Deck 16: Externalities, Public Goods, and Common Resources

Question 1

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. ________, 60 bags of fertilizer will be produced.

A) With a price ceiling
B) With government intervention
C) Absent government intervention
D) To avoid shutting down

Answer 1

Absent government intervention

Question 2

Vaccinations convey ________ to third parties.

A) positive externalities
B) negative externalities
C) economies of scale
D) public goods

Answer 2

positive externalities

Question 3

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. The ________ imposed as a result of producing the efficient level of fertilizer is $250.

A) marginal social cost
B) total damage
C) marginal private cost
D) tax

Answer 3

total damage

Question 4

A well-maintained house and yard is an example of

A) a positive externality.
B) a negative externality.
C) a public good.
D) logrolling.

Question 5

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. What is the total damage imposed as a result of producing the efficient level of fertilizer?

A) $0
B) $250
C) $300
D) $500

Question 6

Assuming there are no externalities, if a firm is producing at an output level where the benefits to consumers are less than the cost to the suppliers to produce it, then price

A) equals marginal cost.
B) is greater than marginal cost.
C) is less than marginal cost.
D) is less than marginal revenue.

Question 7

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. To force this firm to produce the ________ level of output, the government should ________ of $5.00 per bag of fertilizer.

A) efficient; impose a tax
B) market; issue a subsidy
C) efficient; issue a subsidy
D) market; impose a tax

Question 8

The many types of pollution do not include ________ pollution.

A) air
B) price
C) water
D) sound

Question 9

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. The efficient amount of fertilizer is

A) zero because any level of production involves an external cost.
B) 50 bags.
C) 60 bags.
D) indeterminate from this information.

Question 10

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. The ________ amount of fertilizer is 50 bags.

A) efficient
B) unregulated
C) break-even
D) equitable

Question 11

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. Absent government intervention, how much fertilizer will be produced?

A) Zero because any level of production involves an external cost.
B) 50 bags
C) 60 bags
D) indeterminate from this information

Question 12

Air pollution generated by a steel mill is an example of

A) a positive production externality.
B) a negative production externality.
C) a public good.
D) the free-rider problem.

Question 13

Assuming there are no externalities, if a firm is producing at an output level where the benefits to consumers exceed the cost to the suppliers to produce it, then price

A) equals marginal cost.
B) is greater than marginal cost.
C) is less than marginal cost.
D) is less than marginal revenue.

Question 14

Second hand cigarette smoke is an example of a(n)

A) economy of scale.
B) externality.
C) public good.
D) government failure.

Question 15

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. What is the total damage imposed as a result of producing the market (unregulated) level of fertilizer?

A) $250
B) $300
C) $500
D) $600

Question 16

An externality is

A) a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction.
B) the total cost to society of producing an additional unit of a good or service.
C) the amount a consumer pays to consume an additional amount of a particular good.
D) a problem intrinsic to public goods: The good or service is so costly that its provision generally does not depend on whether or not any single person pays.

Question 17

The field of environmental economics is concerned with

A) externalities.
B) public goods.
C) government inefficiency.
D) economies of scale.

Question 18

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. The ________ imposed as a result of producing the market (unregulated) level of fertilizer is $300.

A) marginal social cost
B) total damage
C) marginal private cost
D) tax

Question 19

Assuming no externalities exist, if a good's price is less than its marginal cost, then the benefits consumers derive are

A) greater than the cost of resources needed to produce it and less should be produced.
B) greater than the cost of resources needed to produce it and more should be produced.
C) less than the cost of resources needed to produce it and less should be produced.
D) less than the cost of resources needed to produce it and more should be produced.

Question 20

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1
Refer to Figure 16.1. To force this firm to produce the efficient level of output, the government should impose a tax of

A) $5.00 per bag of fertilizer.
B) $10.00 per bag of fertilizer.
C) $15.00 per bag of fertilizer.
D) an amount that is indeterminate from this information.

Question 21

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3
Refer to Figure 16.3. If this firm is maximizing profits and is not required to take into account damages, it will produce

A) 0 units of output.
B) 6 units of output.
C) 15 units of output.
D) 20 units of output.

Question 22

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The ________ imposed as a result of producing the efficient level of cars is $250.

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

Question 23

The total cost to society of producing an additional unit of a good or service is the marginal

A) external cost.
B) damage cost.
C) social cost.
D) private cost.

Question 24

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The ________ amount of cars is 25.

A) efficient
B) unregulated
C) break-even
D) subsidized

Question 25

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The ________ imposed as a result of producing cars is $10.00 per car.

A) marginal social cost
B) marginal damage cost
C) total cost
D) marginal private cost

Question 26

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. What is the total damage imposed as a result of producing the market (unregulated) level of cars?

A) $250
B) $350
C) $500
D) $700

Question 27

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The unregulated (market) amount of cars is

A) 25.
B) 35.
C) zero because any production results in an external cost.
D) indeterminate from the information given.

Question 28

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3
Refer to Figure 16.3. The efficient level of output of this product is

A) 0.
B) 15.
C) 20.
D) indeterminate from this information.

Question 29

If there are external costs of production and perfectly competitive firms do not account for these costs, at the equilibrium level of output

A) P = MC = MSC.
B) P = MC and P < MSC.
C) P = MC and P > MSC.
D) P > MC and P = MSC.

Question 30

If there are external costs in production and firms do not have to account for these costs, then firms will produce

A) at the efficient level.
B) an output level that is below the efficient level.
C) an output level that is above the efficient level.
D) an output level that is either above or below the efficient level.

Question 31

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. What is the total damage imposed as a result of producing the efficient level of cars?

A) $0
B) $250
C) $350
D) $500

Question 32

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The efficient amount of cars is

A) 25.
B) 35.
C) zero because any production results in an external cost.
D) indeterminate from the information given.

Question 33

If there are external costs of production not accounted for, then marginal

A) cost equals marginal social cost.
B) cost is less than marginal social cost.
C) cost is greater than marginal social cost.
D) social cost is zero.

Question 34

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. To force this firm to produce the efficient level of output, the government should impose a tax of

A) $5.00 per car.
B) $10.00 per car.
C) $15.00 per car.
D) an amount that is indeterminate from this information.

Question 35

If a profit-maximizing perfectly competitive firm does not have to compensate society for a negative externality, the firm will choose to produce where

A) price equals marginal cost.
B) price equals marginal social cost.
C) marginal cost equals marginal social cost.
D) marginal revenue equals marginal social cost.

Question 36

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The marginal damage cost imposed as a result of producing cars is

A) $5.00 per car.
B) $10.00 per car.
C) $15.00 per car.
D) indeterminate from this information.

Question 37

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The ________ amount of cars is 35.

A) efficient
B) unregulated
C) subsidized
D) break-even

Question 38

It is assumed that the marginal benefit of consumption

A) remains constant as more units of the good are consumed.
B) increases as more units of the good are consumed.
C) decreases as more units of the good are consumed.
D) could either increase or decrease as more units of the good are consumed.

Question 39

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. To force this firm to produce the ________ level of output, the government should ________ of $10.00 per car.

A) market; impose a tax
B) efficient; impose a tax
C) market; issue a subsidy
D) efficient; issue a subsidy

Question 40

Refer to the information provided in Figure 16.2 below to answer the question(s) that follow. Figure 16.2
Refer to Figure 16.2. The ________ imposed as a result of producing the market (unregulated) level of cars is $350.

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

Question 41

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3
Refer to Figure 16.3. At 15 units of output there are external ________ per unit.

A) costs of $0
B) benefits of $2
C) costs of $6
D) benefits of $8

Question 42

If a subsidy is granted to perfectly competitive firms that provide external benefits to society, the firm's marginal cost curve will shift ________ and the industry supply curve will shift to the ________.

A) down; left
B) down; right
C) up; right
D) up; left

Question 43

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3
Refer to Figure 16.3. If the firm maximizes profits and the government ________, it will produce 20 units of output.

A) establishes a price floor of $6
B) establishes a price ceiling of $8
C) requires it to take damages into account
D) does not require it to take damages into account

Question 44

Education generates external benefits. When these external benefits are not considered, the market will produce

A) an efficient level of education.
B) more than the efficient level of education.
C) less than the efficient level of education.
D) zero units of education.

Question 45

Refer to Scenario 16.1 below to answer the question(s) that follow.
SCENARIO 16.1: The marginal benefit for a particular food is described by MB = 30 - q, where q refers to the quantity of the food. The marginal cost of producing the food is described by MC = 2q. There is a negative externality associated with food production and the marginal social cost of food production is MSC = 4q.
Refer to Scenario 16.1. The efficient output level is ________ and the efficient price is ________.

A) 10 units of food; $20
B) 6 units of food; $24
C) 0 units of food; $0
D) 4.29 units of food; $25.71

Question 46

You spend $300 every month to keep your lawn and garden maintained. Your neighbor has told you that she derives $50 a month in enjoyment from being able to look at your beautiful yard. Which of the following is true?

A) You are spending too much on your yard, because your neighbor derives only $50 worth of benefits.
B) You should refuse to spend anything on your yard unless your neighbor pays you $50 a month.
C) If you took into consideration the benefits your neighbor derived, the efficient level of lawn maintenance would be greater than $300 a month.
D) If you took into consideration the benefits your neighbor derived, the efficient level of lawn maintenance would be less than $300 a month.

Question 47

Taxes on a producing firm's spillovers

A) are designed to make it easier for economists to measure spillovers.
B) will lead to a zero level of output.
C) are simply meant to force decision makers to consider the full costs of their actions.
D) are designed primarily as a way to raise money so that the government can compensate the victims of the externality.

Question 48

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3
Refer to Figure 16.3. At 20 units of output there are external

A) costs of $2 per unit.
B) benefits of $2 per unit.
C) costs of $5 per unit.
D) benefits of $5 per unit.

Question 49

If the government taxes a steel company by an amount equal to the damages of each marginal ton of steel, then the steel company's marginal cost curve is the same as the marginal

A) damage cost curve.
B) social cost curve.
C) private cost curve.
D) benefit cost curve.

Question 50

When the government taxes a firm that generates external costs, the firm will produce

A) more units of output than before the tax was imposed in order to continue maximizing profits.
B) the same number of units of output as before the tax was imposed to continue maximizing profits.
C) fewer units of output than before the tax was imposed in order to continue maximizing profits.
D) either more or fewer units of output than before the tax was imposed depending upon what happens to the profit-maximizing level of output.

Question 51

Refer to the information provided in Figure 16.3 below to answer the question(s) that follow. Figure 16.3
Refer to Figure 16.3. The ________ level of output of this product is 15.

A) unregulated
B) efficient
C) break-even
D) market

Question 52

Refer to Scenario 16.1 below to answer the question(s) that follow.
SCENARIO 16.1: The marginal benefit for a particular food is described by MB = 30 - q, where q refers to the quantity of the food. The marginal cost of producing the food is described by MC = 2q. There is a negative externality associated with food production and the marginal social cost of food production is MSC = 4q.
Refer to Scenario 16.1. The competitive output level is ________ and the competitive price is ________.

A) 10 units of food; $20
B) 6 units of food; $24
C) 0 units of food; $0
D) 4.29 units of food; $25.71

Question 53

When the government imposes a tax on a firm that generates external costs, the tax is

A) always borne entirely by the firm.
B) always borne entirely by the consumer.
C) usually borne by both the firm and the consumer.
D) borne only by the government.

Question 54

Suppose that you rent a house next to a factory. The factory legally emits a chemical into the air that smells like feet. You now have to spend $300 more per month on air fresheners because the firm pollutes the air. You could move to another house far enough away from the factory, but the rent for that house is $200 more than you now pay. The efficient solution to this problem is that

A) the factory owner should compensate you $300 so that you can pay for the additional expenses you incur.
B) you should move to the new house because the additional rent on that new house is less than the additional expenses you incur from living next to the factory.
C) the factory owner should reimburse you $100, the difference between your expenses and the higher rent on the new house.
D) the firm should be able to continue to pollute because only one person is being harmed by the factory's pollution.

Question 55

If the government wishes to encourage firms to internalize externalities, they should ________ activities resulting in negative externalities and ________ activities resulting in positive externalities

A) tax; subsidize
B) subsidize; tax
C) ban; generate
D) place an injunction against; tax

Question 56

For the efficient level of output to be produced, marginal

A) private cost must equal zero.
B) benefit must equal marginal private cost.
C) social cost must be zero.
D) benefit must equal marginal social cost.

Question 57

If a tax is placed on perfectly competitive firms that impose external costs on society, the firm's marginal cost curve will shift ________ and the industry supply curve will shift to the ________.

A) down; left
B) down; right
C) up; right
D) up; left

Question 58

If the production of a good generates external benefits, the government could increase efficiency by

A) taxing the production of the good to reduce the amount produced.
B) subsidizing production of the good to increase the amount produced.
C) regulating production of the good to reduce the amount produced.
D) requiring all producers of the product to be licensed to produce the product.

Question 59

In the presence of negative externalities, ________ is produced and in the presence of positive externalities, ________ is produced.

A) too little of the good; too much of the good
B) too much of the good; too little of the good
C) too much of the good; the right amount of the good
D) the right amount of the good; too little of the good

Question 60

Once a firm is made to internalize a negative externality, the price will

A) increase and output will decrease.
B) increase and output will increase.
C) decrease and output will decrease.
D) decrease and output will increase.

Question 61

There are 1,000 families in a neighborhood that is affected by noise pollution from a local factory. The noise level is within legal limits, but could be reduced further if the company spent $5,000 on technological improvements. The company agrees to make these improvements if the affected families contribute the $5,000. A committee starts to collect donations to pay for the improvements. Which of the following is most likely to occur?

A) Because there are relatively few families involved and the individual contribution is so small, all families will voluntarily contribute.
B) Because each individual contribution is so small and individuals will benefit from the reduction in noise whether they contribute or not, most people will not contribute and the firm will not make the improvements.
C) Even if the families raise the $5,000, the firm will not reduce its noise pollution because it is within legal limits.
D) The courts will force the firm to spend the $5,000 regardless of whether or not the families contribute the money.

Question 62

There are 10,000 families in a neighborhood that are affected by noise pollution from a local factory. The noise could be reduced if the company spent $5,000 on technological improvements. The company agrees to make these improvements if the affected families contribute the $5,000. Since there are so many families, they fail to come to a resolution to which they will all agree. This outcome is an example of the

A) free-rider problem.
B) drop-in-the-bucket problem.
C) Coase theorem.
D) collective action problem (that arises when there are too many parties involved).

Question 63

An external cost is

A) MSC + MC.
B) MSC ‐ MC.
C) MSC/ MC.
D) MSC × MC.

Question 64

You accidentally run into your next door neighbor's fence and destroy it. Your neighbor sues you and you are required to pay $1,000 to repair the fence. This is an example of

A) the Coase theorem.
B) a liability rule.
C) an injunction.
D) the free-rider problem.

Question 65

If there are external costs of production and firms do not have to account for these costs, then the firms will ________ and ________ compared with the efficient values.

A) underproduce; underprice
B) underproduce; overprice
C) overproduce; underprice
D) overproduce; overprice

Question 66

The Coase theorem states that

A) the private sector will fail to produce the efficient amount of a public good because of the free-rider problem.
B) under certain conditions, private parties can arrive at the efficient solution without government involvement.
C) if there are external costs in production, the government must intervene in the market to assure that the efficient level of output is produced.
D) public goods should be produced up to the point where the additional benefit received by society equals the additional cost of producing the good.

Question 67

Refer to the information provided in Figure 16.4 below to answer the question(s) that follow.
Los Angeles International Airport (LAX) is located next to Playa Del Rey. The noise from air traffic negatively affects individuals living in Playa Del Rey, however, this cost is not considered by airlines or air travelers. The airlines feel they have a right to use the airspace while the individuals living in Playa Del Rey feel they have the right to quiet. The following diagram depicts the marginal costs and marginal benefits associated with air travel. Figure 16.4
Refer to Figure 16.4. If the government assigns property rights to ________ and no negotiations occur between the parties, the resulting level of air travel is 120 units.

A) the residents of Playa Del Rey
B) both the airlines and the residents of Playa Del Rey in a 50-50 split
C) the airlines
D) indeterminate from the given information.

Question 68

Your roommate has the right to play her harmonica during the day. But you find the best time to study is during the day, and the harmonica playing makes it hard for you to concentrate. You tell your roommate that you will do her laundry every week if she does not play the harmonica during the day and she agrees to this. This is an example of

A) the drop-in-the-bucket problem.
B) liability rules.
C) the Coase theorem.
D) an injunction.

Question 69

You love Christmas and elaborately decorate your home and yard. It is such a spectacle that hundreds of people drive by your house each day to enjoy the display. The noise and traffic disturb your neighbors who sue you, and you are required to take down your display permanently. This is an example of

A) the Coase theorem.
B) a liability rule.
C) an injunction.
D) the free-rider problem.

Question 70

For the Coase theorem to apply, all of the following conditions must be satisfied except

A) The basic rights of the individuals must be clearly understood.
B) There must be no impediments to bargaining.
C) Only a few people can be involved.
D) Liability rules must be established and enforced.

Question 71

Refer to the information provided in Figure 16.4 below to answer the question(s) that follow.
Los Angeles International Airport (LAX) is located next to Playa Del Rey. The noise from air traffic negatively affects individuals living in Playa Del Rey, however, this cost is not considered by airlines or air travelers. The airlines feel they have a right to use the airspace while the individuals living in Playa Del Rey feel they have the right to quiet. The following diagram depicts the marginal costs and marginal benefits associated with air travel. Figure 16.4
Refer to Figure 16.4. Suppose the government assigns property rights to the airlines, then the airlines and the residents engage in negotiations. The resulting efficient level of air travel is

A) 0 units.
B) 100 units.
C) 120 units.
D) indeterminate from the given information.

Question 72

When a perfectly competitive firm weighs price and marginal cost and no externalities exist, it is weighing the full benefits to ________ of additional production against the full costs to ________ of that production.

A) society; society
B) buyers; sellers
C) sellers; buyers
D) government; government

Question 73

Refer to the information provided in Figure 16.4 below to answer the question(s) that follow.
Los Angeles International Airport (LAX) is located next to Playa Del Rey. The noise from air traffic negatively affects individuals living in Playa Del Rey, however, this cost is not considered by airlines or air travelers. The airlines feel they have a right to use the airspace while the individuals living in Playa Del Rey feel they have the right to quiet. The following diagram depicts the marginal costs and marginal benefits associated with air travel. Figure 16.4
Refer to Figure 16.4. Suppose the government assigns property rights to the residents of Playa Del Rey. No negotiations occur between the parties. The resulting level of air travel is

A) 0 units.
B) 100 units.
C) 120 units.
D) indeterminate from the given information.

Question 74

Refer to the information provided in Figure 16.4 below to answer the question(s) that follow.
Los Angeles International Airport (LAX) is located next to Playa Del Rey. The noise from air traffic negatively affects individuals living in Playa Del Rey, however, this cost is not considered by airlines or air travelers. The airlines feel they have a right to use the airspace while the individuals living in Playa Del Rey feel they have the right to quiet. The following diagram depicts the marginal costs and marginal benefits associated with air travel. Figure 16.4
Refer to Figure 16.4. Suppose the government assigns property rights to the airlines. No negotiations occur between the parties. The resulting level of air travel is

A) 0 units.
B) 100 units.
C) 120 units.
D) Indeterminate from the given information.

Question 75

Property rights are protected by

A) taxes and subsidies.
B) bargaining and negotiation.
C) injunctions and liability rules.
D) rivalry and excludability.

Question 76

The Coase theorem will apply only if

A) the courts can be used to determine the amount of compensation that must be made to the damaged party.
B) the amount of compensation that must be made to the damaged party is small.
C) the number of people involved is small.
D) an individual who is not affected by the externality can negotiate a settlement between the parties imposing the externality and the parties that are harmed by the externality.

Question 77

If private bargaining to resolve an externality is to result in an efficient outcome,

A) rights must be protected by liability rules.
B) there must be tradable pollution rights.
C) there must be direct regulation of externalities.
D) the initial assignment of rights must be clear to both parties.

Question 78

There are 10 families in a neighborhood that are affected by noise pollution from a local factory. The noise could be reduced if the company spent $5,000 on technological improvements. The company agrees to make these improvements if the affected families contribute the $5,000. Since there are no legal restrictions governing the factory's noise, the negotiations fail. This outcome is an example of the

A) free-rider problem.
B) drop-in-the-bucket problem.
C) Coase theorem.
D) problem that arises when property rights are not defined.

Question 79

Refer to the information provided in Figure 16.4 below to answer the question(s) that follow.
Los Angeles International Airport (LAX) is located next to Playa Del Rey. The noise from air traffic negatively affects individuals living in Playa Del Rey, however, this cost is not considered by airlines or air travelers. The airlines feel they have a right to use the airspace while the individuals living in Playa Del Rey feel they have the right to quiet. The following diagram depicts the marginal costs and marginal benefits associated with air travel. Figure 16.4
Refer to Figure 16.4. Suppose the government assigns property rights to the residents of Playa Del Rey, then the airlines and the residents engage in negotiations. The resulting efficient level of air travel is

A) 0 units.
B) 100 units.
C) 120 units.
D) indeterminate from the given information.

Question 80

________ is(are) an example of selling externality rights.

A) Auctioning the right to buy a car each year
B) Direct regulation of externalities
C) Having the damaged party avoid the damage
D) Government imposed taxes and subsidies