Externalities 2563
122. One drawback to industrial policy is that
a. technology spillovers are too expensive to control.
b. measuring the size of spillovers from different markets is difficult.
c. spillovers often occur in industries that produce undesirable products for society.
d. positive side effects are often outweighed by negative side effects.
123. The goal of industrial policy should be that
a. industries yielding the largest positive externalities should receive the biggest subsidies.
b. any industry that produces negative externalities should be heavily taxed.
c. any production process that produces negative externalities should be shut down.
d. all industries that produce positive externalities should be equally subsidized.
124. Which of the following is the most effective way to internalize a technology spillover?
a. taxes
b. patents
c. government regulations
d. free markets
2564 Externalities
125. A patent is used to
a. disseminate information.
b. offset the negative effects of taxes.
c. protect inventors for as long as they live.
d. assign property rights.
126. Patents do not
a. provide firms an incentive to research.
b. assign property rights to inventors.
c. protect the rights of inventors for their lifetimes.
d. internalize externalities.
Externalities 2565
Figure 10-9
127. Refer to Figure 10-9. Which graph represents a market with no externality?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. None of the above is correct.
2566 Externalities
128. Refer to Figure 10-9. Which graph represents a market with a positive externality?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Both (b) and (c) are correct.
129. Refer to Figure 10-9. Which graph represents a market with a negative externality?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Both (b) and (c) are correct.
130. Refer to Figure 10-9, Panel (b). The market equilibrium quantity is
a. Q2, which is the socially optimal quantity.
b. Q3, which is the socially optimal quantity.
c. Q2, and the socially optimal quantity is Q3.
d. Q3, and the socially optimal quantity is Q2.
Externalities 2567
131. Refer to Figure 10-9, Panel (b). The market equilibrium price is
a. P2.
b. P3a.
c. P3b.
d. P3a – P3b.
132. Refer to Figure 10-9, Panel (c). The market equilibrium quantity is
a. Q4, which is the socially optimal quantity.
b. Q5, which is the socially optimal quantity.
c. Q4, and the socially optimal quantity is Q5.
d. Q5, and the socially optimal quantity is Q4.
133. Refer to Figure 10-9, Panel (c). The market equilibrium price is
a. P4a.
b. P4b.
c. P5.
d. P4a – P4b.
2568 Externalities
134. Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-
resistant diseases.
Therefore, the market for antibiotics is shown in
a. Panel (a).
b. Panel (b).
c. Panel (c).
d. Both (b) and (c) are correct.
135. Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the
development of antibiotic- resistant diseases. Therefore, the socially optimal quantity of
antibiotics is represented by point
a. Q2.
b. Q3.
c. Q4.
d. Q5.
Externalities 2569
136. Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the
development of antibiotic- resistant diseases. Therefore, the external cost of antibiotic overuse is
represented by
a. Q3 – Q2.
b. Q5 – Q4.
c. P3a – P3b.
d. P4a – P4b.
137. Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the
development of antibiotic- resistant diseases. Therefore, a government policy that internalized the
externality would move the quantity of antibiotics used from point
a. Q2 to point Q3.
b. Q3 to point Q2.
c. Q4 to point Q5.
d. Q5 to point Q4.
2570 Externalities
138. Refer to Figure 10-9. The installation of a scrubber in a smokestack reduces the emission of
harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is
shown in
a. Panel (a).
b. Panel (b).
c. Panel (c).
d. Both (b) and (c) are correct.
139. Refer to Figure 10-9, Panel (b) and Panel (c). The installation of a scrubber in a smokestack
reduces the emission of harmful chemicals from the smokestack. Therefore, the socially optimal
quantity of smokestack scrubbers is represented by point
a. Q2.
b. Q3.
c. Q4.
d. Q5.
Externalities 2571
140. Refer to Figure 10-9, Panel (b) and Panel (c). The installation of a scrubber in a smokestack
reduces the emission of harmful chemicals from the smokestack. Therefore, the external benefit
of smokestack scrubber installation is represented by
a. Q3 – Q2.
b. Q5 – Q4.
c. P3a – P3b.
d. P4a – P4b.
141. Refer to Figure 10–9, Panel (b) and Panel (c). The installation of a scrubber in a smokestack
reduces the emission of harmful chemicals from the smokestack. Therefore, a government policy
that internalized the externality would move the quantity of smokestack scrubbers installed from
point
a. Q2 to point Q3.
b. Q3 to point Q2.
c. Q4 to point Q5.
d. Q5 to point Q4.
2572 Externalities
142. Refer to Figure 10-9, Panel (b) and Panel (c). Which of the following is correct?
a. A tax would move the market in Panel (b) and the market in Panel (c) closer to the socially
optimal outcome.
b. A subsidy would move the market in Panel (b) and the market in Panel (c) closer to the
socially optimal outcome.
c. A tax would move the market in Panel (b) closer to the socially optimal outcome, but a subsidy
would move the market in Panel (c) closer to the socially optimal outcome.
d. A subsidy would move the market in Panel (b) closer to the socially optimal outcome, but a tax
would move the market in Panel (c) closer to the socially optimal outcome.
Figure 10–10
Externalities 2573
143. Refer to Figure 10–10. The graph represents a market in which
a. there is no externality.
b. there is a positive externality.
c. there is a negative externality.
d. The answer cannot be determined from inspection of the graph.
144. Refer to Figure 10-10. Which of the following statements is correct?
a. The private cost of producing the 160th unit of output is $16.
b. The social cost of producing the 160th unit of output is $22.
c. The external cost of producing the 160th unit of output is $6.
d. All of the above are correct.
2574 Externalities
145. Refer to Figure 10-10. Which of the following statements is correct?
a. The private cost of producing the 120th unit of output is $12.
b. The social cost of producing the 120th unit of output is $22.
c. The external cost of producing the 120th unit of output is $2.
d. All of the above are correct.
146. Refer to Figure 10-10. The socially optimal quantity of output is
a. 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by the
seller of the 120th unit.
b. 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by society
of the 120th unit.
c. 160 units, since the value to the buyer of the 160th unit is equal to the cost incurred by the
seller of the 160th unit.
d. 160 units, since the value to the buyer of the 160th unit is equal to the cost incurred by society
of the 160th unit.
Externalities 2575
147. Refer to Figure 10–10. A decrease in output from 160 units to 120 units would
a. move the market from a socially efficient outcome to a socially inefficient outcome.
b. reduce the external cost per unit of output.
c. increase total economic well-being.
d. not be an action of which a benevolent social planner would approve.
148. Refer to Figure 10-10. An increase in output from 120 units to 160 units would
a. move the market from a socially efficient outcome to a socially inefficient outcome.
b. increase the external cost per unit of output.
c. increase total economic well-being.
d. be an action of which a benevolent social planner would approve.
2576 Externalities
149. Refer to Figure 10-10. “The social cost of the last unit produced exceeds the value to buyers
of the last unit produced by $3.” This statement is correct at which quantity of output?
a. 120 units
b. 140 units
c. 160 units
d. The statement is true at all quantities of output.
150. Refer to Figure 10-10. Taking into account private and external costs, the maximum total
surplus that can be achieved in this market is
a. $760.
b. $1,080.
c. $1,440.
d. $1,920.
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Table 10-3
151. Refer to Table 10-3. The table represents a market in which
a. there is no externality.
b. there is a positive externality.
c. there is a negative externality.
d. The answer cannot be determined from inspection of the table.
152. Refer to Table 10-3. The social value of the 4th unit of output that is produced is
a. $10.
b. $16.
c. $26.
d. $30.
Quantity
Private Value
Private Cost
External Benefit
1
$22
$11
$10
2
$20
$14
$10
3
$18
$17
$10
4
$16
$20
$10
5
$14
$23
$10
6
$12
$26
$10
2578 Externalities
153. Refer to Table 10-3. The market equilibrium quantity of output is
a. 3 units.
b. 4 units.
c. 5 units.
d. 6 units.
154. Refer to Table 10-3. The socially optimal quantity of output is
a. 3 units.
b. 4 units.
c. 5 units.
d. 6 units.
155. Refer to Table 10–3. What amount of subsidy per unit of output would move the market from
the equilibrium level of output to the socially optimal level of output?
a. $2
b. $3
c. $5 d. $10
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156. Refer to Table 10–3. Taking into account private and external costs, the maximum total
surplus that can be achieved in this market is
a. $18.
b. $38.
c. $46.
d. $55.
Figure 10–11
2580 Externalities
157. Refer to Figure 10–11. The graph represents a market in which
a. there is no externality.
b. there is a positive externality.
c. there is a negative externality.
d. The answer cannot be determined from inspection of the graph.
158. Refer to Figure 10–11. Which of the following magnitudes is constant over all units of output?
a. the private value of the last unit of output that was produced and sold
b. the social value of the last unit of output that was produced and sold
c. the external benefit of the last unit of output that was produced and sold
d. the private cost of the last unit of output that was produced and sold
Externalities 2581
159. Refer to Figure 10-11. Which of the following statements is correct?
a. The private value of the 420th unit of output is $15.
b. The social value of the 420th unit of output is $42.
c. The external benefit of the 420th unit of output is $27.
d. All of the above are correct.
160. Refer to Figure 10-11. Which of the following statements is correct?
a. The private value of the 240th unit of output is $24.
b. The social value of the 240th unit of output is $42.
c. The external benefit of the 240th unit of output is $18.
d. All of the above are correct.
2582 Externalities
161. Refer to Figure 10-11. The socially optimal quantity of output is
a. 240 units, since the value to the buyer of the 240th unit is equal to the cost incurred by the
seller of the 240th unit.
b. 240 units, since the value to society of the 240th unit is equal to the cost incurred by the seller
of the 240th unit.
c. 420 units, since the value to the buyer of the 420th unit is equal to the cost incurred by the
seller of the 420th unit.
d. 420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller
of the 420th unit.
162. Refer to Figure 10–11. A benevolent social planner would prefer
a. a $24 price to any other price.
b. 420 units to any other quantity of output.
c. a subsidy of $24 per unit to a subsidy of $27 per unit.
d. All of the above are correct.