Chapter 10 Externalities
MULTIPLE CHOICE
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.
producer profit from that market.
b.
total benefit to society from that market.
c.
both equality and efficiency in that market.
d.
output of goods or services in that market.
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.s
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.
2 ❖ Chapter 10/Externalities
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. 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.
10. 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.
11. 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.
Chapter 10/Externalities ❖ 3
12. 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.
13. 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.
14. 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.
15. Which of the following statements about a well-maintained yard best conveys the general nature of the exter-
nality?
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.
16. 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.
4 ❖ Chapter 10/Externalities
17. 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.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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.
Chapter 10/Externalities ❖ 5
23. Which of the following represents a way that a government can help the private market to internalize an exter-
nality?
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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
6 ❖ Chapter 10/Externalities
EXTERNALITIES AND MARKET INEFFICIENCY
1. If an externality is present in a market, economic efficiency may be enhanced by
a.
increased competition.
b.
weakening property rights.
c.
better informed market participants.
d.
government intervention.
2. Externalities tend to cause markets to be
a.
inefficient.
b.
unequal.
c.
unnecessary.
d.
overwhelmed.
3. If a sawmill creates too much noise for local residents,
a.
noise restrictions will force residents to move out of the area.
b.
a sense of social responsibility will cause owners of the mill to reduce noise levels.
c.
the government can raise economic well-being through noise-control regulations.
d.
the government should avoid intervening because the market will allocate resources efficiently.
4. Private markets fail to account for externalities because
a.
externalities don‘t occur in private markets.
b.
sellers include costs associated with externalities in the price of their product.
c.
decisionmakers in the market fail to include the costs of their behavior to third parties.
d.
the government cannot easily estimate the optimal quantity of pollution.
5. Altering incentives so that people take account of the external effects of their actions
a.
is called internalizing the externality.
b.
can be done by imposing a corrective tax.
c.
is the role of government in markets with externalities.
d.
all of the above.
6. When the government intervenes in markets with externalities, it does so in order to
a.
increase production when negative externalities are present.
b.
protect the interests of bystanders.
c.
make certain all benefits are received by market participants.
d.
reduce production when positive externalities are present.
Chapter 10/Externalities ❖ 7
7. All remedies for externalities share the goal of
a.
moving the allocation of resources toward the market equilibrium.
b.
moving the allocation of resources toward the socially optimal equilibrium.
c.
increasing the allocation of resources.
d.
decreasing the allocation of resources.
8. At any given quantity, the willingness to pay in the market for gasoline is reflected in the
a.
height of the demand curve at that quantity.
b.
height of the supply curve at that quantity.
c.
value to the producer of the last unit of gasoline sold.
d.
total quantity of gasoline exchanged in the market.
9. The supply curve for a product reflects the
a.
willingness to pay of the marginal buyer.
b.
quantity buyers will ultimately purchase of the product.
c.
cost to sellers of producing the product.
d.
seller’s profit from producing the product.
10. Since air pollution creates a negative externality,
a.
social welfare will be enhanced when some, but not all air pollution is eliminated.
b.
social welfare is optimal when all air pollution is eliminated.
c.
governments should encourage private firms to consider only private costs.
d.
the free market result maximizes social welfare.
11. The difference between social cost and private cost is a measure of the
a.
loss in profit to the seller as the result of a negative externality.
b.
cost of an externality.
c.
cost reduction when the negative externality is eliminated.
d.
cost incurred by the government when it intervenes in the market.
12. When a market is characterized by an externality, the government
a.
can correct the market failure only in the case of positive externalities.
b.
can correct the market failure only in the case of negative externalities.
c.
can correct the market failure in the case of both positive and negative externalities by inducing
market participants to internalize the externality.
d.
cannot correct for externalities due to the existence of patents.
8 ❖ Chapter 10/Externalities
13. Which of the following statements is correct?
a.
Government should tax goods with either positive or negative externalities.
b.
Government should tax goods with negative externalities and subsidize goods with positive
externalities.
c.
Government should subsidize goods with either positive or negative externalities.
d.
Government should tax goods with positive externalities and subsidize goods with negative
externalities.
Figure 10-1
14. Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates
a.
positive externalities.
b.
negative externalities.
c.
no externalities.
d.
no equilibrium in the market.
15. Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the
equilibrium price and quantity are
a.
$1.90 and 38 units, respectively.
b.
$1.80 and 35 units, respectively.
c.
$1.60 and 42 units, respectively.
d.
$1.35 and 58 units, respectively.
Chapter 10/Externalities ❖ 9
16. Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are
a.
$1.90 and 38 units, respectively.
b.
$1.80 and 35 units, respectively.
c.
$1.60 and 42 units, respectively.
d.
$1.35 and 58 units, respectively.
Figure 10-2. The graph depicts the market for plastic.
17. Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the
graph above. Without any government regulation, how much plastic will be produced?
a.
200
b.
500
c.
650
d.
900
18. Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the
graph above. Without any government regulation, what price will the firm charge per unit of plastic?
a.
$3
b.
$3.50
c.
$5
d.
$8
Private Cost
Social Cost
Demand
650200 500
Quantity
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5 Price
10 ❖ Chapter 10/Externalities
19. Refer to Figure 10-2. Suppose that the production of plastic creates a social cost which is depicted in the
graph above. What is the socially optimal quantity of plastic?
a.
200 units
b.
450 units
c.
500 units
d.
650 units
Figure 10-3
20. Refer to Figure 10-3. The social cost curve is above the supply curve because
a.
it takes into account the external costs imposed on society by the concert.
b.
it takes into account the effect of local noise restrictions on concerts in parks surrounded by
residential neighborhoods.
c.
concert tickets are likely to cost more than the concert actually costs the organizers.
d.
residents in the surrounding neighborhoods get to listen to the concert for free.
21. Refer to Figure 10-3. The difference between the social cost curve and the supply curve reflects the
a.
profit margin of each concert.
b.
cost of spillover effects from the concert (e.g., noise and traffic).
c.
value of concerts to society as a whole.
d.
amount by which the city should subsidize the concert organizers.
Chapter 10/Externalities ❖ 11
22. Refer to Figure 10-3. At the private market outcome, the equilibrium price will be
a.
P0.
b.
P1.
c.
P2.
d.
None of the above is correct.
23. Refer to Figure 10-3. What price and quantity combination best represents the optimum price and number of
concerts that should be organized?
a.
P1, Q1
b.
P2, Q0
c.
P2, Q1
d.
The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are
adversely affected by noise and congestion.
Figure 10-4
24. Refer to Figure 10-4. If this market is currently producing at Q4, then total economic well-being would be
maximized if output
a.
decreased to Q1.
b.
decreased to Q2.
c.
decreased to Q3.
d.
stayed at Q4.
12 ❖ Chapter 10/Externalities
25. Refer to Figure 10-4. This market is characterized by
a.
government intervention.
b.
a positive externality.
c.
a negative externality.
d.
None of the above is correct.
26. Refer to Figure 10-4. Without government intervention, the equilibrium quantity would be
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
27. Refer to Figure 10-4. The socially optimal quantity would be
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
28. Refer to Figure 10-4. This market
a.
has no need for government intervention.
b.
would benefit from a tax on the product.
c.
would benefit from a subsidy for the product.
d.
would maximize total well-being at Q3.
29. Refer to Figure 10-4. If this market is currently producing at Q2, then total economic well-being would in-
crease if output
a.
increased beyond Q4.
b.
decreased to Q1.
c.
increased to Q3.
d.
stayed at Q2.
30. Refer to Figure 10-4. If all external costs were internalized, then the market’s equilibrium output would be
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
Chapter 10/Externalities ❖ 13
31. Refer to Figure 10-4. At Q3
a.
the marginal consumer values this product less than the social cost of producing it.
b.
every consumer values this product less than the social cost of producing it.
c.
the cost to society is equal to the value to society.
d.
the marginal consumer values this product more than the private cost.
32. Refer to Figure 10-4. Externalities in this market could be internalized if
a.
there were a tax on the product.
b.
there were a subsidy for the product.
c.
production were stopped.
d.
the Coase theorem failed.
Figure 10-5
33. Refer to Figure 10-5. Which price and quantity combination represents the social optimum?
a.
P0 and Q1.
b.
P2 and Q1.
c.
P1 and Q0.
d.
P2 and Q0.
34. Refer to Figure 10-5. Which of the following statements is correct?
a.
The marginal benefit of the positive externality is measured by P3 – P1.
b.
The marginal cost of the negative externality is measured by P3 – P2.
c.
The marginal cost of the negative externality is measured by P3 – P1.
d.
The marginal cost of the negative externality is measured by P3 – P0.
14 ❖ Chapter 10/Externalities
Figure 10-6
35. Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?
a.
P
b.
P’
c.
Either P or P’. It is necessary to know whether the externality is positive or negative to determine
which of these is the equilibrium price.
d.
Some price between P and P’. The equilibrium price depends on the negotiating skills of the
interested parties.
36. Refer to Figure 10-6. Which quantity represents the socially-optimal quantity of output in this market?
a.
Q
b.
Q’
c.
Either Q or Q’. It is necessary to know whether the externality is positive or negative to determine
the socially-optimal quantity.
d.
Some quantity between Q and Q’. The socially-optimal quantity depends on the negotiating skills
of the interested parties.
P
P’
QQ’
D
S
External Cost
Quantity
Price
Chapter 10/Externalities ❖ 15
Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a
market.
Quantity
Private Value
1
$14
2
13
3
12
4
11
5
10
6
9
7
8
37. Refer to Table 10-1. What is the equilibrium quantity of output in the market?
a.
2 units
b.
3 units
c.
4 units
d.
5 units
38. Refer to Table 10-1. What is the socially-optimal quantity of output in this market?
a.
1 unit
b.
2 units
c.
3 units
d.
4 units
39. Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium
outcome to the socially-optimal outcome?
a.
$2
b.
$3
c.
$9
d.
$10
40. Refer to Table 10–1. Which of the following statements is correct?
a.
If the external benefit per unit of output were $0 instead of $2, then the socially efficient quantity of
output would be 4 units.
b.
A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to
the socially optimal level of output.
c.
Taking the external cost into account, total surplus declines when the 3rd unit of output is produced
and consumed.
d.
The market for flu shots is a market to which the concepts in this table apply very well.
16 ❖ Chapter 10/Externalities
41. 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.
42. 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.
43. 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.
44. 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.
45. 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.
46. 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.
Chapter 10/Externalities ❖ 17
47. 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.
48. 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.
49. 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.
50. 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.
51. 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.
18 ❖ Chapter 10/Externalities
52. When producers operate in a market characterized by negative externalities, a tax that forces them to internal-
ize 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.
53. When Lisa drives to work every morning, she drives on a congested highway. What Lisa does not realize is
that when she enters the highway each morning she increases the travel time of all other drivers on the high-
way. In this case, the external cost of Lisa’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.
54. 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.
55. 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.
56. 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.
Chapter 10/Externalities ❖ 19
57. 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.
58. 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.
59. 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.
60. Suppose that meat producers create a negative externality. What is the relationship between the equilibrium
quantity and the socially optimal quantity of meat 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.
61. Suppose that electricity producers create a negative externality equal to $5 per unit. What is the relationship
between the equilibrium quantity and the socially optimal quantity of electricity 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.
20 ❖ Chapter 10/Externalities
62. Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette mar-
ket, 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.
63. 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.
64. 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.
65. 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.
66. 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.