive externalities in production in the market.
B) is true only if there are no negative externalities in the market.
C) is true only if there are no positive or negative externalities in the market.
D) is true in theory, but economic efficiency cannot be achieved in a real market.

Question 32

Refer to Figure 15-3. At the competitive market equilibrium, for the last unit produced,

A) the size of the external cost is P_m - P_o.
B) the size of the external benefit is P_m - P_o.
C) the size of the external cost is P_n - P_o.
D) the size of the external benefit is P_n - P_o.

Question 33

Refer to Figure 15-3. The private profit maximising output level is

A) Q_m.
B) Q_n.
C) Q_o.
D) Q_o - Q_m.

Question 34

Refer to Figure 15-2. The size of marginal external costs can be determined by

A) S₂ + S₁ at each output level.
B) S₂ - S₁ at each output level.
C) the supply curve S₂.
D) the supply curve S₁.

Question 35

Which of the following describes how a negative externality affects a competitive market?

A) The externality causes a difference between the private cost of production and the social cost.
B) The externality causes a difference between the private cost of production and the private benefit from consumption.
C) The externality causes consumer surplus to exceed producer surplus.
D) The externality causes a difference between the private cost of production and the equilibrium price.

Question 36

Refer to Figure 15-2. The true marginal cost of the last unit produced is represented by the price

A) P_a.
B) P_b.
C) P_c.
D) P_f.

Question 37

Which of the following would result in a positive externality?

A) A local government establishes a price ceiling on rental apartments.
B) An electric utility burns coal that causes acid rain.
C) Medical research results in a cure for malaria.
D) McDonald's adds new fat-free items to its menu.

Question 38

A free market fails when

A) there is government intervention.
B) there is an external effect in either production, consumption, or both.
C) firms that produce goods which create positive externalities go bankrupt.
D) firms that produce goods which create negative externalities earn high profits.

Question 39

Refer to Figure 15-3. In the absence of any government intervention, the private market

A) underproduces by Q_o - Q_m units.
B) overproduces by Q_o - Q_m units.
C) overproduces by Q_n - Q_m units.
D) underproduces by Q_n - Q_m units.

Question 40

Refer to Figure 15-3. The size of marginal external benefits can be determined by

A) the demand curve D₂.
B) D₂ + D₁ at each output level
C) D₂ - D₁ at each output level.
D) the demand curve D₁.

Question 41

If the social cost of producing a good or service exceeds the private cost,

A) a positive externality exists.
B) the sum of consumer surplus and producer surplus is maximised.
C) the market achieves economic efficiency.
D) a negative externality exists.

Question 42

The cost borne by a producer in the production of a good or service is called

A) private cost.
B) public cost.
C) social cost.
D) internal cost.

Question 43

Refer to Figure 15-5. If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does D₂ represent?

A) the demand curve reflecting external benefits
B) the demand curve reflecting social benefits
C) the demand curve reflecting private benefits
D) the demand curve reflecting the sum of social and external benefits

Question 44

Refer to Figure 15-4. Why is there a deadweight loss?

A) because the marginal social cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit
B) because the marginal private cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit
C) because the marginal social benefit of producing each additional unit in excess of Q₂ exceeds the private cost
D) because the marginal private benefit of producing each additional unit in excess of Q₂ exceeds the social cost

Question 45

Medical research that ends in a cure for a serious disease produces positive externalities. What is the impact of this positive externality on economic efficiency?

A) At equilibrium, less than the economically efficient quantity of medical research is produced.
B) A deadweight loss occurs because at equilibrium, the marginal social cost of medical research is greater than the marginal social benefit.
C) At equilibrium, more than the economically efficient quantity of medical research is produced.
D) A deadweight loss occurs because at equilibrium, the marginal social cost equals the marginal social benefit.

Question 46

Refer to Figure 15-5. If, because of an externality, the economically efficient output is Q₂ and not the current equilibrium output of Q₁, what does D₁ represent?

A) the demand curve reflecting external benefits
B) the demand curve reflecting social benefits
C) the demand curve reflecting private benefits
D) the demand curve reflecting the sum of private and social benefits

Question 47

If the social benefit of consuming a good or a service exceeds the private benefit,

A) a negative externality exists.
B) the market achieves economic efficiency.
C) a positive externality exists.
D) the sum of consumer surplus and producer surplus is maximised.

Question 48

Assume that emissions from electric utilities contribute to pollution in the form of acid rain. Which of the following describes how this affects the market for electricity?

A) The equilibrium in the market is not efficient; the marginal benefit from electricity is greater than the marginal social cost.
B) A deadweight loss occurs; at equilibrium, the additional social cost of production is greater than the additional benefit to consumers.
C) The equilibrium in the market is not efficient; because of the cost of the acid rain, economic efficiency would be greater if more electricity were produced.
D) The equilibrium in the market is not efficient; consumer surplus is equal to producer surplus.

Question 49

Refer to Figure 15-4. What does S₂ represent?

A) the market supply curve that reflects social cost
B) the market supply curve that reflect private cost
C) the market supply curve that reflects external cost
D) the market supply curve that reflects social benefit

Question 50

Refer to Figure 15-5. Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality. The economically efficient output is Q₂. In that case, diagram shows

A) the effect of a subsidy granted to producers of a good.
B) the effect of an excess demand in a market.
C) the effect of a positive externality in the consumption of a good.
D) the effect of a negative externality in the consumption of a good.

Question 51

Refer to Figure 15-4. What is the deadweight loss from producing at the market equilibrium?

A) area C
B) area E
C) area D
D) area F

Question 52

When there is a positive externality,

A) the private benefit received by consumers is greater than the external benefit.
B) the social benefit received by consumers is greater than the private benefit.
C) the private benefit received by consumers is greater than the private cost.
D) the private benefit received by consumers is greater than the social benefit.

Question 53

Refer to Figure 15-4.What is the economically efficient output level?

A) Q₁
B) Q₂ minus Q₁
C) Q₂
D) Q₁ plus Q₂

Question 54

When there is an externality in a market,

A) the externality will move the market to an economically efficient equilibrium.
B) the externality will cause the market price to be less than or greater than the equilibrium price.
C) the government should use price controls to enable the market to reach equilibrium.
D) government intervention may increase economic efficiency.

Question 55

When production generates a negative externality, the true cost of production is the

A) private cost of production.
B) public cost of production.
C) social cost of production.
D) average cost of production.

Question 56

If there are no externalities, a competitive market achieves economic efficiency. If there is a negative externality, economic efficiency will not be achieved because

A) too little of the good will be produced.
B) too much of the good will be produced.
C) a deadweight loss will occur that is equal to the area under the demand curve for the good.
D) economic surplus is maximised.

Question 57

An external cost is created when you

A) graduate from university.
B) buy flowers for your mother on Mother's Day.
C) litter on the side of the road.
D) buy a sandwich for lunch.

Question 58

Refer to Figure 15-4. What does S₁ represent?

A) the market supply curve that reflects social cost
B) the market supply curve that reflects only external cost
C) the market supply curve that reflects only private benefit
D) the market supply curve that reflects private cost

Question 59

When there is a negative externality, the private cost of production ________ the social cost of production.

A) is greater than
B) is equal to
C) eliminates
D) is less than

Question 60

The social cost of cutting trees for firewood in a government forest is

A) the increased likelihood of flooding as more trees are cut.
B) the increased likelihood of flooding as more trees are cut plus the private cost of cutting the trees.
C) opportunity cost to the individual of cutting the wood.
D) the marginal costs of cutting the last tree.

Question 61

Refer to Figure 15-6. What does D₁ represent?

A) the demand curve reflecting social benefit
B) the positive externalities curve
C) the demand curve reflecting private benefit
D) the social welfare curve

Question 62

The private cost of a good or service is the cost borne by the producer.

Question 63

When products that create positive externalities are produced, at the market equilibrium output, the social benefit generated by consuming the product exceeds the private benefit.

Question 64

What is a private cost of production? What is a social cost of production? When is the private cost of production equal to the social cost of production?

Question 65

Explain how mandatory seat belt laws may reduce the negative externalities of risky behaviour.

Question 66

Refer to Figure 15-6. What is the deadweight loss resulting from producing at the market equilibrium?

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

Question 67

An externality is an example of a market failure.

Question 68

Refer to Figure 15-6. What is the economically efficient output level?

A) Q₁
B) Q₁ + Q₂
C) Q₂ - Q₁
D) Q₂

Question 69

An externality refers to economic events outside a market.

Question 70

When there is a positive externality in a free market, too much of the good is produced and consumed.

Question 71

Refer to Figure 15-6. Why is there a deadweight loss?

A) because the marginal private benefit for each additional unit between Q₁ and Q₂ exceeds the marginal cost
B) because the marginal private cost for each additional unit between Q₁ and Q₂ exceeds the marginal private benefit
C) because the marginal social cost for each additional unit between Q₁ and Q₂ exceeds the marginal social benefit
D) because the marginal social benefit for each additional unit between Q₁ and Q₂ exceeds the marginal cost

Question 72

Refer to Figure 15-6. What does D₂ represent?

A) the social welfare curve
B) the demand curve reflecting social benefit
C) the demand curve reflecting private benefit
D) the positive externalities curve

Question 73

What is an externality?

Question 74

When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society.

Question 75

A market failure arises when an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event.

Question 76

An external benefit is created when you pursue a university education.

Question 77

How does a negative externality in production reduce economic efficiency?

Question 78

When there is a negative externality, the competitive output is more than the economically efficient output level.

Question 79

The social cost of a good or service is the cost borne by the producer.

Question 80

Refer to Figure 15-6. What is the market equilibrium output level?

A) Q₁
B) Q₂
C) Q₁ + Q₂
D) Q₂ - Q₁