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4-101
D i f f i c u l t y :
02 Medium
199.
In a free-market economy, a product which entails a positive externality will be
A.
overproduced.
200.
In a situation where an externality occurs, the "third party" refers to those who
A.
buy the product from others.
201.
External benefits in consumption refer to benefits accruing to
A.
those who are selling the product to the consumers.
4-102
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-04 Explain how positive and negative externalities cause under- and
overallocations of resources.
Test Bank: II
Topic:
Externalities
202.
If some activity creates external benefits as well as private benefits, then economic theory
suggests that the activity ought to be
A.
taxed.
203.
If a good that generates negative externalities were priced to take these negative
externalities into account, then its
A.
price would decrease and its quantity would increase.
204.
In a market where negative externalities are associated with consumption and production,
the equilibrium will not be efficient because
A.
too few resources will be allocated toward producing the good.
205.
If there are external benefits associated with the consumption of a good or service,
A.
the private demand curve will overestimate the true demand curve.
206.
If the production of a product or service involves external benefits, then the government
can improve efficiency in the market by
D.
imposing a corrective tax to correct for an underallocation of resources.
4-104
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l t y :
02 Medium
Learning Objective: 04-04 Explain how positive and negative externalities cause under- and
overallocations of resources.
Test Bank: II
Topic:
Externalities
207.
When the production of a good generates external costs, the producing firm's supply curve
will be
C.
vertical.
D.
horizontal.
208.
Where there are spillover (or external) benefits from having a particular product in a
society, the government can make the quantity of the product approach the socially optimal level
by doing the following, except
A.
subsiding the buyers of the product.
209. It is the custom for paper mills located alongside the Layzee River to discharge waste
products into the river. As a result, operators of hydroelectric power-generating plants
downstream along the river find that they must clean up the river's water before it flows
through their equipment.
In the situation described above, we would expect an
D.
overproduction of power by the hydroelectric plants.
210. It is the custom for paper mills located alongside the Layzee River to discharge waste
products into the river. As a result, operators of hydroelectric power-generating plants
downstream along the river find that they must clean up the river's water before it flows
through their equipment.
Refer to the above information. Which of the following policies would be most appropriate for
dealing with this problem?
A.
levy a Pigovian tax on the consumers of paper products and use the tax revenues to conduct
research on new energy sources
211. It is the custom for paper mills located alongside the Layzee River to discharge waste
products into the river. As a result, operators of hydroelectric power-generating plants
downstream along the river find that they must clean up the river's water before it flows
through their equipment.
If the government intervenes and corrects the externality in the situation described above, we
would expect
A.
the output of the paper mills to increase.
212. It is the custom for paper mills located alongside the Layzee River to discharge waste
products into the river. As a result, operators of hydroelectric power-generating plants
downstream along the river find that they must clean up the river's water before it flows
through their equipment.
If the government intervenes and corrects the externality in the situation described, we would
expect
A. the supply of the output from the hydroelectric power plants to decrease.
213.
Refer to the provided supply and demand graph for a product. In the graph, line S is the current
supply of this product, while line S1 is the optimal supply from the society's perspective. This
figure suggests that there is (are)
A. external benefits from the production of this product.
214.
Refer to the provided supply and demand graph for a product. In the graph, line S is the current
supply of this product, while line S1 is the optimal supply from the society's perspective. One
solution to this externality problem is to
A.
give consumers a subsidy of the amount FG per unit.
4-109
215.
Refer to the provided supply and demand graph for a product. In the graph, line S is the current
supply of this product, while line S1 is the optimal supply from the society's perspective. If
government corrects this externality problem and shifts production to the socially
optimal
level, then the product price will be equal to
D.
0D.
216.
Refer to the provided supply and demand graph of Product X. What would happen if the
government taxed the producers of this product because it has negative externalities in
production?
A.
supply would increase
4-111
217.
Refer to the provided supply and demand graph of Product X. If there are positive externalities
from the consumption of Product X, then the socially optimal demand curve would be
A. to the left of line D on the graph.
218.
Refer to the provided supply and demand graph of Product X. What would happen if the
government decided to also start providing Product X in the market?
A.
demand would decrease
219.
Refer to the provided supply and demand graph. S1 and D1 represent the current market supply
and demand, respectively. S2 and D2 represent the socially optimal supply and demand. The
positions of the graphs indicate that there are
A.
external benefits from production and external costs from consumption of the product.
4-114
220.
Refer to the provided supply and demand graph. S1 and D1 represent the current market supply
and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One
way that the government could shift supply to its socially optimal level is to
A.
tax the sellers.
4-115
221.
Refer to the provided supply and demand graph. S1 and D1 represent the current market supply
and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One
way that the government could shift demand to its socially optimal level is to
A.
tax the sellers.
222.
Near an ocean beach, a high-rise building is being constructed that will block the scenic
view of the ocean for the residents of a low-rise building. The Coase theorem suggests that this
type of dispute between the owners of high-rise and low-rise buildings
B.
has to be resolved by city government officials.
223.
According to the Coase Theorem, externality problems
224.
Which of the following antipollution policies is least likely to make use of cost-benefit
analysis?
A.
creating a market for pollution rights
4-117
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Top ic:
Societys Optimal Amount of Externality Reduction
225.
An emission fee levied against polluting firms will tend to shift the
C.
demand curve for the product to the left.
D.
demand curve for the product to the right.
226.
If pollution coming from factories is bad, then why would the socially optimal level of
pollution not be zero?
D.
because there are zero benefits from zero pollution
227.
Antipollution policies can be overaggressively designed and implemented, resulting in
D.
the social costs of pollution reduction becoming less than the benefits.
4-118
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-05 Show why we normally won't want to pay what it would cost to
eliminate every last bit of a negative externality such as air pollution.
Test Bank: II
Topic:
Societys Optimal Amount of Externality Reduction
228.
It has been proposed that a government agency be charged with the task of determining the
amount of pollution that the atmosphere (or a body of water) can safely absorb, establish
"rights" to this limited amount of pollution, and sell those limited amount of rights to
firms.
The firms can then buy and sell these rights among themselves later. This approach is known as
the
A.
taxes and subsidies system.
229.
A market for pollution rights can be expected to
A.
eliminate all pollution.
230.
By requiring car producers to install emission control devices on cars, the government
forces these producers to internalize some of the external costs of auto pollution. This will lead
to the equilibrium price of cars
A.
decreasing and the quantity increasing.
231.
From an economist's perspective, an important consideration for policies to address global
warming is
A.
the market for recyclable inputs.
232.
Oftentimes, the socially optimal quantity for a product that imposes external costs on the
society is not zero, but something greater than zero. This is because completely eliminating the
externality would involve
A.
a much greater marginal benefit than marginal cost.
4-120
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04-05 Show why we normally won't want to pay what it would cost to
eliminate every last bit of a negative externality such as air pollution.
Test Bank: II
Topic:
Societys Optimal Amount of Externality Reduction
233.
Sometimes, public goods whose benefits are less than their costs still get produced because
A.
the marginal benefit is still larger than the marginal cost.
True / False Questions
234.
Market failures refer to those situations where the sellers are not producing as much as the
buyers are wanting to buy.
235.
Demand-side market failures refer to those situations when there is a shortage in the market
because buyers want to buy more than what is available in the market.
