Question 1

Which of the following describes how a negative externality affects a competitive market?

Accepted Answer

A) The externality causes a difference between the private cost of production and the social cost. 
B) The externality causes a difference between the private cost of production and the private benefit from consumption. 
C) The externality causes consumer surplus to exceed producer surplus. 
D) The externality causes a difference between the private cost of production and the equilibrium price. 
A) The externality causes a difference between the private cost of production and the social cost. 
B) The externality causes a difference between the private cost of production and the private benefit from consumption. 
C) The externality causes consumer surplus to exceed producer surplus. 
D) The externality causes a difference between the private cost of production and the equilibrium price. A

Question 2

Why will for-profit producers not produce public goods?

Accepted Answer

A) Markets exist for private goods but not for public goods. 
B) The cost of production can be easily determined. 
C) Buyers will not be willing to pay for the goods since the benefits are not excludable. 
D) All external benefits can be internalised using market prices. 
A) Markets exist for private goods but not for public goods. 
B) The cost of production can be easily determined. 
C) Buyers will not be willing to pay for the goods since the benefits are not excludable. 
D) All external benefits can be internalised using market prices. C

Question 3

Figure 15.6   Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities.
-Refer to Figure 15.6.What does D1 represent?

Accepted Answer

A) The demand curve reflecting social benefit 
B) The positive externalities curve 
C) The demand curve reflecting private benefit 
D) The social welfare curve 
A) The demand curve reflecting social benefit 
B) The positive externalities curve 
C) The demand curve reflecting private benefit 
D) The social welfare curve C

Question 4

Figure 15.5   Figure 15.5 shows a market with an externality.The current market equilibrium output of QS1U1B11S1U1B0 is not the economically efficient output.The economically efficient output is QS1U1B12S1U1B0.
-Refer to Figure 15.5.If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does D1 represent?

Accepted Answer

A) The demand curve reflecting external benefits 
B) The demand curve reflecting social benefits 
C) The demand curve reflecting private benefits 
D) The demand curve reflecting the sum of private and social benefits 
A) The demand curve reflecting external benefits 
B) The demand curve reflecting social benefits 
C) The demand curve reflecting private benefits 
D) The demand curve reflecting the sum of private and social benefits

Question 5

Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution-generating good.All of the following will result from the tax except

Accepted Answer

A) an increase in the equilibrium market price. 
B) a decrease in the equilibrium quantity produced and consumed. 
C) a decrease in market supply of the good. 
D) an increase in the demand for the good. 
A) an increase in the equilibrium market price. 
B) a decrease in the equilibrium quantity produced and consumed. 
C) a decrease in market supply of the good. 
D) an increase in the demand for the good.

Question 6

A market failure arises when an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event.

Accepted Answer

A) True 
 B)False

Question 7

Figure 15.4   Suppose there are several paper mills producing paper for a market.These mills, located upstream from a fishing village, discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river, and the use of the river for recreation and as a public water supply source.Figure 15.4 shows the paper market.Use this Figure to answer the following question(s).
-Refer to Figure 15.4.Why is there a deadweight loss?

Accepted Answer

A) Because the marginal social cost of producing each additional unit in excess of Q2 exceeds the marginal benefit 
B) Because the marginal private cost of producing each additional unit in excess of Q2 exceeds the marginal benefit 
C) Because the marginal social benefit of producing each additional unit in excess of Q2 exceeds the private cost 
D) Because the marginal private benefit of producing each additional unit in excess of Q2 exceeds the social cost 
A) Because the marginal social cost of producing each additional unit in excess of Q2 exceeds the marginal benefit 
B) Because the marginal private cost of producing each additional unit in excess of Q2 exceeds the marginal benefit 
C) Because the marginal social benefit of producing each additional unit in excess of Q2 exceeds the private cost 
D) Because the marginal private benefit of producing each additional unit in excess of Q2 exceeds the social cost

Question 8

An externality is an example of a market failure.

Accepted Answer

A) True 
 B)False

Question 9

If the social cost of producing a good or service exceeds the private cost,

Accepted Answer

A) a positive externality exists. 
B) the sum of consumer surplus and producer surplus is maximised. 
C) the market achieves economic efficiency. 
D) a negative externality exists. 
A) a positive externality exists. 
B) the sum of consumer surplus and producer surplus is maximised. 
C) the market achieves economic efficiency. 
D) a negative externality exists.

Question 10

Assume that production from an electric utility caused acid rain.If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would

Accepted Answer

A) externalise the externality. 
B) result in a marginal social benefit greater than the marginal cost of the electricity. 
C) be an example of supply side economic policy. 
D) internalise the externality. 
A) externalise the externality. 
B) result in a marginal social benefit greater than the marginal cost of the electricity. 
C) be an example of supply side economic policy. 
D) internalise the externality.

Question 11

Figure 15.6   Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities.
-Refer to Figure 15.6.What is the deadweight loss resulting from producing at the market equilibrium?

Accepted Answer

A) B + C 
B) E + C 
C) F 
D) C 
A) B + C 
B) E + C 
C) F 
D) C

Question 12

What does the phrase 'internalising an external cost' mean?

Accepted Answer

A) Limiting the extent to which domestic firms can outsource production 
B) Prohibiting economic activities that create externalities 
C) Forcing producers to factor into their production costs the cost of the externalities created in the production of their output 
D) Finding a way to address cross-border pollution 
A) Limiting the extent to which domestic firms can outsource production 
B) Prohibiting economic activities that create externalities 
C) Forcing producers to factor into their production costs the cost of the externalities created in the production of their output 
D) Finding a way to address cross-border pollution

Question 13

Figure 15.14   Figure 15.14 shows the market for Atlantic tuna, a common resource.The current market equilibrium output of QS1U1B11S1U1B0 is not the economically efficient output.The economically efficient output is QS1U1B12S1U1B0.
-Refer to Figure 15.14.The current market equilibrium output is partly the result of overfishing.In that case, what does S1 represent?

Accepted Answer

A) The private marginal cost of harvesting tuna 
B) The social marginal cost of harvesting tuna 
C) The private marginal benefit of harvesting tuna 
D) The social marginal benefit of harvesting tuna 
A) The private marginal cost of harvesting tuna 
B) The social marginal cost of harvesting tuna 
C) The private marginal benefit of harvesting tuna 
D) The social marginal benefit of harvesting tuna

Question 14

When the government imposes a tax equal to the external cost of producing a product that causes pollution, the government is said to externalise the externality.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is an example of a command and control approach to reducing pollution?

Accepted Answer

A) The government sets a target for maximum emissions 
B) The government imposed a per unit tax on the good that creates pollution 
C) The government gives firms a tax rebate for every unit of pollution abated 
D) None of the above 
A) The government sets a target for maximum emissions 
B) The government imposed a per unit tax on the good that creates pollution 
C) The government gives firms a tax rebate for every unit of pollution abated 
D) None of the above

Question 16

When there is a negative externality, the private cost of production ________ the social cost of production.

Accepted Answer

A) is greater than 
B) is equal to 
C) eliminates 
D) is less than 
A) is greater than 
B) is equal to 
C) eliminates 
D) is less than

Question 17

Medical research that ends in a cure for a serious disease produces positive externalities.What is the impact of this positive externality on economic efficiency?

Accepted Answer

A) At equilibrium, less than the economically efficient quantity of medical research is produced. 
B) A deadweight loss occurs because at equilibrium, the marginal social cost of medical research is greater than the marginal social benefit. 
C) At equilibrium, more than the economically efficient quantity of medical research is produced. 
D) A deadweight loss occurs because at equilibrium, the marginal social cost equals the marginal social benefit. 
A) At equilibrium, less than the economically efficient quantity of medical research is produced. 
B) A deadweight loss occurs because at equilibrium, the marginal social cost of medical research is greater than the marginal social benefit. 
C) At equilibrium, more than the economically efficient quantity of medical research is produced. 
D) A deadweight loss occurs because at equilibrium, the marginal social cost equals the marginal social benefit.

Question 18

One difference between the demand for a private good and that for a public good is that

Accepted Answer

A) with a private good, each consumer chooses the quantity she wants to consume but with a public good, each consumer chooses the price she is willing to pay for a fixed quantity. 
B) with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity. 
C) with a private good, each consumer receives different amounts of benefit from consuming the product but with a public good, every consumer realises the same amount of benefit from consuming the product. 
D) the marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from consuming the last unit of a private good because there are externalities in the consumption of the former. 
A) with a private good, each consumer chooses the quantity she wants to consume but with a public good, each consumer chooses the price she is willing to pay for a fixed quantity. 
B) with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity. 
C) with a private good, each consumer receives different amounts of benefit from consuming the product but with a public good, every consumer realises the same amount of benefit from consuming the product. 
D) the marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from consuming the last unit of a private good because there are externalities in the consumption of the former.

Question 19

What does a positive externality cause?

Accepted Answer

A) The marginal social benefit to be equal to the marginal private cost of the last unit produced 
B) The marginal social benefit to be less than the marginal private cost of the last unit produced 
C) The marginal social benefit to exceed the marginal private cost of the last unit produced 
D) The marginal private benefit to exceed the marginal social cost of the last unit produced 
A) The marginal social benefit to be equal to the marginal private cost of the last unit produced 
B) The marginal social benefit to be less than the marginal private cost of the last unit produced 
C) The marginal social benefit to exceed the marginal private cost of the last unit produced 
D) The marginal private benefit to exceed the marginal social cost of the last unit produced

Question 20

Figure 15.2   Figure 15.2 shows a market with a negative externality.
-Refer to Figure 15.2.What price represents the true marginal cost of the last unit produced?

Accepted Answer

A) Pa 
B) Pb 
C) Pc 
D) Pf. 
A) Pa 
B) Pb 
C) Pc 
D) Pf.

Which of the following describes how a negative externality affects a competitive market?

Why will for-profit producers not produce public goods?

Figure 15.6 Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 15.6.What does D₁ represent?

Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution-generating good.All of the following will result from the tax except

A market failure arises when an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event.

An externality is an example of a market failure.

If the social cost of producing a good or service exceeds the private cost,

Assume that production from an electric utility caused acid rain.If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would

Figure 15.6 Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 15.6.What is the deadweight loss resulting from producing at the market equilibrium?

What does the phrase 'internalising an external cost' mean?

When the government imposes a tax equal to the external cost of producing a product that causes pollution, the government is said to externalise the externality.

Which of the following is an example of a command and control approach to reducing pollution?

When there is a negative externality, the private cost of production ________ the social cost of production.

Medical research that ends in a cure for a serious disease produces positive externalities.What is the impact of this positive externality on economic efficiency?

One difference between the demand for a private good and that for a public good is that

What does a positive externality cause?

Figure 15.2 Figure 15.2 shows a market with a negative externality. -Refer to Figure 15.2.What price represents the true marginal cost of the last unit produced?

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: The Interaction of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Consumer Choice and Behavioural Economics

Technology Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition: The Competitive Model in a More Realistic

Oligopoly: Markets With Few Competitors

The Markets for Labour and Other Factors of Production

Comparative Advantage and the Gains From International Trade

Government Intervention in the Market

The Distribution of Income and Social Policy

Filters

Exam 15: Externalities, Environmental Policy and Public Goods

Which of the following describes how a negative externality affects a competitive market?

Why will for-profit producers not produce public goods?

Figure 15.6 Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 15.6.What does D1 represent?

Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution-generating good.All of the following will result from the tax except

A market failure arises when an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event.

An externality is an example of a market failure.

If the social cost of producing a good or service exceeds the private cost,

Assume that production from an electric utility caused acid rain.If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would

Figure 15.6 Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 15.6.What is the deadweight loss resulting from producing at the market equilibrium?

What does the phrase 'internalising an external cost' mean?

When the government imposes a tax equal to the external cost of producing a product that causes pollution, the government is said to externalise the externality.

Which of the following is an example of a command and control approach to reducing pollution?

When there is a negative externality, the private cost of production ________ the social cost of production.

Medical research that ends in a cure for a serious disease produces positive externalities.What is the impact of this positive externality on economic efficiency?

One difference between the demand for a private good and that for a public good is that

What does a positive externality cause?

Figure 15.2 Figure 15.2 shows a market with a negative externality. -Refer to Figure 15.2.What price represents the true marginal cost of the last unit produced?

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: The Interaction of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Consumer Choice and Behavioural Economics

Technology Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition: The Competitive Model in a More Realistic

Oligopoly: Markets With Few Competitors

The Markets for Labour and Other Factors of Production

Comparative Advantage and the Gains From International Trade

Government Intervention in the Market

The Distribution of Income and Social Policy

Filters

Figure 15.6 Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 15.6.What does D₁ represent?