Deck 17: Externalities and Public Goods

Question 1

Which one of the following statements is false?

A) A nonrival good is a good where consumption by one person does not reduce the quantity that can be consumed by others.
B) An exclusive good is a good to which consumers may be denied access.
C) A good that, once produced is not accessible to all customers, is nonexclusive good
D) A rival good is a good where consumption by one person reduces the quantity that can be consumed by others.

Answer 1

C

Question 2

Which of the following is a real-world example of a positive externality?

A) You are craving a soda for lunch. However, the customer ahead of you in line at the hot dog stand buys the last can.
B) National defense is available even for people who do not pay income taxes.
C) A person seated in a non-smoking section of a restaurant decides to sneak a few puffs of a cigarette.
D) A child receives a vaccination to prevent the spread of measles.

Answer 2

D

Question 3

A nonexclusive good

A) is also non-rival.
B) is also rival.
C) must be free.
D) is one where once the good is produced, no one can be prohibited from consuming the good.

Answer 3

D

Question 4

A rural road is generally considered

A) a public good, but if it gets congested at times, it may not be considered as such because it is no longer true that one person's use of the road does not reduce the ability of others to "consume it"/use it productively.
B) a positive externality.
C) a public good, even when congested.
D) a natural monopoly.

Question 5

Which of the following is a real-world example of a public good?

A) You are craving a Diet Coke® for lunch, so you purchase one from the hot dog stand in front of your classroom building.
B) National defense is available even for people who do not pay income taxes.
C) A person seated in a non-smoking section of a restaurant decides to sneak a few puffs of a cigarette.
D) A child receives a vaccination to prevent the spread of measles.

Question 6

Which of the following is a real-world example of a negative externality?

A) You are craving a soda for lunch. However, the customer ahead of you in line at the hot dog stand buys the last can.
B) National defense is available even for people who do not pay income taxes.
C) A person seated in a non-smoking section of a restaurant decides to sneak a few puffs of a cigarette.
D) A child receives a vaccination to prevent the spread of measles.

Question 7

An example of a good that is nonexclusive but rival is

A) hunting in a public game area.
B) national defense.
C) public radio.
D) a pay-TV channel.

Question 8

When the market for product Y includes a positive externality,

A) marginal social cost exceeds marginal private cost.
B) marginal private cost exceeds marginal social cost.
C) marginal social benefit exceeds marginal private benefit.
D) marginal private benefit exceeds marginal social benefit.

Question 9

An externality arises when

A) an economic good is produced by many firms.
B) the actions of a decision maker affect other decision makers in a way not reflected in the market price.
C) the actions of a decision maker do not affect other decision makers.
D) the market equilibrium is inefficient.

Question 10

Negative externalities

A) create a deadweight loss as do positive externalities.
B) move the economy closer to the social optimum.
C) create a deadweight loss and move the equilibrium away from the social optimum.
D) should be eliminated completely to move to the social optimum.

Question 11

What must be true for the provision of wireless service in an airport to be considered a public good?

A) It must be free and it must include the use of a laptop with no charge also.
B) It must be free and it would still be considered a public good even though additional users may crowd people off the network or make it too slow to utilize effectively.
C) It must be free and it must have enough excess capacity in the network such that additional users do not reduce the ability of other individuals to utilize the network.
D) It must be available to all, but the airport could charge for access to the service.

Question 12

A non-rival good

A) is also nonexclusive.
B) is also exclusive.
C) must be free.
D) is one where the consumption of the good by one person does not reduce the quantity available for consumption by another person.

Question 13

A rival good is one

A) wherein consumption by one person reduces the amount that can be consumed by others.
B) wherein two individuals may fight to gain access to the good.
C) which is made more or less freely available by the supplier.
D) wherein consumption by one person increases the amount that can be consumed by others.

Question 14

An example of a good that is non-rival but exclusive is

A) hunting in a public game area.
B) national defense.
C) public radio.
D) a pay-TV channel.

Question 15

A governmental limit on the amount of pollution that may be emitted is referred to as

A) a public good.
B) an emissions standard.
C) an emissions fee.
D) a positive externality.

Question 16

When the market for product X includes a negative externality,

A) marginal social cost exceeds marginal private cost.
B) marginal private cost exceeds marginal social cost.
C) marginal social benefit exceeds marginal private benefit.
D) marginal private benefit exceeds marginal social benefit.

Question 17

A public good is a good

A) that is produced by a government agency.
B) that, when it is consumed by one decision maker, affects other decision makers in a way not reflected in the market price.
C) that, when it is consumed by one decision maker, does not reduce the quantity that may be consumed by other decision makers and to which all consumers have access.
D) that is free.

Question 18

An example of a positive externality is

A) a rear-end spoiler feature on the back of sports cars that helps to stabilize and improve handling for the vehicle.
B) legislation reducing air pollution.
C) a chemical plant that emits thermal pollution.
D) a chocolate factory whose aroma draws people to an area of the city that has a large quantity of tourist activities and shopping.

Question 19

Which of the following is not a good example of common property?

A) The internet.
B) A hunting ground.
C) A reservoir of oil.
D) A dormitory room.

Question 20

Which of the following is a key feature of a public good?

A) The good is rival in its consumption, but a consumer cannot be excluded from the good.
B) The good is non-rival in its consumption and a consumer cannot be excluded from the good.
C) The good is non-rival in its consumption, but a consumer can be excluded from the good.
D) The good is rival in its consumption and a consumer can be excluded from the good.

Question 21

If the detriment to society from a negative externality is measure as $5 per unit of output of a particular good, the best way of moving closer to the social optimum would be to

A) subsidize consumers who purchase the good by $5 per unit to offset the negative externality that they may endure.
B) limit the production of the good to four days per week.
C) calculate the negative value of the externality and assess a fine on each producer to pay for clean up in proportion to their profits from production of the good.
D) assess a simple tax of $5 per unit of production on suppliers of the good.

Question 22

Suppose that the government could accurately measure the marginal cost of an externality such as water pollution. In order to reduce production from a plant that emits water pollution, the government places an optimal emissions fee on the plant. The final amount of production equates demand with the marginal social cost to society. The deadweight loss associated with this fee is

A) equal to the amount of the tax.
B) equal to the quantity reduction as a result of the tax.
C) measured as .
D) zero.

Question 23

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the equation of the marginal external cost is:

A) MEC = Q.
B) MEC = 2Q.
C) MEC = 2Q + 10.
D) MEC = 10.

Question 24

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the cost of the externality at the market equilibrium (i.e. where the externality is not taken into account in production decisions) is

A) $0.
B) $112.5.
C) $150.
D) $250.

Question 25

The efficient amount of pollution in society

A) is zero.
B) occurs when the detriment to society from every unit of pollution emitted is taken into account appropriately and remedies are created such that the supply curve for each industry is fully reflective of all marginal social costs.
C) is impossible to calculate and therefore it is probably better to set maximum limits for pollution output for each firm in industries that pollute in proportion to their profits.
D) is achieved without the government setting any emissions standards because the market equilibrium will coincide with the social optimum in the absence of intervention.

Question 26

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve for the industry can be expressed as P = 60-Q. If the industry currently does not take into account the negative externality in its supply decisions, the industry is ________________ by _____________ units relative to the social optimum.

A) under-producing; 5
B) over-producing; 5
C) under-producing; 8
D) over-producing; 8

Question 27

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . The sum of the consumer surplus plus producer surplus at the market equilibrium (i.e. the equilibrium where production decisions do not take into account the externality) is:

A) $0.
B) $112.5
C) $150.
D) $225

Question 28

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the deadweight loss from producing at the market equilibrium is

A) $30
B) $37.5.
C) $55.
D) $67.5.

Question 29

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve for the industry can be expressed as P = 60-Q. What is the socially optimal level of output?

A) 20 units.
B) 15 units.
C) 10 units.
D) 6 units.

Question 30

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . The net social benefit at the market equilibrium (i.e. the equilibrium where production decisions do not take into account the externality) is:

A) $0.
B) $112.5
C) $150.
D) $225

Question 31

Suppose that the marginal private benefit of a new vaccine could be measured as $M P B = 10 - Q$ . Suppose that the marginal social benefit could be measured as $M S B = 12 - Q$ . Suppose that the private marginal cost curve could be measured as $M P C = Q$ . If there is no subsidy in this market,

A) society will over-consume this product by 2 units.
B) society will over-consume this product by 1 unit.
C) society will under-consume this product by 2 units.
D) society will under-consume this product by 1 unit.

Question 32

Suppose that an industry emits a chemical that pollutes the ground water. Without considering the effects of the pollution, the industry has a marginal private cost curve of MPC = Q+30. The market demand curve is $P = 60 - Q$ , while the marginal social cost curve is MSC = 2Q + 30. How can the optimal level of emissions fee best be depicted on a graph in this problem?

A) The optimal fee shifts down the marginal private cost of production until it intersects demand at the socially optimal output level.
B) The optimal fee shifts the demand curve out until it intersects the marginal private cost of production at the socially optimal level of production.
C) The optimal fee establishes a maximum level of output at the socially optimal level of production.
D) The optimal fee shifts the marginal private cost of production up until it intersects the demand curve at the socially optimal level of production.

Question 33

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be MSC = 2Q+30 and the marginal private cost of production to be $M P C = Q$ +30. The market demand curve can be expressed as $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the net social benefit of producing at the social optimum (rather than at the private optimum) is

A) $0.
B) $112.5
C) $150.
D) $250

Question 34

Suppose that an industry emits a chemical that pollutes ground water. Without considering the effects of the pollution, the industry has a marginal private cost curve of MPC = Q+30. The market demand curve is $P = 60 - Q$ , while the marginal social cost curve is MSC = 2Q + 30. What level of emissions fee would achieve the socially optimal level of output?

A) $54.
B) $32.
C) $12.
D) $10.

Question 35

Suppose that an industry emits a chemical that pollutes the ground water. Without considering the effects of the pollution, the industry has a marginal private cost curve of MPC = Q+30. The market demand curve is $P = 60 - Q$ , while the marginal social cost curve is MSC = 2Q + 30. What is the socially optimal emissions standard?

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

Question 36

A congestion toll is

A) like an emissions fee.
B) like an emissions standard.
C) like a negative externality.
D) like common property.

Question 37

To move closer to the social optimum when a negative externality exists, the cost to society of the externality should be

A) incorporated/added on to the price so that demand reflects the true social costs.
B) calculated per unit and producers taxed accordingly with a goal of making the supply curve reflective of the marginal social cost of the externality.
C) minimized by forcing producers of the externality to shut down when they produce a negative externality.
D) minimized by subsidizing the producers of the externality.

Question 38

When the government can set emissions standards for polluting industries, which of the following statements is correct?

A) The government should set the emissions standard to zero because pollution is bad for people.
B) The government should set the emissions standard to achieve the socially optimal level of production which, in general, is not equal to zero.
C) The government should employ emissions taxes instead because emissions standards cannot generally achieve the social optimum.
D) The government should not set emissions standards because the market equilibrium will coincide with the social optimum in the absence of intervention.

Question 39

In the diagram below, the external cost savings from producing at the socially optimal quantity rather than at the private equilibrium can be represented as:

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

Question 40

An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The marginal social cost production can be expressed as MSC = 2Q + 30. The consultants calculate the marginal private cost production to be MPC = Q+30. The market demand curve can be expressed as $P = 60 - Q$ . If the consultants have accurately measured the impact of the pollution externality, the $\underline{\text{change}}$ in social surplus from moving to the social optimum (rather than at the private optimum) is

A) $30
B) $37.5.
C) $55.
D) $67.5.

Question 41

Suppose that the marginal private benefit of a new vaccine could be measured as $M P B = 10 - Q$ . Suppose that the marginal social benefit could be measured as $M S B = 12 - Q$ . Suppose that the private marginal cost curve could be measured as $M P C = Q$ . What quantity represents the optimal societal consumption of the vaccine?

A) 4 units.
B) 5 units.
C) 6 units.
D) 10 units.

Question 42

Suppose that Bill, George, and Al constitute the entire market for consumers of national defense. Each man has an identical demand curve for national defense, which can be expressed as $P = 50 - Q$ . Suppose that the marginal cost for national defense can be expressed as $M C = \$ 30$ . What is the optimal quantity of national defense?

A) 150 units.
B) 60 units
C) 40 units.
D) 20 units.

Question 43

The free rider problem occurs

A) when externalities are unaccounted for.
B) for both exclusive and non-exclusive goods.
C) when a governmental body intervenes in the workings of a private market.
D) a consumer consumes a good that others pay for but pays nothing herself.

Question 44

In public goods markets, the efficient provision of the public good is determined by

A) the intersection of the horizontal sum of the demand curves of the consumers in the market with the marginal cost curve of the good.
B) the intersection of the vertical sum of the demand curves of the consumers in the market with the marginal cost curve of the good.
C) The intersection of the demand curve for each individual consumer with the marginal cost curve for the good.
D) the intersection of the total cost of producing the good and the vertical sum of the demand curves of the consumers in the market.

Question 45

The Coase Theorem implies that victims of pollution should be able to pay polluters not to pollute if the victims value a reduction in pollution more than the polluters value the production of the pollution. Which of the following does not explain why this type of payment does not work in "real life"?

A) If there are many victims, the costs to them of organizing may be quite high.
B) If there are many firms in the industry, it may be difficult for the victims to negotiate with all of the firms.
C) The victims may have trouble quantifying the value to them of reducing the pollution.
D) Bargaining costs are likely to be small in this case, so the theorem does not apply.

Question 46

In markets with externalities or public goods,

A) private benefits exceed social benefits.
B) private costs exceed social costs.
C) the private costs and benefits that decision makers face diverge from the social costs and benefits.
D) the private costs and benefits that decision makers face are the same as the social costs and benefits.

Question 47

Suppose a particular national park imposes a voluntary contribution system for entrants of the park. It is suggested that all entrants pay something and there is an estimate given that $5 per user on average will be sufficient to pay for the expenses of maintaining the park. It is most likely that

A) everybody that enters the park will pay a sufficient amount to make sure that expenses are covered.
B) nobody who uses the park will contribute anything and the expenses will not be covered.
C) some users of the park will not pay anything and will act as trespassers.
D) some users of the park will not pay anything and will act as free riders.

Question 48

Suppose that the marginal private benefit of a new vaccine could be measured as $M P B = 10 - Q$ . Suppose that the marginal social benefit could be measured as $M S B = 12 - Q$ . Suppose that the private marginal cost curve could be measured as $M P C = Q$ . What amount of a per-unit subsidy would encourage the optimal societal consumption of the vaccine?

A) $1.
B) $2.
C) $4.
D) $6.

Question 49

A commonality between externalities and public goods is that

A) in each case, markets are not likely to allocate resources efficiently, even though they might otherwise be competitive.
B) in each case, government agency intervention would create inefficiency compared to the market solution.
C) competitive markets are likely to be efficient in each case.
D) the invisible hand (as discussed by Adam Smith) is likely to lead to efficiency in each case.

Question 50

According to the Coase Theorem, in the absence of bargaining costs,

A) property rights are key to determining the final outcome of a dispute.
B) regardless of the initial assignment of property rights, the parties will successfully bargain to the efficient outcome.
C) whichever party has more money will determine the outcome of a dispute.
D) whichever party has the larger initial assignment of property rights will control the outcome of a dispute.

Question 51

Suppose that a smoker and a non-smoker are seated next to each other in a restaurant. This restaurant does not offer a non-smoking section. The smoker is indifferent between 1) smoking and 2) not smoking and consuming a $6 dessert. The non-smoker values being able to eat in a smoke-free environment at $10. According to the Coase Theorem, and assuming no bargaining costs, what will happen?

A) The smoker will continue to smoke because that is his right.
B) The smoker will stop smoking, just to be a nice guy.
C) The non-smoker will offer to pay the smoker between $6 and $10 to stop smoking, but the smoker will refuse because he has the right to smoke.
D) The non-smoker will offer to pay the smoker between $6 and $10 to stop smoking, and the smoker will accept the money and refrain from smoking.

Question 52

________________ states that regardless of how property rights are assigned with an externality, the allocation of resources will be will be efficient when the parties can costlessly bargain with each other.

A) Bargaining power
B) Opportunity cost
C) The Coase Theorem
D) Common Property

Question 53

The reason why we sum the demand curves of individual consumers vertically rather than horizontally in a public goods market is that

A) the willingness to pay in a public good market is smaller than that in a standard market.
B) individual consumers are unlikely to be willing to pay enough to cover the marginal cost of production of a public good.
C) the marginal social benefit of the X^th unit includes all consumers' marginal social benefits because the public good is non-exclusive and non-rival.
D) the concept of quantities is meaningless in the case of public goods.

Question 54

Which of the following is not an example of a free rider problem?

A) Sally listens to public radio but never contributes to her local station.
B) Fred benefits when the National Guard arrives to help create a flood wall around his town, but he is so poor that he pays no taxes.
C) Joe works with two other students on a group project for his intermediate microeconomics class. The grade is based on a group paper, but Joe goes to a movie instead of working on the paper because he knows that the other group members will write it without him.
D) John goes into his local corner shop and walks out with an apple without paying for it.

Question 55

Efficient provision of a public good occurs when

A) the marginal cost and the marginal social benefit curves intersect; the marginal social benefit curve is the sum of all the individual demand curves for the good.
B) the marginal cost and the marginal social benefit curves intersect; the marginal social benefit curve reflects the costs and benefits of producing the good.
C) each individual votes on the amount that is to be spent on public goods.
D) the free market is left to determine the social costs and benefits.