Deck 5: Externalities- Problems and Solutions

Question 1

Which of the following is defined as the private marginal benefit to the consumers plus any costs associated with the consumption of the good that are imposed on others but for which those others are not fully compensated?

A) total social benefit
B) total private benefit
C) social marginal benefit
D) private marginal benefit

Answer 1

social marginal benefit

Question 2

Without government intervention,it is ___________ true that ___________ in equilibrium.

A) always; private marginal benefit equals private marginal cost
B) sometimes; private marginal benefit equals private marginal cost
C) always; private costs equal private benefits
D) always; social marginal benefit equals social marginal cost

Answer 2

always; private marginal benefit equals private marginal cost

Question 3

Suppose that a market is in equilibrium and that there is no government intervention in the market.If the private marginal cost of producing an item is $4 and the social marginal cost of production is $6,what is the private marginal benefit of the item?

A) $2
B) $4
C) $10
D) $6

Answer 3

$4

Question 4

If plumes of exhaust from passing buses are inhaled by bicyclists,a _________ externality is being imposed on __________.

A) positive; bus riders
B) negative; bus riders
C) positive; bicyclists
D) negative; bicyclists

Question 5

The purchase of coal by a utility is best described as a:

A) social cost.
B) private cost.
C) private benefit.
D) negative externality.

Question 6

_____ is a problem that causes the market economy to deliver an outcome that does not maximize efficiency.

A) Internalities
B) Externalities
C) Moral hazard
D) Market failure

Question 7

Suppose your neighbor's dog has been using your lawn in an unwanted way.If the dog's owner agrees to compensate you for his dog's use of your yard,this is an example of:

A) a tax.
B) a subsidy.
C) private bargaining.
D) a government solution to an external cost.

Question 8

In a free market in which there is pollution,the optimal amount of pollution reduction occurs when:

A) social marginal benefits of reduction equal its total social costs.
B) social total benefits of reduction are maximized.
C) social marginal benefits of reduction equal its social marginal costs.
D) social marginal benefits of reduction equal zero.

Question 9

In private equilibrium,a positive production externality will lead to __________; a negative consumption externality will lead to ___________.

A) SMC less than PMC; SMC greater than PMC
B) SMC less than PMC; SMC less than PMC
C) SMB less than PMB; SMC greater than PMC
D) SMC less than PMC; SMB less than PMB

Question 10

Someone else playing music loudly on the radio in a dormitory the night before your economics exam is an example of which of the following?

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

Question 11

Which of the following activities is most likely to impose a negative externality?

A) smoking
B) drinking coffee
C) going to a movie
D) riding a bicycle

Question 12

_____ arise whenever the actions of one party make another party worse or better off,yet the first party neither bears the cost nor receives the benefits of doing so.

A) Internalities
B) Externalities
C) Moral hazard
D) Adverse selection

Question 13

The ____________ is the direct benefit to consumers of consuming an additional unit of a good.

A) private total benefit
B) private marginal benefit
C) social total benefit
D) social marginal benefit

Question 14

Suppose a company that produces chemicals disposes of PCBs (a cancer-causing toxin)in the local lake.The private costs of production are incurred by __________; the social costs of production are incurred by ____________.

A) the company; the company
B) the company; people affected by the PCBs and the company
C) people affected by the PCBs; the company
D) people affected by the PCBs; people affected by the PCBs and the company

Question 15

Suppose your neighbor decides to secure his single-room air conditioner with duct tape and black plastic,creating a view from your house that you consider visually unappealing.The duct tape and black plastic are an example of:

A) a negative production externality.
B) a positive production externality.
C) a positive consumption externality.
D) a negative consumption externality.

Question 16

To maximize social welfare when there are no externalities,marginal private costs must be:

A) equal to marginal social costs.
B) less than marginal private benefits.
C) equal to marginal private benefits
D) greater than marginal private benefits.

Question 17

To maximize social welfare,which of the following must always be TRUE?

A) Marginal social benefit equals marginal social cost.
B) Marginal private benefit equals marginal social cost.
C) Marginal social benefit equals marginal private cost.
D) Marginal private benefit equals marginal private cost.

Question 18

In 1997,representatives from 170 nations met in Kyoto,Japan,to discuss global warming,which is caused by the:

A) burning of fossil fuels such as coal and oil.
B) use of renewable sources of energy.
C) natural conversion of carbon dioxide into oxygen.
D) attempts by various governments to reduce acid rain.

Question 19

Suppose your neighbor enjoys letting the grass in his yard grow wild and free,a practice with which you disagree.This is an example of a:

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

Question 20

To maximize total welfare,one must equate ________ with ________.

A) total social benefit; total social cost
B) marginal social benefit; total social cost
C) total social benefit; marginal social cost
D) marginal social benefit; marginal social cost

Question 21

With respect to solving a problem of a negative externality,the assignment problem refers to the difficulty in determining who:

A) to tax or subsidize.
B) is to blame for an externality.
C) bears the damage caused by an externality.
D) is not affected by an externality.

Question 22

Part I of the Coase Theorem states that when there are well-defined property rights and costless bargaining,then,in a market in which there is an externality,which statement is TRUE?

A) The socially optimal level of consumption can be achieved through the use of taxes and subsidies by the government.
B) The socially optimal level of consumption can be achieved through the use of quantity restrictions by the government.
C) The socially optimal level of consumption can be achieved through negotiations between the affected parties.
D) The socially optimal level of consumption cannot be achieved without mediation by the government.

Question 23

Suppose your roommate smokes in your apartment,imposing a cost on you.The Coase theorem suggests that one solution would involve:

A) the government establishing that your roommate owns the air in your apartment.
B) recognizing the fact that no one can own the air in your apartment.
C) the government establishing that it owns the air in your apartment.
D) a government ban against the production of tobacco products.

Question 24

According to part II of the Coase theorem,to achieve the efficient solution to an externality:

A) the party imposing the externality must be assigned the property rights.
B) property rights must be periodically switched between the parties.
C) the government must impose taxes or subsidies.
D) property rights must be assigned to one party or the other.

Question 25

Suppose you often come home and find that an uninvited dog has left a calling card in your yard.Determining whose dog is responsible is an example of which of the following?

A) holdout problem
B) assignment problem
C) free rider problem
D) externality-internalization problem

Question 26

If utilities pollute the air too much in private equilibrium,corrective taxation of the utilities would:

A) shift the private marginal cost curve downward.
B) shift the private marginal cost curve upward.
C) reduce pollution and shift the private marginal cost curve downward.
D) reduce pollution and shift the private marginal cost curve upward.

Question 27

An implication of part I of the Coase theorem is that in the presence of externalities,government:

A) should primarily establish property rights to prevent market failure.
B) should primarily use taxes to prevent market failure.
C) should primarily use subsidies to prevent market failure.
D) can do nothing to prevent market failure.

Question 28

Your neighbor Gabriella plays loud music that irritates you and the rest of her neighbors.She agrees to turn down the music by 5 decibels for every $25 she receives from her neighbors,and even though you and your neighbors collectively value reductions of 5 decibels at more than $25 per person,no one pays.This is an example of:

A) the holdout problem.
B) the assignment problem.
C) the free rider problem.
D) the problem of internalizing an externality.

Question 29

Which of the following suggests that when an investment has a personal cost but a common benefit,individuals will invest too little?

A) holdout problem
B) assignment problem
C) free rider problem
D) externality-internalization problem

Question 30

Government subsidizes producers of education in part because education is believed to produce a positive externality.The subsidy:

A) shifts the private demand curve to the left.
B) shifts the private demand curve to the right.
C) shifts the private supply curve to the right.
D) shifts the private supply curve to the left.

Question 31

Complete the following sentence so that it ALWAYS holds true: In the presence of a positive production externality,________ is produced relative to the optimal level.

A) too much
B) too little
C) the right amount
D) any of the above

Question 32

If SUVs produce a negative externality,taxing the buyers of SUVs would do which of the following?

A) shift the private demand curve to the left
B) shift the private demand curve to the right
C) shift the private supply curve to the right
D) shift the private supply curve to the left

Question 33

not answer

Question 34

The success of the Coase theorem depends crucially on:

A) one party internalizing the externality.
B) the ability of at least one party to make a credible threat.
C) negotiation between the parties.
D) one party internalizing the externality,and negotiation between the parties.

Question 35

Suppose that factories in Chicago,Illinois,and Gary,Indiana,produce pollution that affects people living in western Michigan.Even though the polluting plants and affected individuals can be identified,the externality cannot be resolved privately because of the large number of both polluters and affected individuals.This is an example of:

A) the assignment problem.
B) the free rider problem.
C) the problem of internalizing an externality.
D) transaction costs and negotiating problems.

Question 36

If you wish to assign property rights so that a previously existing externality is now fully accounted for in a market transaction,you have to solve:

A) the holdout problem.
B) the assignment problem.
C) the free rider problem.
D) the problem of internalizing the externality.

Question 37

For a tax to lead to the optimal amount of pollution,it should be set:

A) greater than social marginal damage.
B) equal to social marginal damage.
C) greater than social marginal cost.
D) equal to social marginal cost.

Question 38

Under an optimal tax system,polluting producers have the incentive to reduce pollution up to the point at which the cost of the reduction is:

A) twice the tax imposed.
B) equal to the tax imposed.
C) equal to the total benefit of the reduction.
D) twice the total benefit of the reduction.

Question 39

Taxing the producer of an externality based on the amount of the externality produced is equivalent to which of the following?

A) subsidizing the consumer
B) subsidizing those outside the market
C) increasing the producer's input costs
D) increasing the benefits of the consumers in the market

Question 40

Which of the following results when shared ownership of property rights gives each owner power over all the others?

A) the holdout problem
B) the assignment problem
C) the free rider problem
D) the problem of internalizing an externality

Question 41

Which type of approach does the Environmental Protection Agency take toward resolving externality problems?

A) public-sector solutions
B) Coasian bargaining
C) military action
D) free market solutions

Question 42

When the social marginal benefit curve of reduction of pollution is locally flat and the costs of reduction are uncertain,which of the following generally makes sense?

A) quantity intervention
B) price (tax)intervention
C) direct government provision of the product in question
D) no action

Question 43

When are quantity restrictions not the same as price restrictions (via taxes)? Describe one situation in which the government would be better off imposing quantity restrictions than setting a tax,and explain why quantity restrictions are better in that case.

Question 44

Suppose that the demand for a chemical is given by Q = 100 - 2P,where quantity is measured in pounds.The market supply is given by MC = 5.Assume that the marginal external damage of this product is $3 per unit.
(a)What is the equilibrium price and quantity of this good without government intervention?
(b)What level of taxation would generate the socially efficient level of the good?

Question 45

People who live on the edge of small lakes sometimes have break walls constructed on their property by the shore.A break wall is typically a vertical column of wood or concrete that prevents high water levels from covering part of the owner's property,reducing the size of the beach,and/or eroding the yard.However,several communities have restricted property owners from building break walls.Can you think of a reason for that? Hint: Think about potential externalities of building a break wall.

Question 46

Suppose government wants to get the amount of pollution right.Which instrument for intervention should the government choose?

A) quantity intervention
B) price (tax)intervention
C) direct government provision of the product in question
D) no action

Question 47

A subsidy on the production of education to change its equilibrium price and quantity would:

A) increase price and quantity.
B) increase price and decrease quantity.
C) decrease price and quantity.
D) decrease price and increase quantity.

Question 48

If the social marginal benefit curve of reducing pollution is locally flat,which statement must be true?

A) The benefit to society pollution reduction is larger than if the curve is steep.
B) The marginal damage curve of pollution is steep.
C) The marginal damage curve of pollution is flat.
D) The marginal damage associated with reducing pollution is very large.

Question 49

Suppose government subsidized the consumption of education by giving education vouchers to parents to spend at the school of their choice.The subsidy would:

A) shift the private demand curve to the left.
B) shift the private demand curve to the right.
C) shift the private supply curve to the right.
D) shift the private supply curve to the left.

Question 50

If government knows the private and social benefit and cost curves associated with reducing pollution,which type of instrument for intervention should the government choose?

A) either price or quantity interventions
B) neither price nor quantity interventions
C) direct government provision of the product in question
D) no action because the free market level of pollution is efficient

Question 51

In a free market with pollution and no government intervention,the market equilibrium quantity of pollution reduction is reached when:

A) pollution reduction is zero.(No pollution is reduced.)
B) the social marginal cost of reduction equals twice the marginal benefit of reduction.
C) the social marginal benefits of reduction equal its social costs.
D) the social marginal benefits of reduction equal its social marginal costs.

Question 52

Suppose your neighbor enjoys riding around his yard on a rather loud dirt bike.What kind of externality is this (positive or negative,consumption or production)? What would the government have to do,if anything,to facilitate a Coasian solution to this externality? Would the result be socially optimal? Explain.

Question 53

A government payment to an individual or firm that lowers the cost of consumption or production,respectively,is referred to as which of the following?

A) Coasian compensation
B) subsidy
C) tax
D) free rider problem

Question 54

When firms in a polluting industry have different costs for the technology to reduce pollution,which of the following is efficient?

A) mandating equivalent reductions in pollution from all firms
B) mandating that each firm reduce pollution up to the point at which the marginal cost of reducing pollution is equal to the total social benefit of the reductions for each firm
C) mandating that each firm reduce pollution up to the point at which the marginal cost of reducing pollution for each firm is equal to the marginal social benefit of the reductions
D) mandating that each firm reduce pollution up to the point at which the marginal benefit of doing so is zero

Question 55

Suppose your town wishes to build a dam to protect itself from the risk of flooding.Despite the fact that each family in the town is willing and able to pay up to $200 to have the dam built and it will cost only $150 per family,a voluntary contribution campaign is unable to raise enough funds to build the dam.Why? What type of problem is this,and what solution would you recommend?