Question 1

What does the phrase "internalizing 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 2

The market demand for a public good can be determined by

Accepted Answer

A)  adding up the total private benefits and external benefits that each quantity provides the citizens of a country. 
B)  adding up how much each citizen expects to consume at each possible price. 
C)  adding up how much each consumer is willing to pay for each unit of the public good. 
D)  estimating the value of the benefit that each unit provides and multiplying that by the number of consumers. 
A)  adding up the total private benefits and external benefits that each quantity provides the citizens of a country. 
B)  adding up how much each citizen expects to consume at each possible price. 
C)  adding up how much each consumer is willing to pay for each unit of the public good. 
D)  estimating the value of the benefit that each unit provides and multiplying that by the number of consumers.

Question 3

Economists argue that the level of pollution should be

Accepted Answer

A)  reduced completely to zero because by definition, it is a negative external effect. 
B)  ignored because it has always been present since the beginning of history. 
C)  reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. 
D)  best determined by elected officials who can speak on behalf of the public. 
A)  reduced completely to zero because by definition, it is a negative external effect. 
B)  ignored because it has always been present since the beginning of history. 
C)  reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. 
D)  best determined by elected officials who can speak on behalf of the public.

Question 4

A negative externality exists if

Accepted Answer

A)  there are price controls in a market. 
B)  there are quantity controls in a market. 
C)  the marginal social cost of producing a good or service exceeds the private cost. 
D)  the marginal private cost of producing a good or service exceeds the social cost. 
A)  there are price controls in a market. 
B)  there are quantity controls in a market. 
C)  the marginal social cost of producing a good or service exceeds the private cost. 
D)  the marginal private cost of producing a good or service exceeds the social cost.

Question 5

Figure 5-8   Consider a chemical plant that discharges toxic fumes over a nearby community. To reduce the emissions of toxic fumes the firm can install pollution abatement devices. Figure 5-8 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.
-Refer to Figure 5-8. Suppose the emissions reduction target is currently established at 8 million tons. What is the area that represents the cost of eliminating an additional 1 million tons?

Accepted Answer

A)  A 
B)  B + C 
C)  A + B 
D)  A + B + C 
A)  A 
B)  B + C 
C)  A + B 
D)  A + B + C

Question 6

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 realizes 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 realizes 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 7

When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society.

Accepted Answer

A) True 
 B)False

Question 8

The 2005, 24 European Union nations established a cap-and-trade system which was designed to

Accepted Answer

A)  eliminate air pollution and greenhouse gases by the year 2020. 
B)  reduce carbon dioxide emissions. 
C)  provide fast growing developing countries with the technology to reduce their carbon emissions. 
D)  remove all taxes from polluting industries. 
A)  eliminate air pollution and greenhouse gases by the year 2020. 
B)  reduce carbon dioxide emissions. 
C)  provide fast growing developing countries with the technology to reduce their carbon emissions. 
D)  remove all taxes from polluting industries.

Question 9

Article Summary
According to a study by the Center for Neighborhood Technology, homes located within one-half mile of frequently-used public transportation held their value much better during the recent housing market downturn than did those without easy access to public transportation, and the greater home values reflect greater demand for neighborhoods in close proximity to public transportation. In addition to higher home values, the study found that close proximity to public transportation offers lower transportation costs, a wider variety of travel options, and access to more employment opportunities.
Source: Meg Handley, "Study: Proximity to Public Transit Boosts Home Values," U.S. News & World Report, March 22, 2013.
-When there is a negative externality, the competitive output is more than the economically efficient output level.

Accepted Answer

A) True 
 B)False

Question 10

"Free riding" is a characteristic of which type of good?

Accepted Answer

A)  a private good 
B)  a common resource 
C)  a public good 
D)  a good that is both rival and excludable 
A)  a private good 
B)  a common resource 
C)  a public good 
D)  a good that is both rival and excludable

Question 11

In the past the federal government often employed what is called a "command and control" approach to the reduction of pollution emissions. Many economists are critical of this approach because

Accepted Answer

A)  it does not lead to significant reductions in pollution. 
B)  they believe a market-based approach will reduce pollution more efficiently. 
C)  the "command and control" approach is designed to help firms at the expense of consumers. 
D)  the "command and control" approach leads to negative externalities. 
A)  it does not lead to significant reductions in pollution. 
B)  they believe a market-based approach will reduce pollution more efficiently. 
C)  the "command and control" approach is designed to help firms at the expense of consumers. 
D)  the "command and control" approach leads to negative externalities.

Question 12

In England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was

Accepted Answer

A)  the area of pasture was nonexcludable and the consumption of the grass was rival. 
B)  self-interest motives led livestock owners to raise too many cows and sheep. 
C)  due to a policy of neglect on the part of the English government. 
D)  it did not get enough rainfall. 
A)  the area of pasture was nonexcludable and the consumption of the grass was rival. 
B)  self-interest motives led livestock owners to raise too many cows and sheep. 
C)  due to a policy of neglect on the part of the English government. 
D)  it did not get enough rainfall.

Question 13

A product is considered to be excludable if it is jointly owned by all members of a community.

Accepted Answer

A) True 
 B)False

Question 14

Briefly explain the command-and-control approach in dealing with an externality such as pollution. Give an example of the U.S. government using the command-and-control approach to deal with the pollution problem.

Accepted Answer

Command-and-control is an approach that

Question 15

State and local governments subsidize college students with grants and low-interest loans. The loans and subsidies are examples of

Accepted Answer

A)  positive externalities. 
B)  Coase subsidies. 
C)  Pigovian subsidies. 
D)  emission allowances. 
A)  positive externalities. 
B)  Coase subsidies. 
C)  Pigovian subsidies. 
D)  emission allowances.

Question 16

What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?

Accepted Answer

A Pigovian tax is a government

Question 17

Figure 5-4   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 5-4 shows the paper market. Use this Figure to answer the following question(s).
-Refer to Figure 5-4. 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 18

Figure 5-10   Chicken pox vaccinations for toddlers benefit society by protecting young children and by preventing an epidemic of the disease. Thus, the social benefits of chicken pox vaccinations exceed the private benefit for any quantity of vaccinations as illustrated in Figure 5-10.
-Consider the following methods of pollution reduction: a. the government sets a target for maximum emissions
B. the government mandates the installation of specific pollution abatement equipment
C. the government imposes a per unit tax on the good that creates pollution
D. the government gives firms a tax rebate for every unit of pollution abated
Which of the above is an example of a command and control approach to reducing pollution?

Accepted Answer

A)  a only 
B)  b only 
C)  a and b only 
D)  a, b, and d only 
E)  a, b, c, and d 
A)  a only 
B)  b only 
C)  a and b only 
D)  a, b, and d only 
E)  a, b, c, and d

Question 19

Figure 5-2   Figure 5-2 shows a market with a negative externality.
-A market supply curve reflects the

Accepted Answer

A)  external costs of producing a good or service. 
B)  external benefits of producing a good or service. 
C)  social costs of producing a good or service. 
D)  private costs of producing a good or service. 
A)  external costs of producing a good or service. 
B)  external benefits of producing a good or service. 
C)  social costs of producing a good or service. 
D)  private costs of producing a good or service.

Question 20

Which of the following is an example of a quasi-public good?

Accepted Answer

A)  cable television 
B)  organic apples 
C)  stock of knowledge in the public domain 
D)  crime prevention 
A)  cable television 
B)  organic apples 
C)  stock of knowledge in the public domain 
D)  crime prevention

Exam 5: Externalities, Environmental Policy, and Public Goods

What does the phrase "internalizing an external cost" mean?

The market demand for a public good can be determined by

Economists argue that the level of pollution should be

A negative externality exists if

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

When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society.

The 2005, 24 European Union nations established a cap-and-trade system which was designed to

"Free riding" is a characteristic of which type of good?

In the past the federal government often employed what is called a "command and control" approach to the reduction of pollution emissions. Many economists are critical of this approach because

A product is considered to be excludable if it is jointly owned by all members of a community.

Briefly explain the command-and-control approach in dealing with an externality such as pollution. Give an example of the U.S. government using the command-and-control approach to deal with the pollution problem.

State and local governments subsidize college students with grants and low-interest loans. The loans and subsidies are examples of

What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?

Figure 5-2 Figure 5-2 shows a market with a negative externality. -A market supply curve reflects the

Which of the following is an example of a quasi-public good?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters