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. Private markets fail to account for externalities because
a.
b.
c.
d.
4. 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.
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 are correct.
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.
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.
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.
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.
$4.00
b.
$6.00
c.
$7.00
d.
$10.00
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
20. Refer to Figure 10–2. The private value of the 200th unit of plastic exceeds the social cost of the 200th unit of plastic
by
a.
$4.
b.
$8.
c.
$12.
d.
$16.
21. Refer to Figure 10–2. A benevolent social planner would like to see
a.
200 units of plastic produced.
b.
500 units of plastic produced.
c.
650 units of plastic produced.
d.
more than 650 units of plastic produced.
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
22. 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.
23. 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.
24. 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.
25. 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
26. 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.
27. 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.
28. Refer to Figure 10–4. Without government intervention, the equilibrium quantity would be
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
29. Refer to Figure 10–4. The socially optimal quantity would be
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
30. 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.
31. 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.
32. 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.
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.
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.
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
Private Cost
External Cost
1
$14
$10
$2
2
13
11
2
3
12
12
2
4
11
13
2
5
10
14
2
6
9
15
2
7
8
16
2
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 cost 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.
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.
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 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.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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.
57. 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