Externalities
Multiple Choice – Section 00: Introduction
1. In a market economy, government intervention
a. will always improve market outcomes.
b. reduces efficiency in the presence of externalities.
c. may improve market outcomes in the presence of externalities.
d. is necessary to control individual greed.
2. In the absence of externalities, the “invisible hand” leads a market to maximize
a. producer profit from that market.
b. total benefit to society from that market.
c. both equality and efficiency in that market.
d. output of goods or services in that market.
2484 Externalities
3. The term market failure refers to
a. a market that fails to allocate resources efficiently.
b. an unsuccessful advertising campaign which reduces demand.
c. ruthless competition among firms.
d. a firm that is forced out of business because of losses.
4. Market failure can be caused by
a. too much competition.
b. externalities.
c. low consumer demand.
d. scarcity.
Externalities 2485
5. An externality is an example of
a. a corrective tax.
b. a tradable pollution permit.
c. a market failure.
d. Both a and b are correct.
6. An externality is the impact of
a. society‘s decisions on the well-being of society.
b. a person’s actions on that person’s well-being.
c. one person’s actions on the well-being of a bystander.
d. society’s decisions on the poorest person in the society.
2486 Externalities
7. The impact of one person‘s actions on the well-being of a bystander is called
a. an economic dilemma.
b. deadweight loss.
c. a multi-party problem.
d. an externality.
8. An externality
a. results in an equilibrium that does not maximize the total benefits to society.
b. causes demand to exceed supply.
c. strengthens the role of the “invisible hand” in the marketplace.
d. affects buyers but not sellers.
Externalities 2487
9. In what sense do externalities cause the “invisible hand” of the marketplace to fail?
a. Externalities lead to government intervention in markets, which exacerbates the problems
associated with externalities.
b. Externalities result in prices that are too high for many consumers to pay.
c. Markets fail to produce the maximum total benefit to society when positive or negative
externalities are present.
d. Markets produce too little of a good when positive or negative externalities are present.
10. An externality is
a. the costs that parties incur in the process of agreeing and following through on a bargain.
b. the uncompensated impact of one person‘s actions on the well-being of a bystander.
c. the proposition that private parties can bargain without cost over the allocation of resources.
d. a market equilibrium tax.
2488 Externalities
11. A cost imposed on someone who is neither the consumer nor the producer is called a
a. corrective tax.
b. command and control policy.
c. positive externality.
d. negative externality.
12. An externality arises when a person engages in an activity that influences the well-being of
a. buyers in the market for that activity and yet neither pays nor receives any compensation for
that effect.
b. sellers in the market for that activity and yet neither pays nor receives any compensation for
that effect.
c. bystanders in the market for that activity and yet neither pays nor receives any compensation
for that effect.
d. Both (a) and (b) are correct.
Externalities 2489
13. An externality exists whenever
a. the economy cannot benefit from government intervention.
b. markets are not able to reach equilibrium.
c. a firm sells its product in a foreign market.
d. Bobbi engages in an activity that influences the well-being of Rosa and yet Bobbi neither pays
nor receives payment for that influence.
14. A negative externality arises when a person engages in an activity that has
a. an adverse effect on a bystander who is not compensated by the person who causes the effect.
b. an adverse effect on a bystander who is compensated by the person who causes the effect.
c. a beneficial effect on a bystander who pays the person who causes the effect.
d. a beneficial effect on a bystander who does not pay the person who causes the effect.
2490 Externalities
15. A positive externality arises when a person engages in an activity that has
a. an adverse effect on a bystander who is not compensated by the person who causes the effect.
b. an adverse effect on a bystander who is compensated by the person who causes the effect.
c. a beneficial effect on a bystander who pays the person who causes the effect.
d. a beneficial effect on a bystander who does not pay the person who causes the effect.
16. When externalities are present in a market, the well-being of market participants
a. and market bystanders are both directly affected.
b. and market bystanders are both indirectly affected.
c. is directly affected, and market bystanders are indirectly affected.
d. is indirectly affected, and market bystanders are directly affected.
Externalities 2491
17. Dog owners do not bear the full cost of the noise their barking dogs create and often take too few
precautions to prevent their dogs from barking. Local governments address this problem by
a. making it illegal to “disturb the peace.”
b. having a well-funded animal control department.
c. subsidizing local animal shelters.
d. encouraging people to adopt cats.
18. Which of the following statements about a well-maintained yard best conveys the general nature
of the externality?
a. A well-maintained yard conveys a positive externality because it increases the home’s market
value.
b. A well-maintained yard conveys a negative externality because it increases the property tax
liability of the owner.
c. A well-maintained yard conveys a positive externality because it increases the value of adjacent
properties in the neighborhood.
d. A well-maintained yard cannot provide any type of externality.
2492 Externalities
19. Since restored historic buildings convey a positive externality, local governments may choose to
a. regulate the demolition of them.
b. provide tax breaks to owners who restore them.
c. increase property taxes in historic areas.
d. Both a and b are correct.
20. All externalities
a. cause markets to fail to allocate resources efficiently.
b. cause equilibrium prices to be too high.
c. benefit producers at the expense of consumers.
d. cause equilibrium prices to be too low.
Externalities 2493
21. When an externality is present, the market equilibrium is
a. efficient, and the equilibrium maximizes the total benefit to society as a whole.
b. efficient, but the equilibrium does not maximize the total benefit to society as a whole.
c. inefficient, but the equilibrium maximizes the total benefit to society as a whole.
d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.
22. When externalities exist, buyers and sellers
a. neglect the external effects of their actions, but the market equilibrium is still efficient.
b. do not neglect the external effects of their actions, and the market equilibrium is efficient.
c. neglect the external effects of their actions, and the market equilibrium is not efficient.
d. do not neglect the external effects of their actions, and the market equilibrium is not efficient.
2494 Externalities
23. Dioxin emission that results from the production of paper is a good example of a negative
externality because
a. self-interested paper firms are generally unaware of environmental regulations.
b. there are fines for producing too much dioxin.
c. self-interested paper producers will not consider the full cost of the dioxin pollution they create.
d. toxic emissions are the best example of an externality.
24. If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will
a. emit a lower level of smoke than is socially efficient.
b. emit a higher level of smoke than is socially efficient.
c. emit an acceptable level of smoke.
d. not emit any smoke in an attempt to avoid paying the entire cost.
Externalities 2495
25. Which of the following is an example of an externality?
a. cigarette smoke that permeates an entire restaurant
b. a flu shot that prevents a student from transmitting the virus to her roommate
c. a beautiful flower garden outside of the local post office
d. All of the above are correct.
26. Which of the following statements is not correct?
a. Government policies may improve the market’s allocation of resources when negative
externalities are present.
b. Government policies may improve the market’s allocation of resources when positive
externalities are present.
c. A positive externality is an example of a market failure.
d. Without government intervention, the market will tend to undersupply products that produce
negative externalities.
2496 Externalities
27. Which of the following represents a way that a government can help the private market to
internalize an externality?
a. taxing goods that have negative externalities
b. subsidizing goods that have positive externalities
c. The government cannot improve upon the outcomes of private markets.
d. Both a and b are correct.
28. Which of the following is not correct?
a. Markets allocate scarce resources with the forces of supply and demand.
b. The equilibrium of supply and demand is typically an efficient allocation of resources.
c. Governments can sometimes improve market outcomes.
d. Externalities cannot be positive.
Externalities 2497
29. Research into new technologies provides a
a. negative externality, and too few resources are devoted to research as a result.
b. negative externality, and too many resources are devoted to research as a result.
c. positive externality, and too few resources are devoted to research as a result.
d. positive externality, and too many resources are devoted to research as a result.
30. Melissa engages in an activity that influences the well-being of a bystander. In order for Melissa’s
activity to give
rise to an externality, it must be the case that
a. Melissa fails to recognize the impact of her activity on the bystander’s well-being.
b. the bystander fails to recognize the impact of Melissa’s activity on his or her well-being.
c. the well-being of the bystander is adversely impacted by Melissa’s activity.
d. Melissa neither pays nor receives any compensation for her activity.
2498 Externalities
31. William engages in an activity that influences the well-being of a bystander. In which of the
following instances does an externality arise?
a. The impact of William’s activity on the bystander is adverse, and William compensates the
bystander
accordingly.
b. The impact of William’s activity on the bystander is adverse, but William fails to compensate
the bystander.
c. The impact of William’s activity on the bystander is beneficial and the bystander compensates
William
accordingly.
d. Externalities arise in all of the above cases.
32. In a certain city, the local government regulates the destruction of historic buildings and provides
tax breaks to owners of historic buildings who restore them. These government policies
a. reflect the fact that restored historic buildings convey a positive externality.
b. reflect the fact that the destruction of historic buildings conveys a positive externality.
c. are likely to worsen the market failure that is associated with historic buildings and the
restoration of such buildings.
d. are likely to decrease the well-being of society as a whole.
Externalities 2499
Multiple Choice – Section 01: Externalities and Market Inefficiency
1. If an externality is present in a market, economic efficiency may be enhanced by
a. increased competition.
b. weakening property rights.
c. better informed market participants.
d. government intervention.
2. Externalities tend to cause markets to be
a. inefficient.
b. unequal.
c. unnecessary.
d. overwhelmed.
2500 Externalities
3. If a sawmill creates too much noise for local residents,
a. noise restrictions will force residents to move out of the area.
b. a sense of social responsibility will cause owners of the mill to reduce noise levels.
c. the government can raise economic well-being through noise-control regulations.
d. the government should avoid intervening because the market will allocate resources efficiently.
4. Private markets fail to account for externalities because
a. externalities don’t occur in private markets.
b. sellers include costs associated with externalities in the price of their product.
c. decisionmakers in the market fail to include the costs of their behavior to third parties.
d. the government cannot easily estimate the optimal quantity of pollution.
Externalities 2501
5. Altering incentives so that people take account of the external effects of their actions
a. is called internalizing the externality.
b. can be done by imposing a corrective tax.
c. is the role of government in markets with externalities.
d. All of the above are correct.
6. When the government intervenes in markets with externalities, it does so in order to
a. increase production when negative externalities are present.
b. protect the interests of bystanders.
c. make certain all benefits are received by market participants.
d. reduce production when positive externalities are present.
2502 Externalities
7. All remedies for externalities share the goal of
a. moving the allocation of resources toward the market equilibrium.
b. moving the allocation of resources toward the socially optimal equilibrium.
c. increasing the allocation of resources.
d. decreasing the allocation of resources.
8. At any given quantity, the willingness to pay in the market for gasoline is reflected in the
a. height of the demand curve at that quantity.
b. height of the supply curve at that quantity.
c. value to the producer of the last unit of gasoline sold.
d. total quantity of gasoline exchanged in the market.