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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.
58. 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.
59. 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.
60. 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.
61. 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.
62. 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.
63. 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.
64. 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.
65. 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.
66. 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.
67. 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.
68. 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
69. Refer to Figure 10-7. Which quantity represents the social optimum for this market?
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
70. 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.
Figure 10-8
71. 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
72. 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
73. 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.
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
74. 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
75. 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
76. 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
77. 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.
78. 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
79. 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.
80. If we know that the supply curve for good x fails to reflect the total cost to society of producing 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 demand curve for good x fails to reflect the value to society of that good.
81. Internalizing a positive externality will cause the demand curve to
a.
shift to the right.
b.
shift to the left.
c.
become more elastic.
d.
remain unchanged.
82. Positive externalities
a.
result in a larger than efficient equilibrium quantity.
b.
result in smaller than efficient equilibrium quantity.
c.
result in an efficient equilibrium quantity.
d.
can be internalized with a corrective tax.
83. A positive externality
a.
is a benefit to the producer of the good.
b.
is a benefit to the consumer of the good.
c.
is a benefit to someone other than the producer and consumer of the good.
d.
results in an optimal level of output.
84. A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current
level of output of good x,
a.
social value = private value = private cost < social cost.
b.
social cost > private value = social value > private cost.
c.
social cost = private cost = private value < social value.
d.
social value = private cost = social cost > private value.
85. A benevolent social planner would prefer that the output of good x be decreased from its current level if, at the current
level of output of good x,
a.
social value = private value = private cost < social cost.
b.
private cost < social cost = private value = social value.
c.
social cost = private cost = private value < social value.
d.
social cost = private cost = private value = social value.
86. If a market is characterized by a positive externality that is not the result of a technology spillover,
a.
the socially optimal level of output is less than the equilibrium level of output, and the optimal price is greater
than the equilibrium price.
b.
the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal
price is less than the equilibrium price.
c.
the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal
price is greater than the equilibrium price.
d.
the socially optimal level of output is less than the equilibrium level of output, and the socially optimal price is
less than the equilibrium price.
87. To enhance the well-being of society, a social planner will encourage firms to increase production when
a.
the firms are producing basic goods.
b.
there is a shortage in the market.
c.
technology spillovers are associated with production.
d.
negative externalities “spill over” into production.
88. When the production of a good results in a positive externality, the social value curve is
a.
below the demand curve, indicating that the total value to society is less than the private benefit.
b.
above the demand curve, indicating that the total value to society is greater than the private benefit.
c.
identical to the demand curve, indicating that the total cost to society is the equal to the private benefit.
d.
above the supply curve, indicating that the total cost to society exceeds the private cost.
89. A positive externality will cause a market to produce
a.
more than is socially desirable.
b.
less than is socially desirable.
c.
the socially optimal equilibrium amount.
d.
more than the same market would produce in the presence of a negative externality.
90. A positive externality
a.
causes the product to be overproduced.
b.
provides an additional benefit to market participants.
c.
benefits consumers because it results in a lower equilibrium price.
d.
is a benefit to a market bystander.
91. A positive externality occurs when
a.
Jack receives a benefit from John's consumption of a certain good.
b.
Jack receives personal benefits from his own consumption of a certain good.
c.
Jack's benefit exceeds John's benefit when they each consume the same good.
d.
Jack's receives a loss from John’s consumption of a certain good.
92. When a market experiences a positive externality,
a.
the demand curve does not reflect the value to society of the good.
b.
too much of the good is being produced.
c.
the government can internalize the externality by imposing a tax on the product.
d.
the private value is greater than the social value.
93. Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the
a.
private benefit equals the social benefit at the private market solution.
b.
private cost exceeds the private benefit at the private market solution.
c.
social value exceeds the private value at the private market solution.
d.
private cost exceeds the social benefit at the private market solution.
94. Which of the following policies is the government most inclined to use when faced with a positive externality?
a.
taxation
b.
permits
c.
subsidies
d.
usage fees
95. If education produces positive externalities, we would expect
a.
the government to tax education.
b.
the government to subsidize education.
c.
people to realize the benefits, which would increase the demand for education.
d.
colleges to relax admission requirements.
96. If education produces positive externalities and the government does not intervene in the market, we would expect
a.
the equilibrium price to be higher than the optimal price.
b.
the equilibrium quantity to be lower than the optimal level.
c.
the equilibrium quantity to be higher than the optimal level.
d.
both a and b are correct
97. Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the
equilibrium quantity and the socially optimal quantity of cookies to be produced?
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.
98. Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the
equilibrium quantity and the socially optimal quantity of plants grown?
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.
99. Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the
equilibrium quantity and the socially optimal quantity of flu shots produced?
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.
100. Suppose that elementary education creates a positive externality. If the government does not subsidize education,
then
a.
the equilibrium quantity of education will be equal to the socially optimal quantity of education.
b.
the equilibrium quantity of education will be greater than the socially optimal quantity of education.
c.
the equilibrium quantity of education will be less than the socially optimal quantity of education.
d.
There is not enough information to answer the question.
101. Which of the following is an example of a positive externality?
a.
Sue not catching the flu because she got a flu vaccine
b.
Mary not catching the flu from Sue because Sue got a flu vaccine
c.
Sue catching the flu because she did not get a flu vaccine
d.
Mary catching the flu from Sue because Sue did not get a flu vaccine
102. University researchers create a positive externality because what they discover in their research labs can easily be
learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship between
the equilibrium quantity of university research and the optimal quantity of university research produced?
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.
103. Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without
government intervention in the vaccination market, which of the following statements is correct?
a.
At the current output level, the marginal social benefit exceeds the marginal private benefit.
b.
The current output level is inefficiently low.
c.
A per-shot subsidy could turn an inefficient situation into an efficient one.
d.
All of the above are correct.
104. Because there are positive externalities from higher education,
a.
private markets will under-supply college classes.
b.
private markets will over-supply college classes.
c.
the government should impose a tax on college students.
d.
government intervention cannot improve the market for college classes.
105. Which of the following is true of markets characterized by positive externalities?
a.
Social value exceeds private value, and market quantity exceeds the socially optimal quantity.
b.
Social value is less than private value, and market quantity exceeds the socially optimal quantity.
c.
Social value exceeds private value, and market quantity is less than the socially optimal quantity.
d.
Social value seldom exceeds private value; therefore, social quantity is less than private quantity.
106. In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry to
a.
shift to the right.
b.
shift to the left.
c.
become more elastic.
d.
remain unchanged.
107. Which of the following statements is not correct?
a.
A patent is a way for the government to encourage the production of a good with technology spillovers.
b.
A tax is a way for the government to reduce the production of a good with a negative externality.
c.
A tax that accurately reflects social costs produces the socially optimal outcome.
d.
Government policies cannot improve upon private market outcomes.
108. Technology spillover is one type of
a.
negative externality.
b.
positive externality.
c.
subsidy.
d.
producer surplus.
109. Which of the following best defines the situation where one firm's research yields knowledge that is used by society
as a whole?
a.
social cost
b.
opportunity cost of technology
c.
internalization of an externality
d.
technology spillover
110. Government intervention that aims to promote technology-enhancing industries is called
a.
assisted technology.
b.
intervention policy.
c.
industrial technology assistance.
d.
industrial policy.
111. Technology spillover occurs when
a.
a firm passes the high costs of technical research on to society through higher prices.
b.
a firm's research yields technical knowledge that is used by society as a whole.
c.
the government subsidizes firms engaged in high-tech research.
112. When technology spillover occurs,
a.
it is the government's responsibility to own firms that are engaged in high-tech research.
b.
a firm's research yields technological knowledge that can then be used by society as a whole.
c.
those firms engaged in technology research should be taxed by the government.
d.
firms invest in the latest production technology and the cost of that technology "spills over" to the prices
consumers must pay for the product.
113. Research into new technologies
a.
provides positive externalities because it creates knowledge others can use.
b.
results in negative externalities because government funding for research causes less government spending in
other areas.
c.
is protected by patent laws, which eliminates the need for government intervention.
d.
should only be funded by the corporations that will receive the profits from the research.
114. If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a
technology spillover, it should
a.
impose a corrective tax on any firm producing a technology spillover.
b.
offer tax credits to consumers who are adversely affected by the new technology.
c.
subsidize producers by an amount equal to the value of the technology spillover.
d.
provide research grants to those firms not currently engaging in research to increase competition in the
industry.
115. When an industry is characterized by technology spillover, what should the government do to ensure that the market
equilibrium equals the socially optimal equilibrium?
a.
Impose a tax greater than the value of the technology spillover.
b.
Not allow production of any product that causes a technology spillover.
c.
Provide a subsidy equal to the value of the technology spillover.
d.
Require producers to "clean up" any spillover that results from their production process.
116. In the case of a technology spillover, the government can encourage firms to internalize a positive externality by
a.
taxing production, which would decrease supply.
b.
taxing production, which would increase supply.
c.
subsidizing production, which would decrease supply.
d.
subsidizing production, which would increase supply.
117. In the case of a technology spillover, internalizing a positive externality through a government subsidy will cause the
industry's supply curve to
a.
shift up by an amount equal to the subsidy.
b.
shift down by an amount less than the subsidy.
c.
shift down by an amount equal to the subsidy.
d.
shift down by an amount greater than the subsidy.
118. Which of the following is NOT a way of internalizing technology spillovers?
a.
subsidies
b.
patent protection
c.
industrial policy
d.
taxes
119. If the production of computer chips yields greater technology spillovers than the production of potato chips, the
government should
a.
encourage the production of computer chips with subsidies.
b.
discourage the production of potato chips with taxes.
c.
encourage the production of potato chips with subsidies.
d.
discourage the production of computer chips with taxes.
120. Industrial policy aims to
