Deck 20: Public Goods and Externalities

Question 1

In case of a good that is nonrival in consumption,the quantity of the good produced:

A)increases with the increase in consumption.
B)decreases with the increase in consumption
C)is not affected by the change in consumption.
D)is not affected by changes in the cost of production of the good.

Answer 1

is not affected by the change in consumption.

Question 2

The severity of the free rider problem that arises in case of a public good:

A)is lower if the good is provided by the government.
B)varies directly with the cost of producing it.
C)is overstated in expensive public projects.
D)varies directly with the number of people who consume it.

Answer 2

varies directly with the number of people who consume it.

Question 3

A congested,toll road is characterized by:

A)nonexclusion and nonrivalry in consumption.
B)nonexclusion and rivalry in consumption
C)exclusion and nonrivalry in consumption.
D)exclusion and rivalry in consumption.

Answer 3

exclusion and rivalry in consumption.

Question 4

The free rider problem associated with the provision of a public good becomes unsustainable with a(n):

A)increase in the number of beneficiaries.
B)decrease in the accessibility of the good.
C)increase in the elasticity of supply of the good.
D)decrease in the budget deficit.

Question 5

A beautiful sunset can be categorized as a good that is characterized by:

A)nonrivalry in consumption and nonexclusion.
B)rivalry in consumption and nonexclusion.
C)nonrivalry in consumption and exclusion.
D)rivalry in consumption and exclusion.

Question 6

Which of the following problems can be associated with goods characterized by nonexclusion?

A)Externality
B)Decreasing returns to scale
C)Adverse selection problem
D)Free riding

Question 7

Identify the correct statement.

A)The marginal cost of producing a public good is zero.
B)Any good that is provided by the government can be considered as a public good.
C)A public good is often under consumed as supply usually exceeds demand.
D)The consumers of a public good tend to underestimate the value of the good.

Question 8

An uncongested,non-toll road is characterized by:

A)nonexclusion and nonrivalry in consumption.
B)nonexclusion and rivalry in consumption.
C)exclusion and nonrivalry in consumption.
D)exclusion and rivalry in consumption.

Question 9

Which of the following is the best example of a public good?

A)A museum funded by government taxes
B)All-you-can-eat buffet
C)Satellite television
D)A lighthouse

Question 10

A congested,non-toll road is characterized by:

A)nonexclusion and nonrivalry in consumption.
B)nonexclusion and rivalry in consumption.
C)exclusion and nonrivalry in consumption.
D)exclusion and rivalry in consumption.

Question 11

For which of the following goods will the free rider problem arise?

A)A private golf course
B)Cable television
C)Movie theatres
D)A toll free highway

Question 12

An uncongested,toll road is characterized by:

A)nonexclusion and nonrivalry in consumption.
B)nonexclusion but rivalry in consumption.
C)exclusion and nonrivalry in consumption.
D)exclusion but rivalry in consumption.

Question 13

Which of the following is an example of a good characterized by exclusion and nonrivalry in consumption?

A)National defense
B)A toll free interstate highway
C)Cable television
D)A sedan

Question 14

Which of the following characteristics can be associated with a museum charging entry fees to all the visitors above 12 years of age?

A)Nonexclusion
B)Positive externality
C)Exclusion
D)Negative externality

Question 15

A Web site which allows users to share music at no cost is an example of a(n):

A)good characterized by rivalry and exclusion.
B)inferior good.
C)luxury good.
D)good that is nonrival in consumption.

Question 16

Which of the following statements is true?

A)A good that is nonrival in consumption must necessarily be characterized by nonexclusion.
B)A good characterized by nonexclusion is always a natural resource and cannot be produced.
C)A good that is nonrival in consumption will neither be produced by private firms nor will it be provided by the government.
D)A good that is nonrival in consumption and has high exclusion costs,will not be produced by private firms.

Question 17

The good for which the characteristics of exclusion and rivalry in consumption do not apply is referred to as a:

A)public good.
B)common resource.
C)inferior good.
D)normal good.

Question 18

A defining attribute of a public good is that:

A)to consume this good,consumers must reduce consumption of other goods.
B)consumers can easily enforce ownership rights over such goods.
C)it is not possible to exclude people from the enjoyment of this good.
D)the consumption by one person influences the consumption of others.

Question 19

A swimming club charges membership fees to all the members.This implies that a pool at this club would be characterized by:

A)nonrivalry in consumption and nonexclusion.
B)rivalry in consumption and nonexclusion.
C)nonrivalry in consumption and exclusion.
D)rivalry in consumption and exclusion.

Question 20

Which of the following categories of goods is nonrival in consumption and satisfies the nonexclusion condition?

A)Inferior goods
B)Private goods
C)Common resources
D)Public goods

Question 21

A socially efficient quantity of a good is said to be produced,if at that output level:

A)the marginal external cost equals the marginal social benefit.
B)the private marginal cost equals the marginal social benefit.
C)the marginal private costs are equal to external costs.
D)the difference between the private marginal cost and social marginal benefit is maximized.

Question 22

The efficient output of a public good occurs at the point where the:

A)curve formed by the horizontal summation of marginal benefit curves of users intersects the marginal cost curve.
B)curve formed by the horizontal summation of the individual demand curves intersects the marginal cost curve.
C)curve formed by the vertical summation of all users' demand curves intersects the marginal cost curve.
D)curve formed by the vertical summation of the social cost curves intersects the social benefit curve.

Question 23

Which of the following aspects of the free-rider problem is overcome by government financing of a public good?

A)The problem of overproduction
B)The external cost associated with production
C)The tendency of people to withhold payment
D)The high search cost associated with the consumption of the good

Question 24

The combined or market demand curve for a public good is:

A)the locus of the quantity demanded of the public good by a user at different price levels.
B)formed by the horizontal summation of all the individual demand curves.
C)formed by the vertical summation of all the individual demand curves.
D)the positively sloping portion of the community indifference curve.

Question 25

Competitive markets are unlikely to produce the efficient quantity of a public good because:

A)public goods are nonrival in consumption but exclusion costs are low.
B)public goods are nonrival and are characterized by nonexclusion.
C)the marginal benefit derived from a public good is less than the marginal cost of producing the good.
D)the marginal benefit of a public good increase with an increase in consumption of the good.

Question 26

Which of the following is true of patents?

A)Patents encourage unlimited investment in research and development.
B)Patents have no associated costs.
C)Patents grant temporary monopoly power.
D)Patents are not binding unless the product is a luxury good.

Question 27

The free-rider problem occurs because:
a.it is easy to exclude others from consuming the good.
b.consumption is rival in nature,and the consumption of a product by one individual diminishes that available for others.
c.exclusion is costly or impossible,so that a consumer or producer can use the good without having to pay for it.
d.the consumption of a good imposes costs on others who not directly involved in the transaction.

Question 28

Free rider behavior is:

A)always irrational since the individual who free rides causes a misallocation of resources.
B)a rational behavior in the case of public goods.
C)more likely to cause a problem if it is provided by private firms.
D)less likely to cause a problem if it is consumed by a large number of people.

Question 29

Government financing of a public good with taxes:

A)leads to a more efficient allocation of resources compared to private markets.
B)reveals accurately the society's demand for the public good.
C)leads to deficit in the current account of the trade balance.
D)inevitably results in a budget surplus.

Question 30

The government can overcome the free rider problem in the provision of a public good by:

A)encouraging private firms to produce it.
B)producing the good at a zero marginal cost.
C)providing the goods only to those who pay taxes.
D)subsidizing the production of public goods.

Question 31

Which of the following statements is true of patents?

A)Patents should be granted for such inventions which cannot be immediately imitated.
B)The cost of granting patents to private firms is more than the benefit,if the goods produced by them are characterized by nonexclusion.
C)In the absence of patents the amount of new knowledge produced will not be socially optimal.
D)A patent grants permanent monopoly power to an inventor.

Question 32

Which of the following is true with respect to the rationing problem in case of a public good?

A)The rationing problem associated with a public good is greater than a private good.
B)The rationing problem does not exist in case of a public good.
C)The rationing problem in case of a public good can be solved through taxation.
D)The rationing problem increases with an increase in the number of people consuming the good.

Question 33

A _____ gives the inventor the right to make a new product or use a new process typically for 17 years.

A)service mark
B)brand name
C)patent
D)trade mark

Question 34

The economic efficiency argument for patents is to:

A)ensure the profitability of firms with patent protection.
B)enable people and firms to internalize the external benefits of their inventions.
C)raise sufficient revenue for the firms so that they can at least break even.
D)ensure that the benefits of discoveries and inventions are entirely transferred to society at-large.

Question 35

Suppose good A is a public good.The marginal cost of providing 5 units of this good is $300.The marginal benefit derived from the consumption of 5 units by 3 individuals X,Y,and Z are $75,$125,and $100 respectively.Assuming that X,Y,and Z are the only consumers of good A,which of the following will hold true?

A)Good A will be overproduced in the economy.
B)Good A will be underproduced in the economy.
C)Producing 5 units of A is efficient.
D)More than 5 units of good A must be produced to make the outcome efficient.

Question 36

Which of the following helps to achieve efficiency in production?

A)Altruistic production and consumption behavior
B)Sufficient information to measure total social costs and benefits
C)Additional capital per worker
D)A rigid monetary and fiscal policy

Question 37

Patents generally encourage firms to invest in research and development when:

A)the marginal cost of the invention is greater than the marginal benefit.
B)the invention has nonrival benefits but exclusion is not possible.
C)the private cost of the invention is less than the social benefit.
D)the private cost of invention is equal to the social cost.

Question 38

Suppose that an economy has four people,A,B,C,and D,whose reported marginal benefits from a public good are $30,$40,$50,and $60,respectively.If the marginal cost of producing the public good is $200,then the quantity of the public good should be:

A)increased even if none of the individuals can be excluded.
B)increased only if individual A can be excluded.
C)decreased if none of the individuals can be excluded.
D)decreased unless individual A or B can be excluded.

Question 39

The efficient output of a public good is determined at the point where:

A)the average revenue curve intersects the marginal cost curve.
B)the total benefit curve is at its maximum.
C)the social marginal benefit curve intersects the marginal cost curve.
D)the social total cost curve intersects the social benefit curve.

Question 40

Suppose that an economy has four people,A,B,C,and D,whose reported marginal benefits from a public good are $30,$40,$50,and $60,respectively.If the marginal cost of the public good is $150,then the quantity of the public good produced should be:

A)increased even if none of the individuals are excluded.
B)increased only if individual A can be excluded.
C)decreased even if none of the individuals are excluded.
D)decreased unless individual A or B can be excluded.

Question 41

When the entire costs and benefits of a transaction are borne by the participants of that transaction:

A)the market outcome will be inefficient.
B)then private costs and social costs are identical.
C)an external cost is imposed on the society.
D)an external benefit is generated in the society.

Question 42

Suppose a competitive industry generates some sort of pollution while producing its output.In order to internalize the externality,the government may:

A)impose a tax equal to the marginal external cost of pollution.
B)offer a subsidy equal to the marginal external benefit derived from the consumption of the good.
C)impose a quota that reduces output to the point where private marginal costs of production equal marginal revenue.
D)impose a price floor on the good produced by the industry.

Question 43

When a producer does not internalize the negative externality associated with the production of a good,then:

A)the socially optimal quantity of output must be larger than the market output.
B)the socially optimal quantity of output must be less than the market output.
C)the socially optimal quantity of output must be equal to the market output.
D)the socially optimal quantity of output can be either larger or smaller than the market output.

Question 44

The cost imposed by an economic activity on others,who are not directly involved in the transaction,is referred to as:

A)a sunk cost.
B)an implicit cost.
C)an external cost.
D)resource overutilization.

Question 45

When a positive externality generated from the production of a good has not been internalized,then:

A)the socially optimal quantity of output must be larger than the market level of output.
B)the socially optimal quantity of output must be less than the market level of output.
C)the socially optimal quantity of output must be equal to the market level of output.
D)the socially optimal quantity of output can be either larger or smaller than the market level of output.

Question 46

When externalities occur,economic agents:

A)disregard the external effects of their actions,but the market outcome is efficient.
B)disregard the external effects of their actions,and the market outcome is inefficient.
C)consider the external effects of their actions,and the market outcome is efficient.
D)consider the external effects of their actions,but the market outcome is inefficient.

Question 47

If there is an external cost associated with the production or consumption of a good in a competitive industry,then:

A)the output of the good produced will be too small compared to its demand in the market.
B)in equilibrium,the social marginal cost of production will be greater than the private marginal benefit to the consumers.
C)private benefits derived from the consumption of the good will exceed the private cost of producing the good.
D)the efficient level of output is given by the point where the private marginal cost curve intersects the private marginal benefit curve.

Question 48

A competitive market will generally _____ a good that involves an external cost.

A)underproduce
B)overproduce
C)produce the optimal amount of
D)produce no units of

Question 49

When an economic activity generates a benefit for those who are not directly involved in it a(n)_____ is said to exist.

A)competitive advantage
B)marginal benefit
C)external benefit
D)tragedy of commons problem.

Question 50

When do externalities arise?

A)When the explicit costs of producing a good or service are not borne by the producer
B)When an economic activity imposes a burden on them who are not directly involved in it
C)When the government produces such goods and services which are consumed by only a particular class of people
D)When goods of mass consumption are not produced as they do not yield profit for the producers

Question 51

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
According to Figure 20-1,the efficient output is ______ than the equilibrium output by _____ units.

A)more;400
B)less;400
C)more;100
D)less;200

Question 52

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
Refer to Figure 20-1.When the efficient output is being produced,the price of the good must be:

A)$90.
B)$108.
C)$100.
D)$40.

Question 53

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

A)Tony plants roses in the large flowerbed in front of his condominium.
B)Terry buys a cheeseburger from McDonalds.
C)Pat installs a new CD player in his sedan.
D)Sam shovels the snow from the porch of his house.

Question 54

The social cost of producing a commodity is equal to the:

A)the sum of fixed and variable costs.
B)the difference between the total cost and opportunity cost.
C)the sum of private and external costs.
D)the difference between the private and external cost.

Question 55

Which of the following is true of externalities?

A)Positive externalities arise when an economic activity imposes costs on others who are not directly involved in the activity.
B)Negative externalities can be internalized by offering subsidies to the agents who generate such externalities.
C)Like public goods,externalities always result in a free rider problem.
D)Externalities may arise from either production or consumption of a good or service.

Question 56

What would happen if the government tries to internalize an externality,generated from the production of a commodity,through taxation?

A)The commodity will be overproduced
B)The commodity will definitely be underproduced
C)The market level of output will coincide with the efficient level
D)The price of the commodity will decline

Question 57

Which of the following is a point of similarity between public goods and the goods that generate an external benefit?

A)Both are overproduced
B)A free rider problem arises in case of both the goods
C)Both result in inefficient allocation of resources
D)Both can be produced at zero marginal cost

Question 58

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
From Figure 20-1,we can infer that the efficient output is:

A)900 units.
B)500 units.
C)400 units.
D)600 units.

Question 59

Which of the following activities entails an external cost?

A)Bob chooses engineering as a major because engineers earn more than other professionals.
B)Sarah gets in her car and drives to the beach.
C)Tom paints the walls of his room.
D)Victoria purchases tomatoes from the local grocery store.

Question 60

A firm produces a product valued by many loyal customers.In the process of producing the product,the firm produces a by-product that benefits the growth of fish and other aquatic life in the near-by stream.The impact of the firm's production on aquatic life is an example of:

A)a moral hazard.
B)an external benefit.
C)an opportunity cost.
D)a free rider advantage.

Question 61

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
Refer to Figure 20-1.If the government levies a tax of $28 per unit of output,then:

A)the marginal social benefit will exceed the marginal social cost and the good will be underproduced.
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced.
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced.
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

Question 62

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
In Figure 20-2,the efficient output is:

A)700 units.
B)400 units.
C)300 units.
D)0 units.

Question 63

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
Refer to Figure 20-1.A comparison between the efficient outcome and the market equilibrium reveals that:

A)the price level when the outcome is efficient is higher than the price at the market equilibrium by $30.
B)the price level when the outcome is efficient is lower than the price at the market equilibrium by $10.
C)the price level when the outcome is efficient is lower than the price at the market equilibrium by $40.
D)the price level when the outcome is efficient is higher than the price at the market equilibrium by $20.

Question 64

When there are external costs to production,output produced in a competitive market:

A)is less than the efficient level.
B)is more than the efficient level.
C)increases with an imposition of a tax on the commodity.
D)eventually falls to zero.

Question 65

Which of the following will hold true when property rights are not well defined or are not appropriately assigned?

A)Goods that generate external costs will be overproduced.
B)Goods that generate external costs will be underproduced.
C)Goods that generate external benefits will be overproduced.
D)Goods that generate external benefits will be produced only by the government.

Question 66

The marginal social cost and marginal private cost curves of an economic activity coincide:

A)when there are no negative externalities.
B)if the marginal social cost is a ray from the origin.
C)when marginal external benefits are small,but positive.
D)at very high output levels.

Question 67

Reducing automobile pollution beyond a certain point is not efficient when:

A)the marginal benefit from reduced pollution is less than the marginal cost of reducing the pollution.
B)the marginal cost of reducing pollution is less than the marginal benefit from reduced pollution.
C)the marginal private cost of producing automobiles is less than the marginal social cost.
D)the marginal external cost of pollution is zero.

Question 68

A tax used to internalize an external cost is unlike most other taxes because it:

A)creates a deadweight loss.
B)moves the output level away from the socially optimal level.
C)drives the output level toward the socially optimal level.
D)distorts incentives.

Question 69

If the production of a certain commodity generates external benefits for those who do not participate directly in the production process,then:

A)too large a quantity of the good will be produced.
B)at equilibrium,the marginal social benefit is less than the cost of producing an extra unit.
C)the government can subsidize consumption of the good and improve efficiency.
D)a government intervention in this market will cause the marginal social benefit to exceed the marginal social cost.

Question 70

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
In Figure 20-1,the marginal external cost at the equilibrium output level is:

A)$0.
B)$40.
C)$10.
D)$28.

Question 71

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
From Figure 20-2,we can conclude that to help the market attain the efficient level of output,the government should:

A)provide a subsidy of $8 per unit to the producer.
B)impose a tax of $4 per unit of production.
C)provide a subsidy of $3 per unit to the producer.
D)impose a tax of $3 per unit of production.

Question 72

All of the following statements are true in the context of the Coase theorem,except:

A)private bargaining will not always produce an efficient outcome.
B)as long as the property rights are clearly defined and enforced,bargaining between the parties can ensure an efficient outcome.
C)the initial assignment of property rights has distributional implications but will not affect the attainment of an efficient outcome,as long as there is a small number of parties involved.
D)government intervention is necessary to achieve an efficient outcome in the presence of externalities.

Question 73

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
In Figure 20-2,if the efficient output is being produced,the market price of the commodity must be:

A)$12.
B)$17.
C)$20.
D)$24.

Question 74

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
In Figure 20-2,the efficient output is _____ than the market equilibrium output by _____ units.

A)more;300
B)less;300
C)more;100
D)less;100

Question 75

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
In Figure 20-2,if the current level of output is 700 units,then the marginal social benefit is:

A)more than the marginal social cost and the output is more than the socially optimum level.
B)more than the marginal social cost and the output is less than the socially optimum level.
C)less than the marginal social cost and the output is more than the socially optimum level.
D)equal to the marginal social cost and the output is equal to the socially optimum level.

Question 76

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
In Figure 20-1,if the government levies a tax of $8 per unit of output,then:

A)the marginal social benefit will exceed the marginal social cost and the good will be underproduced.
B)marginal social benefit will not exceed the marginal social cost and the good will not be overproduced.
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced.
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

Question 77

Externalities mainly arise because:

A)consumers have more market power than sellers.
B)producers have more market power than consumers.
C)of inadequate provision of public goods.
D)of inappropriate assignment of property rights.

Question 78

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
Refer to Figure 20-2.If the government provides a subsidy of $8 per unit of output,then the:

A)marginal social benefit will exceed the marginal social cost and the good will be underproduced.
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced.
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced.
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.

Question 79

Use the following figure to answer the question : Figure 20-2 : shows the competitive supply curve of a commodity is given by S₁,the private marginal benefit curve is D₁,the marginal social benefit curve is D₂,and the MB_E curve reflects the marginal external benefits.
In Figure 20-2,the price level when the efficient output is being produced is _____ than the price level when the market equilibrium output is being produced by _____.

A)less;$8
B)more;$4
C)less;$3
D)more;$3

Question 80

Use the following figure to answer the question : Figure 20-1 : D₁ and S₁ are the private demand and supply curves,of a commodity produced by a competitive firm.S₂ reflects the social marginal cost of production,while S₀ represents the external marginal cost.
Refer to Figure 20-1.Which of the following policies can be adopted by the government to increase production from the equilibrium level to the efficient level?

A)Provide a subsidy of $30 per unit
B)Impose a tax of $100 per unit
C)Provide a subsidy of $100 per unit
D)Impose a tax of $20 per unit