The Economic Way of Thinking, 13e (Heyne)
Chapter 10 Externalities and Conflicting Rights
1) Economists use the term externalities to refer to
A) consequences people ignore in their decision making.
B) any cost associated with an action.
C) foreign imports or exports.
D) the behavior in which people actually engage as distinct from their alleged reasons for acting
as they do.
E) the outside directors of a corporation as distinct from corporate directors who are also
managers.
2) Another term for negative externalities is
A) bad vibrations.
B) non-marginal costs.
C) spillover costs.
D) sunk costs.
E) surplus product.
3) Positive externalities are created by people when they
A) add to the net real income of society.
B) are altruistic or concerned for the welfare of others.
C) benefit others without intending to do so.
D) increase the general welfare.
E) promote the happiness of others.
4) The term externalities refers to
A) consequences of action not taken into account in making decisions.
B) social interactions associated with urban-industrial economies.
C) the superficial consequences of decisions.
D) the visible consequences of decisions.
5) Externalities occur
A) only when a person acts out of greed.
B) only when a person acts out of selfish interest.
C) only when a person is concerned with personal profit.
D) only when the decision maker does not take into account all the benefits or costs from an
action.
6) A positive externality clearly occurs when
A) a person behaves in the public interest.
B) a person’s action unintentionally benefits other people.
C) a person behaves only with courtesy and social grace.
D) a person couldn’t care less about anybody else.
7) A negative externality clearly occurs when
A) a person’s action unintentionally benefits other people.
B) a person behaves in the public interest.
C) a person’s action unintentionally imposes costs on other people.
D) a person couldn’t care less about anybody else.
8) What is required for a negative externality to occur?
A) The intention or plan to directly impose costs on others
B) The full costs of an action aren’t taken into account
C) A total lack of concern for other people’s welfare
D) Greed
9) What is required for a positive externality to occur?
A) The full benefits of an action aren’t taken into account.
B) The intention or plan to directly help other people
C) A concern for social welfare
D) Courtesy and honesty
E) All the above.
10) Did Mother Teresa create positive externalities when she helped the poor of Calcutta?
A) No, because the poor continued to exist and her efforts were largely unsuccessful.
B) No, because she fully calculated all the benefits of her activities.
C) Yes, because her activities have inspired and benefited countless others whom Mother Teresa
could not have known about or taken into account.
D) Yes, because her activities had nothing to do with the search for economic profit.
11) Did Mother Teresa create negative externalities when she helped the poor of Calcutta?
A) Yes, if her activities unintentionally imposed costs on others, such as upsetting people who
don’t believe in charity for the poor.
B) No, because she strove only to do good, not bad.
C) No, because her activities were accomplished in a state of grace.
D) No, because her activities were altruistic.
E) B, C, D, are all correct.
12) A teenager plays his radio loudly at the beach. What can we conclude?
A) He creates a negative externality if it unintentionally annoys or upsets others.
B) He creates a positive externality if it unintentionally benefits others who enjoy the same
music.
C) He creates no externality, if others remain unaffected by the music.
D) All of the above.
13) Bongo plays drums in his parents’ garage after school. What can we be sure of?
A) Bongo’s drumming imposes negative externalities on others.
B) Bongo’s drumming delivers positive externalities to others.
C) Bongo expects to benefit while drumming.
D) All of the above.
14) Which is an example of a negative externality?
A) A tornado
B) A hurricane
C) A flood
D) All of the above.
E) None of the above.
15) Which is an example of a negative externality?
A) A beautiful sunset
B) A cool summer breeze
C) A clear blue sky
D) A deadly bolt of lightening
E) None of the above.
16) A negative externality
A) occurs under any undesirable event.
B) occurs when an action doesn’t take into account the costs it imposes on others.
C) can be a natural phenomenon, such as being struck dead by a bolt of lightening.
D) cannot occur at the same time as a positive externality.
17) Which might be an example of a positive externality?
A) Loud hip-hop music
B) A dog gets loose from its master
C) A lost wallet filled with twenty-dollar bills
D) The rumbling of a Harley Davidson Low Rider motorcycle
E) Any of the above, as long as they unintentionally benefit others
18) Gus happens to spot a couple of sunbathers during his walk in the park. The sunbathers
generate
A) a negative externality if Gus is disturbed by their activity.
B) a positive externality if Gus enjoys witnessing their activity.
C) both of the above.
D) neither of the above, as long as no monetary payment was involved.
19) Suppose a Chinese restaurant provides free tea and fortune cookies to its customers. The
restaurant is clearly
A) generating a negative externality.
B) generating a positive externality.
C) selling food below cost.
D) attempting to increase its total profit.
E) doing none of the above.
20) A national taco chain offers in-house customers free refills on drinks. It is clearly
A) attempting to increase its total profit.
B) generating a negative externality.
C) generating a positive externality.
D) engaging in predatory pricing.
E) doing none of the above.
21) A local bar provides free pretzels and peanuts and cheap drinks on a Monday night. But soon
a fight breaks out in the parking lot between two quarreling patrons. Neighboring homeowners
awaken as a result, and call the police. What can we clearly conclude?
A) The bar’s free pretzels and peanuts generate a positive externality.
B) Each fighter imposes a negative externality on the other fighter.
C) The fighters impose a negative externality on the neighboring homeowners.
D) The neighboring homeowners impose a negative externality on the police.
E) All of the above are true.
22) People will tend to “internalize externalities” when
A) responsibility for the consequences of actions is more clearly assigned to the actors.
B) spillover costs and benefits become more common and widespread.
C) they calculate more carefully the marginal costs and marginal benefits of their decisions.
D) they feel less empathy for others.
23) Drivers who enter an expressway during the rush hour create negative externalities whenever
they
A) could have taken another route.
B) drive under the speed limit.
C) fail to yield as they merge.
D) have no other passengers in their vehicles.
E) inadvertently slow down all the drivers behind them.
24) Externalities could be eliminated from society if it were not for the existence of
A) conflicting interests.
B) government.
C) private property.
D) selfishness
E) transaction costs.
25) Property rights are useful in predicting behavior when we define ownership of a resource as
A) a moral claim to a particular resource.
B) legal title to the resource.
C) physical possession of the resource.
D) the ability to appropriate the benefits from use of a resource.
26) The property rights people actually possess
A) are limited to the rights sanctioned by law.
B) are the rights they can exercise regardless of what others do.
C) are the similar rights they grant other because all rights in a society must be mutual.
D) depend heavily on the cooperation of other people.
27) For social cooperation to be promoted, an effective system of property rights will be one in
which people
A) behave cautiously and considerately because their rights are not clear.
B) enjoy most rights in common with all other members of the society.
C) know exactly what their rights are and don’t expect them to change significantly.
D) know their rights are always dependent upon continuing majority approval.
E) realize the rules of the game can change at any moment.
28) A great deal of damage is done to the environment in the urban U.S. because
A) a system based on private property cannot provide for a common environment.
B) few people understand the economics of pollution.
C) many and perhaps most people assign little or no value to a pleasant environment.
D) the environment is treated as everyone‘s property and therefore as no one’s property.
E) the United States has no central planning.
29) The concept of private property is
A) a legal absolute.
B) a matter of degree.
C) a moral absolute.
D) an invention of economists.
30) In any society, an effective system of property rights would not be possible without
A) the cooperation of other people.
B) the entire legal system to adjudicate them fairly.
C) the police to enforce them.
D) non-property (public rights).
31) Which of the following is not among the first steps the textbook recommends be taken to
reduce negative externalities?
A) Adjudication
B) More scientific research
C) Negotiation
D) The cultivation of civic virtues
32) Could pollution be eliminated by banning all activities harmful to the environment?
A) No, because legislation is influenced by industrial lobbyists.
B) No, because the cost of doing so would be higher than even the most dedicated
environmentalist would agree to accept.
C) Not until we have better information on the sources of pollution.
D) Yes, if we are willing to place long-run considerations ahead of short-run profits.
33) Pollution is a cost because it entails the sacrifice of valued opportunities
A) and because the process of creating it confers no benefits on the members of society.
B) for some people.
C) and reduces the net welfare of society.
D) which makes everyone worse off in the long run.
34) What the economist calls externalities create social problems
A) because opportunity costs are low when people live close to one another.
B) only when the externalities are negative spillovers.
C) partly because people have a limited ability to empathize.
D) when people know about all the consequences of their behavior.
35) It would have been very difficult to clean up Lake Erie some years ago without government
participation primarily because
A) environmental improvements benefit everyone and should therefore be financed from taxes.
B) the lake is a navigable body of water.
C) the lake is officially public property.
D) the pursuit of profit will cause environmental deterioration.
E) too many people could benefit without helping to pay the cost of the cleanup.
36) Which of the following is a significant barrier to reducing the damage people do to one
another’s environment?
A) Low negotiation costs among people
B) Property rights clearly assigned to specific persons
C) Scarcity of public or common property relative to private property
D) All of them.
E) None of them.
37) If nation-states are able to extend effective control over ocean resources from 3 miles to 200
miles off their coasts, valuable marine animals are more likely to be harvested
A) at a rate consistent with their long-run preservation.
B) at a rate inconsistent with their long-run preservation.
C) too rapidly for maximum net benefit.
D) too slowly for maximum net benefit.
E) up to the point of extinction.
38) According to the text, because people in an urban-industrial society will always disagree to
some extent about who ought to have which rights,
A) it is unreasonable to expect negative externalities to be completely eliminated.
B) negative externalities cannot be reduced without government coercion.
C) negative externalities should not be thought of as the consequence of disagreement over
property rights.
D) there is no point in discussing the matter.
E) we must depend upon government to decide exactly what should be prohibited or
commanded.
39) The effective coordination of social behavior through voluntary exchange depends
significantly upon
A) clearly defined property rights.
B) such civic virtues as courtesy and tolerance.
C) well-established and generally accepted rules regarding behavior.
D) all of the above.
40) People who consent to bear costs for the benefit of others whom they do not know personally
usually do so
A) because they are concerned about the welfare of society.
B) because they have been offered some benefit as an inducement.
C) only when they are compelled by force.
D) without calculating the costs to themselves.
41) Court decisions aiming to resolve disputes by determining who in fact possesses contested
legal rights
A) prevent any change from occurring.
B) prevent undesirable changes from occurring.
C) promote cooperation by clarifying and stabilizing expectations.
D) substitute legal criteria for economic criteria and thereby create windfall profits and losses.
E) substitute public-welfare criteria for private-interest criteria.
42) Direct controls imposing identical emission limits on all polluters are
A) efficient if emissions can be accurately monitored, which is seldom possible.
B) equitable because all polluters bear equal costs.
C) likely to require a great deal of high-cost pollution reduction.
D) more efficient and equitable than a system of fines because fines matter less to large than to
small polluters.
43) Protecting air quality by establishing identical low limits on noxious discharges for all firms
is a questionable policy because
A) a little pollution from many sources adds up to excessive pollution.
B) by allowing firms to pollute at all it sacrifices the community’s interest to private profit.
C) it does not allow high-cost air polluters to exceed the air pollution limits.
D) it tolerates preventable air pollution.
E) no one knows the possible side effects of the discharges.
44) When a tax on emissions into the air accurately reflects the cost to all members of society of
an additional unit of the emissions, it
A) amounts to no more than a license to pollute.
B) encourages firms to reduce emissions as long as the cost of doing so is less than the cost of
continuing the emissions.
C) gives firms little incentive to search for less-polluting production processes.
D) will not prevent large and profitable firms from polluting.
45) A tax on firms for polluting will be most effective in reducing pollution at low cost if the tax
A) is levied on a one-time, lump-sum basis.
B) per unit of pollutant is constant.
C) per unit of pollutant is lower for low polluting firms.
D) per unit of pollutant is proportioned to profits or ability to pay.
46) According to your text, controversies about negative externalities are almost always conflicts
between the legitimate expectations of citizens and the
A) desire of individuals for greater profits.
B) desire of politicians to be reelected.
C) legitimate expectations of other citizens.
D) mindless urge for more material goods.
E) strident demands of environmentalists.
47) Suppose a judge is trying to decide whether, as a matter of fact, homeowners currently
possess the right to prevent airplanes from flying low over their houses. The judge’s ruling is
correct if his decision results in
A) a fall in the market value of the houses.
B) a rise in the market value of the house.
C) no change in the market value of the houses.
D) uncertainty about the market value of the houses.
48) Adjudication, as discussed in the text, is a process for settling disagreements by supporting
and enforcing which rights?
A) Rights based on an original act of mixing human labor with previously unowned resources
B) The most ancient rights, whether or not they have been enforced
C) The most widely and confidently accepted rights
D) The rights of the majority
49) According to the textbook, the noise of jet engines is not a negative externality for baggage
handlers
A) because it leaves no residue in the environment.
B) because the benefits are greater than the costs.
C) because they are paid to live with the noise.
D) because they wear hearing-protection devices.
E) unless it leaves them with permanent hearing loss.
50) The first step toward reducing negative externalities or maintaining them within acceptable
bounds, according to the argument of the textbook, is
A) constructing an exhaustive list of all negative externalities.
B) creating a central planning authority for negative externalities.
C) cultivating such civic virtues as courtesy and tolerance.
D) halting population growth.
E) prohibiting activities whose costs are greater than their benefits.
51) What important function does adjudication perform in the process of reducing negative
externalities?
A) It allocates the revenue from negative externalities to the people who have been damaged.
B) It arbitrates between beneficiaries of negative externalities and the people who must bear their
costs.
C) It decides whether punitive or merely compensatory damages will be awarded.
D) It discovers who has which rights.
E) It imposes criminal penalties on the people responsible for generating negative externalities.
52) What is the great advantage of adjudication over legislation in the management of negative
externalities?
A) Adjudication has lower costs.
B) Adjudication maintains the continuity of expectations.
C) Courts are bound by the rule of law and legislatures are not.
D) Courts can act more quickly than legislatures.
E) There are no clear answers in such cases.
53) Which of the following is a disadvantage of the command-and-control approach to the
problem of pollution?
A) It creates licenses to pollute.
B) It is undemocratic.
C) It only works in societies where everyone (or almost everyone) has a high degree of
environmental consciousness.
D) It usually overlooks less costly ways to achieve given goals.
E) It violates property rights.
54) If airports decide to compensate people who suffer from airplane noise because their homes
are under the runway approaches, to whom should they offer monetary payments? The people
who
A) actually live in affected residences.
B) are bothered by the noise but themselves never travel on commercial airlines.
C) both own affected residences and live in them.
D) either own affected residences or live in them.
E) own affected residences whether or not they live in them.
55) The authors of the textbook would not want to say you were “littering” when you toss your
peanut shells under your seat at a major league baseball game because
A) peanut shells are biodegradable.
B) someone is going to clean up after you.
C) the games are played outside.
D) the stadium is public property and public property is no one’s property.
E) the people in charge of putting on the game don’t mind at all.
56) The jet noise assaulting the ears of a baggage handler is not an externality or spillover cost if
A) baggage handlers are required by law to wear hearing protectors.
B) baggage handlers are required by their employers to wear hearing protectors.
C) baggage handlers freely choose to wear hearing protectors.
D) baggage handlers find the pay sufficiently attractive to stay with their jobs.
E) the noise does no permanent damage to their hearing.
57) Adjudication reduces problems created by negative externalities by
A) assigning liability to the party most able to pay (the deep pocket).
B) balancing marginal social benefits against marginal social costs.
C) discovering who has what rights.
D) making more accurate private benefit-cost analyses.
E) measuring externalities more precisely.
58) The principal reason we no longer see huge herds of bison (popularly known as “buffalo”) on
the American prairies is because
A) the bison has been declared an endangered species.
B) the bison have not been declared an endangered species.
C) the bison were slaughtered in the 19th century in a wasteful manner.
D) the bison were slaughtered in the 19th century in response to financial incentives.
E) the people who own prairie land usually don’t want bison on their property.
59) Freeways in large cities tend to be congested during rush hours to the point where offer little
or no advantage over non-freeway routes because
A) drivers generally ignore marginal benefits and costs.
B) drivers usually ignore marginal benefits and costs during rush hours.
C) no monetary fee is charged for the use of freeways during rush hours.
D) not enough freeways have been constructed due to special interests’ control of the
government.
E) people need to get to work and the demand for freeway travel is consequently inelastic during
rush hours.