Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Externalities 2523
42. Negative externalities occur when one person's actions
a. cause another person to lose money in a stock market transaction.
b. cause his or her employer to lose business.
c. reveal his or her preference for foreign-produced goods.
d. adversely affect the well-being of a bystander who is not a party to the action.
43. A negative externality
a. is an adverse impact on a bystander.
b. causes the product in a market to be under-produced.
c. is an adverse impact on market participants.
d. is present in markets where the good or service does not have any impact on bystanders.
44. A negative externality
a. is a cost to a bystander.
b. is a cost to the buyer.
c. is a cost to the seller.
d. exists with all market transactions.
2524 Externalities
45. Which of the following illustrates the concept of a negative externality?
a. A college professor plays a vigorous game of racquet ball with the racquet he recently
purchased.
b. A flood wipes out a farmer's corn crop.
c. A college student plays loud music on his new stereo system at 2:00 a.m.
d. A janitor eats a hamburger during his lunch break.
46. When a negative externality exists in a market, the cost to producers
a. is greater than the cost to society.
b. will be the same as the cost to society.
c. will be less than the cost to society.
d. will differ from the cost to society, regardless of whether an externality is present.
Externalities 2525
47. When negative externalities are present in a market
a. private costs will be greater than social costs.
b. social costs will be greater than private costs.
c. only government regulation will solve the problem.
d. the market will not be able to reach any equilibrium.
48. Negative externalities lead markets to produce
a. greater than efficient output levels and positive externalities lead markets to produce smaller
than efficient output levels.
b. smaller than efficient output levels and positive externalities lead markets to produce greater
than efficient output levels.
c. greater than efficient output levels and positive externalities lead markets to produce efficient
output levels.
d. efficient output levels and positive externalities lead markets to produce greater than efficient
output levels.
2526 Externalities
49. Suppose that large-scale pork production has the potential to create ground water pollution. Why
might this type of pollution be considered an externality?
a. The groundwater pollution reduces the cost of large-scale pork production.
b. The economic impact of a large-scale pork production facility is localized in a small geographic
area.
c. The pollution has the potential for creating a health risk for water users in the region
surrounding the pork production facility.
d. Consumers will not reap the benefits of lower production cost from large-scale pork
production.
50. Markets are often inefficient when negative externalities are present because
a. private costs exceed social costs at the private market solution.
b. externalities cannot be corrected without government regulation.
c. social costs exceed private costs at the private market solution.
d. production externalities lead to consumption externalities.
Externalities 2527
51. When the social cost curve is above a product's supply curve,
a. the government has intervened in the market.
b. a negative externality exists in the market.
c. a positive externality exists in the market.
d. the distribution of resources is unfair.
52. Suppose the government imposes a tax in a certain market in order to internalize an externality.
This type of policy is based on which of the Ten Principles of Economics?
a. People face trade-offs.
b. People respond to incentives.
c. Markets are usually a good way to organize economic activity.
d. The cost of something is what you give up to get it.
2528 Externalities
53. When a policy succeeds in giving buyers and sellers in a market an incentive to take into account
the external effects of their actions, the policy is said to
a. equalize private value and private cost.
b. equalize private cost and external cost.
c. externalize the actions of the buyers and sellers.
d. internalize the externality.
54. Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative
externality. If the market does not internalize the externality,
a. the supply curve would adequately reflect the marginal social cost of production.
b. consumers will be required to pay a higher price for steel than they would have if the
externality were internalized.
c. the market equilibrium quantity will not be the socially optimal quantity.
d. producers will produce less steel than they otherwise would if the externality were internalized.
Externalities 2529
55. When producers operate in a market characterized by negative externalities, a tax that forces
them to internalize the externality will
a. give sellers the incentive to account for the external effects of their actions.
b. increase demand.
c. increase the amount of the commodity exchanged in market equilibrium.
d. restrict the producers' ability to take the costs of the externality into account when deciding
how much to supply.
56. When Monique drives to work every morning, she drives on a congested highway. What Monique
does not realize is that when she enters the highway each morning she increases the travel time of
all other drivers on the highway.
In this case, the external cost of Monique’s highway trip
a. increases the social cost above the private cost.
b. lowers the social cost below the private cost.
c. increases the social value above the private benefit.
d. decreases the social value below the private benefit.
2530 Externalities
57. An optimal tax on pollution would result in which of the following?
a. Producers will choose not to produce any pollution.
b. Producers will internalize the cost of the pollution.
c. Producers will maximize production.
d. The value to consumers at market equilibrium will exceed the social cost of production.
58. Which of the following statements is correct?
a. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to
the market and decrease the price of the good produced.
b. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to
the market and increase the price of the good produced.
c. Internalizing a negative externality will cause an industry to increase the quantity it supplies to
the market and decrease the price of the good produced.
d. Internalizing a negative externality will cause an industry to increase the quantity it supplies to
the market and increase the price of the good produced.
Externalities 2531
59. A negative externality will cause a private market to produce
a. less than is socially desirable.
b. more than is socially desirable.
c. exactly the quantity that is socially desirable.
d. less than the same market would produce in the presence of a positive externality.
60. Private markets fail to reach a socially optimal equilibrium when negative externalities are present
because
a. social costs equal private costs at the private market solution.
b. private costs exceed social costs at the private market solution.
c. social costs exceed private costs at the private market solution.
d. they internalize externalities.
2532 Externalities
61. When negative externalities are present in a market,
a. producers will be affected but consumers will not.
b. producers will supply too much of the product.
c. demand will be too high.
d. the market will still maximize total benefits.
62. Which of the following would not be considered a negative externality?
a. Smelter, Inc. creates steel and pollution.
b. Your friend buys a new puppy that barks every night.
c. You have an adverse reaction to a medication your doctor prescribed for you.
d. Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.
Externalities 2533
63. Suppose that beef producers create a negative externality. What is the relationship between the
equilibrium quantity of beef and the socially optimal quantity of beef?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
64. Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the
relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
2534 Externalities
65. Suppose that smoking creates a negative externality. If the government does not interfere in the
cigarette market, then
a. the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of
cigarettes smoked.
b. the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity
of cigarettes smoked.
c. the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of
cigarettes smoked.
d. There is not enough information to answer the question.
66. Suppose that a firm produces electricity by burning coal. The production process creates a
negative externality of air pollution. If the firm does not internalize the cost of the externality, it
will produce where
a. the value of electricity to consumers equals the private cost of producing electricity.
b. the value of electricity to consumers equals the social cost of producing electricity.
c. the cost of the externality is maximized.
d. the transaction costs of private bargaining are minimized.
Externalities 2535
67. Suppose that a negative externality is created by the production of good X. Which of the
following statements is correct?
a. The social cost of producing good X includes the private cost plus the cost to bystanders of the
externality.
b. The increased social cost can be graphed as a decrease in demand.
c. The market equilibrium quantity will be the socially optimal quantity as long as the government
does not interfere.
d. Both a and b are correct.
68. Which of the following is NOT an example of a negative externality?
a. air pollution from a manufacturing plant.
b. disrupted sleep from a neighbor’s loud music.
c. an illness caused by secondhand cigarette smoke.
d. a decrease in your property value from neglecting your lawn and garden.
2536 Externalities
69. A paper plant produces water pollution during the production process. If the government forces
the plant to internalize the negative externality, then the
a. supply curve for paper would shift to the right.
b. supply curve for paper would shift to the left.
c. demand curve for paper would shift to the right.
d. demand curve for paper would shift to the left.
Figure 10-7
Externalities 2537
70. Refer to Figure 10-7. Which quantity represents the social optimum for this market?
a. Q1.
b. Q2.
c. Q3.
d. Q4.
71. Refer to Figure 10-7. To internalize the externality in this market, the government should
a. impose a tax on this product.
b. provide a subsidy for this product.
c. forbid production.
d. produce the product itself.
2538 Externalities
Figure 10-8
72. Refer to Figure 10-8. What is the equilibrium price in this market?
a. $8
b. Between $8 and $10
c. $10
d. More than $10
Externalities 2539
73. Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?
a. 8 units
b. Between 8 and 10 units
c. 10 units
d. More than 10 units
74. Refer to Figure 10-8. If the government wanted to tax or subsidize this good to achieve the
socially-optimal level of output, it would
a. introduce a subsidy of $2 per unit.
b. impose a tax of $2 per unit.
c. introduce a subsidy of $4 per unit.
d. impose a tax of $4 per unit.
2540 Externalities
Table 10-2
The following table shows the private value, private cost, and social value for a market with a
positive externality.
Quantity
Private Value
Private Cost
Social Value
1
27
6
34
2
24
10
31
3
21
14
28
4
18
18
25
5
15
22
22
6
12
26
19
75. Refer to Table 10-2. What is the equilibrium quantity of output in this market?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
76. Refer to Table 10-2. What is the socially-optimal level of output in this market?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
Externalities 2541
77. Refer to Table 10-2. How large would a subsidy need to be in this market to move the market
from the equilibrium level of output to the socially-optimal level of output?
a. $3
b. $5
c. $7
d. $9
78. Which of the following is an example of a positive externality?
a. A college student buys a new car when she graduates.
b. The mayor of a small town plants flowers in the city park.
c. Local high school teachers have pizza delivered every Friday for lunch.
d. An avid fisherman buys new fishing gear for his next fishing trip.
2542 Externalities
79. Which of the following is an example of a positive externality?
a. air pollution
b. a person littering in a public park
c. a nice garden in front of your neighbor's house
d. the pollution of a stream
80. If we know that the demand curve for good x fails to reflect the total value to society of that
good, then we know that
a. the market for good x is characterized by an externality, but we cannot determine whether the
externality is positive or negative from this fact alone.
b. the market for good x is characterized by a positive externality.
c. the market for good x is characterized by a negative externality.
d. the supply curve for good x fails to reflect the cost to society of producing that good.
