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.
b.
c.
d.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. 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.
31. 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.
32. Josiah installed a metal sculpture in his front yard. A positive externality arises if the sculpture
a.
increases the value of other properties in the neighborhood.
b.
increases the value of Josiah’s home.
c.
is visually unappealing to Josiah’s neighbors.
d.
creates a safety hazard for neighborhood children.
33. Josiah installed a metal sculpture in his front yard. A negative externality arises if the sculpture
a.
increases the value of other properties in the neighborhood.
b.
decreases the value of Josiah’s home.
c.
is visually appealing to Josiah’s neighbors.
d.
creates a safety hazard for neighborhood children.