Q&A Hero

Q: The Coase theorem states that A) government intervention is always needed if externalities are present. B) assigning property rights is the only thing the government should do in a market economy. C) if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. D) a free market equilibrium is the best solution to address externalities.

Q: Figure 5-7 Refer to Figure 5-7. Which of the following statements is true? A) At QE the benefits of reducing pollution outweighs the cost of pollution reduction. B) At QB society is under allocating resources to pollution reduction. C) The optimal quantity of pollution reduction is QB. D) The optimal quantity of pollution reduction is QE.

Q: Figure 5-7 Refer to Figure 5-7. What is the incremental benefit of increasing the quantity of pollution reduction from QBto QE units? A) PF B) PF QE C) the value of the area BEF D) the value of the area QBBFQE

Q: Figure 5-7 Refer to Figure 5-7. What is the incremental cost of increasing the quantity of pollution reduction from QBto QE units? A) PE B) the value of the area QBBEQE C) PE QE D) the value of the area BEF

Q: Figure 5-7 Refer to Figure 5-7. The marginal benefit of reducing pollution curve is the same curve as A) the supply of pollution reduction curve. B) the demand for pollution reduction curve. C) the positive externality curve. D) the external benefit curve.

Q: Figure 5-7 Refer to Figure 5-7. The marginal cost of reducing pollution curve is the same curve as A) the supply of pollution reduction curve. B) the demand for pollution reduction curve. C) the negative externality curve. D) the value of pollution reduction curve.

Q: If there is pollution in producing a product, then the market equilibrium price A) is too high and equilibrium quantity is too low. B) and equilibrium quantity are too low. C) and equilibrium quantity are too high. D) is too low and equilibrium quantity is too high.

Q: Because producers do not bear the external cost of pollution A) the economically efficient level of production is achieved. B) private production is below the economically efficient level. C) private production exceeds the economically efficient level. D) the market price is too high.

Q: Economists argue that the level of pollution should be 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.

Q: In economics, the optimal level of pollution is A) zero. B) the level for which the total benefit from reducing the pollution is the greatest. C) the level for which the marginal benefit from reducing the pollution is the greatest. D) the level for which the net benefit from reducing the pollution is the greatest.

Q: How does a positive externality in consumption reduce economic efficiency?

Q: A negative externality is an example of market failure. The root of the problem lies in the definition and enforcement of property rights. Explain.

Q: What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?

Q: Explain how mandatory seat belt laws may reduce the negative externalities of risky behavior.

Q: How does a negative externality in production reduce economic efficiency?

Q: What is a private cost of production? What is a social cost of production? When is the private cost of production equal to the social cost of production?

Q: What is an externality?

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

Q: An external benefit is created when you pursue a college education.

Q: When products that create positive externalities are produced, at the market equilibrium output, the social benefit generated by consuming the product exceeds the private benefit.

Q: An externality is an example of a market failure.

Q: The social cost of a good or service is the cost borne by the producer.

Q: When there is a negative externality, the competitive output is more than the economically efficient output level.

Q: When there is a positive externality in a free market, too much of the good is produced and consumed.

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

Q: The private cost of a good or service is the cost borne by the producer.

Q: An externality refers to economic events outside a market.

Q: 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. Refer to the Article Summary. People who do not use public transportation can still benefit from it, as is shown by the higher home values. As a result, the marginal social benefit from public transportation is ________ the marginal private benefit to those who use public transportation. A) equal to B) greater than C) less than D) unrelated to

Q: 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. Refer to the Article Summary. Higher home values which result from close proximity to public transportation are an example of a ________ due to the public transportation. A) positive externality. B) negative externality. C) private cost. D) social cost.

Q: Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. Refer to Figure 5-6. Why is there a deadweight loss? A) because the marginal private benefit for each additional unit between Q1 and Q2 exceeds the marginal cost B) because the marginal private cost for each additional unit between Q1 and Q2 exceeds the marginal private benefit C) because the marginal social cost for each additional unit between Q1 and Q2 exceeds the marginal social benefit D) because the marginal social benefit for each additional unit between Q1 and Q2 exceeds the marginal cost

Q: Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. Refer to Figure 5-6. What is the deadweight loss resulting from producing at the market equilibrium? A) B + C B) E + C C) F D) C

Q: Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. Refer to Figure 5-6. What is the market equilibrium output level? A) Q1 B) Q2 C) Q1 + Q2 D) Q2 - Q1

Q: Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. Refer to Figure 5-6. What does D2 represent? A) the social welfare curve B) the demand curve reflecting social benefit C) the demand curve reflecting private benefit D) the positive externalities curve

Q: Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. Refer to Figure 5-6. What is the economically efficient output level? A) Q1 B) Q1 + Q2 C) Q2 - Q1 D) Q2

Q: Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. Refer to Figure 5-6. What does D1 represent? A) the demand curve reflecting social benefit B) the positive externalities curve C) the demand curve reflecting private benefit D) the social welfare curve

Q: Figure 5-5 Figure 5-5 shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. Refer to Figure 5-5. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does D2 represent? 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 social and external benefits

Q: Figure 5-5 Figure 5-5 shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. Refer to Figure 5-5. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does D1 represent? 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

Q: Figure 5-5 Figure 5-5 shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. Refer to Figure 5-5. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, diagram shows A) the effect of a subsidy granted to producers of a good. B) the effect of an excess demand in a market. C) the effect of a positive externality in the consumption of a good. D) the effect of a negative externality in the consumption of a good.

Q: 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? 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

Q: 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. What is the deadweight loss from producing at the market equilibrium? A) area C B) area E C) area D D) area F

Q: 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.What is the economically efficient output level? A) Q1 B) Q2 minus Q1 C) Q2 D) Q1 plus Q2

Q: 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. What does S2 represent? A) the market supply curve that reflects social cost B) the market supply curve that reflect private cost C) the market supply curve that reflects external cost D) the market supply curve that reflects social benefit

Q: 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. What does S1 represent? A) the market supply curve that reflects social cost B) the market supply curve that reflects only external cost C) the market supply curve that reflects only private benefit D) the market supply curve that reflects private cost

Q: 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? 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.

Q: Assume that emissions from electric utilities contribute to pollution in the form of acid rain. Which of the following describes how this affects the market for electricity? A) The equilibrium in the market is not efficient; the marginal benefit from electricity is greater than the marginal social cost. B) A deadweight loss occurs; at equilibrium the additional social cost of production is greater than the additional benefit to consumers. C) The equilibrium in the market is not efficient; because of the cost of the acid rain, economic efficiency would be greater if more electricity were produced. D) The equilibrium in the market is not efficient; consumer surplus is equal to producer surplus.

Q: The social cost of cutting trees for firewood in a government forest is A) the increased likelihood of flooding as more trees are cut. B) the increased likelihood of flooding as more trees are cut plus the private cost of cutting the trees. C) opportunity cost to the individual of cutting the wood. D) the marginal costs of cutting the last tree.

Q: When there is an externality in a market A) the externality will move the market to an economically efficient equilibrium. B) the externality will cause the market price to be less than or greater than the equilibrium price. C) the government should use price controls to enable the market to reach equilibrium. D) government intervention may increase economic efficiency.

Q: An external cost is created when you A) graduate from college. B) buy flowers for your mother on Mother's Day. C) litter on the side of the road. D) buy a sandwich for lunch.

Q: If the social benefit of consuming a good or a service exceeds the private benefit A) a negative externality exists. B) the market achieves economic efficiency. C) a positive externality exists. D) the sum of consumer surplus and producer surplus is maximized.

Q: The cost borne by a producer in the production of a good or service is called A) private cost. B) public cost. C) social cost. D) internal cost.

Q: If the social cost of producing a good or service exceeds the private cost A) a positive externality exists. B) the sum of consumer surplus and producer surplus is maximized. C) the market achieves economic efficiency. D) a negative externality exists.

Q: When production generates a negative externality, the true cost of production is the A) private cost of production. B) public cost of production. C) social cost of production. D) average cost of production.

Q: When there is a positive externality A) the private benefit received by consumers is greater than the external benefit. B) the social benefit received by consumers is greater than the private benefit. C) the private benefit received by consumers is greater than the private cost. D) the private benefit received by consumers is greater than the social benefit.

Q: When there is a negative externality, the private cost of production ________ the social cost of production. A) is greater than B) is equal to C) eliminates D) is less than

Q: If there are no externalities a competitive market achieves economic efficiency. If there is a negative externality, economic efficiency will not be achieved because A) too little of the good will be produced. B) too much of the good will be produced. C) a deadweight loss will occur that is equal to the area under the demand curve for the good. D) economic surplus is maximized.

Q: "A competitive market achieves economic efficiency by maximizing the sum of consumer surplus and producer surplus." This statement A) is true only if there are positive externalities in production in the market. B) is true only if there are no negative externalities in the market. C) is true only if there are no positive or negative externalities in the market. D) is true in theory, but economic efficiency cannot be achieved in a real market.

Q: Which of the following describes how a positive externality affects a competitive market? A) The externality causes a difference between the private benefit from consumption and the social benefit. B) The externality causes a difference between the private benefit from production and the social cost of production. C) The externality causes quantity demanded to exceed quantity supplied. D) The externality causes a difference between the social cost of production and the social cost of consumption.

Q: Alternative approaches for reducing carbon dioxide emissions are A) carbon taxes and carbon scrubbing. B) carbon trading and carbon subsidies. C) carbon taxes and carbon trading. D) burning low carbon coal and deforestation.

Q: Which of the following could be evidence of a market failure? A) Resources in an economy are not fully utilized. B) The market price of a product is above the average cost of production. C) There are only a handful of firms competing against each other in an industry. D) Market prices do not reflect true production costs.

Q: A free market fails when A) there is government intervention. B) there is an external effect in either production, consumption, or both. C) firms that produce goods which create positive externalities go bankrupt. D) firms that produce goods which create negative externalities earn high profits.

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

Q: A positive externality results when A) economists are sure that a good or service provides benefits to consumers. B) someone pays for a good or service even though she is not directly affected by the production or consumption of it. C) when people who live in one country benefit from the production of a good or service that occurs in another country. D) people who are not directly involved in producing or paying for a good or service benefit from it.

Q: 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) 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.

Q: Which of the following would result in a positive externality? A) A local government establishes a price ceiling on rental apartments. B) An electric utility burns coal that causes acid rain. C) Medical research results in a cure for malaria. D) McDonald's adds new fat-free items to its menu.

Q: Pollution is an example of a A) public good. B) positive externality. C) private cost. D) negative externality

Q: Figure 5-3 Refer to Figure 5-3. At the competitive market equilibrium, for the last unit produced A) the size of the external cost is Pm- Po. B) the size of the external benefit is Pm- Po. C) the size of the external cost is Pn- Po. D) the size of the external benefit is Pn- Po.

Q: Figure 5-3 Refer to Figure 5-3. The deadweight loss due to the externality is represented by the area A) mso. B) msn. C) nso. D) mtn.

Q: Figure 5-3 Refer to Figure 5-3. In the absence of any government intervention, the private market A) under produces by Qo- Qm units. B) over produces by Qo- Qm units. C) over produces by Qn- Qm units. D) under produces by Qn- Qm units.

Q: Figure 5-3 Refer to Figure 5-3. The size of marginal external benefits can be determined by A) the demand curve D2. B) D2+ D1at each output level C) D2- D1at each output level. D) the demand curve D1.

Q: Figure 5-3 Refer to Figure 5-3. The private profit maximizing output level is A) Qm. B) Qn. C) Qo. D) Qo- Qm.

Q: Figure 5-3 Refer to Figure 5-3. The efficient output level is A) Qm. B) Qn. C) Qo. D) Qo- Qm.

Q: A market demand curve reflects the A) private benefits of consuming a product. B) external benefits of consuming a product. C) social benefits of consuming a product. D) the sum of private and social benefits of consuming a product.

Q: Which of the following conditions holds in an economically efficient competitive market equilibrium? A) The deadweight loss is positive but at a minimum. B) Producer and consumer surplus are exactly equal in size. C) There are no positive and no negative external effects from consumption and production. D) The marginal benefit of the last unit produced and consumed is maximized.

Q: A market supply curve reflects the 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.

Q: Figure 5-2 Figure 5-2 shows a market with a negative externality. Refer to Figure 5-2. The true marginal cost of the last unit produced is represented by the price A) Pa. B) Pb. C) Pc. D) Pf.

Q: Figure 5-2 Figure 5-2 shows a market with a negative externality. Refer to Figure 5-2. The marginal benefit of the last unit produced is represented by the price A) Pa. B) Pb. C) Pc. D) Pf.

Q: Figure 5-2 Figure 5-2 shows a market with a negative externality. Refer to Figure 5-2. The size of marginal external costs can be determined by A) S2+ S1at each output level. B) S2- S1at each output level. C) the supply curve S2. D) the supply curve S1.

Q: Figure 5-2 Figure 5-2 shows a market with a negative externality. Refer to Figure 5-2. The deadweight loss due to the externality is represented by the area A) abc. B) abf. C) abd. D) ade.

Q: Figure 5-2 Figure 5-2 shows a market with a negative externality. Refer to Figure 5-2. The private profit maximizing quantity for the firm is A) Qa. B) Qb. C) Qb- Qd. D) Qd.

Q: Figure 5-2 Figure 5-2 shows a market with a negative externality. Refer to Figure 5-2. The efficient output level is A) Qd. B) Qb. C) Qa. D) Qb- Qd.