Chapter 10/Externalities ✦ 57 Chapter 10 Externalities Market failure in the form of externalities arises when a production costs are included in the prices of goods b not all costs and benefits are included in the prices of goods c the benefits exceed the costs of consuming goods d the market fails to achieve equilibrium ANSWER: b not all costs and benefits are included in the prices of goods SECTION: INTRO OBJECTIVE: 1 Which of the following is an example of a positive externality? a air pollution b a person littering in a public park c a nice garden in front of your neighbor’s house d the pollution of a stream ANSWER: c a nice garden in front of your neighbor’s house SECTION: INTRO OBJECTIVE: 1 The social cost of a good is a its benefit to the people who buy and consume it b its total benefit to everyone in society c its cost to everyone in the society that occurs in addition to the private costs d the cost paid by the firm that produces and sells it ANSWER: c its cost to everyone in the society that occurs in addition to the private costs SECTION: INTRO OBJECTIVE: 1 The private benefit of consuming a good is a its benefit to the people who buy and consume it b its total benefit to everyone in the society c its cost to everyone in the society d the cost paid by the firm that produces and sells it ANSWER: a its benefit to the people who buy and consume it SECTION: INTRO OBJECTIVE: 1 When a person drives a car that pollutes the air the a private cost of consuming the car’s services exceeds the social cost b private benefit of consuming the car’s services exceeds the social benefit c social cost of consuming the car’s services exceeds the private cost d social benefit of consuming the car’s services exceeds the private benefits ANSWER: c social cost of consuming the car’s services exceeds the private cost SECTION: INTRO OBJECTIVE: 1 58 ✦ Chapter 10/Externalities If a perfectly competitive industry is not forced to take account of a negative externality it creates, it will produce where a the marginal cost of production equals the marginal private benefit b the marginal cost of production equals the marginal social benefit c the marginal social cost of production equals the marginal social benefit d price equals marginal social benefit ANSWER: a the marginal cost of production equals the marginal private benefit SECTION: 1 OBJECTIVE: 2 Flu shots are associated with a positive externality. (Those who come in contact with people who are inoculated are helped as well.) Given perfect competition with no government intervention in the vaccination market, which of the following holds? a At the current output level, the marginal social benefit exceeds the marginal private benefit b The current output level is inefficiently low c A pershot subsidy could turn an inefficient situation into an efficient one d All of the above are correct ANSWER: d All of the above are correct SECTION: 1 OBJECTIVE: 2 Because there are positive externalities from higher education, a private markets would provide too little of it b private markets would provide too much of it c the government should impose a tax on college students d the government should impose a tax on students’ families ANSWER: a private markets would provide too little of it SECTION: 1 OBJECTIVE: 2 This diagram represents the tobacco industry. Which of the following would be included in the supply (private cost) curve? a the cost of labor b the cost to the government of the hospital expenses of smokers with cancer c the increased risk of cancer to the nonsmoking passengers in the smoker’s car pool d the price of a pack of cigarettes ANSWER: a the cost of labor SECTION: 1 OBJECTIVE: 2 Chapter 10/Externalities ✦ 59 10 This diagram represents the tobacco industry. It is clear that the industry creates a positive externalities b negative externalities c no externalities d no equilibrium in the market ANSWER: b negative externalities SECTION: 1 OBJECTIVE: 2 11 This diagram represents the tobacco industry. The market creates an equilibrium price and quantity exchanged of a $1.90 and 42 units b $1.80 and 35 units c $1.60 and 42 units d $1.35 and 59 units ANSWER: c $1.60 and 42 units SECTION: 1 OBJECTIVE: 2 12 This diagram represents the tobacco industry. The socially optimal price and quantity exchanged are a $1.90 and 42 units b $1.80 and 35 units c $1.60 and 42 units d $1.35 and 59 units ANSWER: b $1.80 and 35 units SECTION: 1 OBJECTIVE: 2 60 ✦ Chapter 10/Externalities 13 This diagram represents the tobacco industry. If the government uses a pollution tax, how much of a tax must be imposed on each unit of production? a $1.30 b $0.50 c $1.80 d $0.30 ANSWER: d $0.30 SECTION: 3 OBJECTIVE: 5 14 This diagram represents the tobacco industry. If the government uses a pollution tax, how much tax revenue will the government receive? a $12.60 b $10.50 c $66.50 d $63.00 ANSWER: b $10.50 SECTION: 1 OBJECTIVE: 2 15 Internalizing an externality means a the good becomes a public good b government regulations or taxes are sufficient to eliminate the externality completely c government imposes regulations that eliminate the externality completely d incentives are altered so that people take account of the external effects of their actions ANSWER: d incentives are altered so that people take account of the external effects of their actions SECTION: 2 OBJECTIVE: 3 16 A dentist shared an office building with a radio station. The electrical current from the dentist’s drill causes static in the radio broadcast, causing the radio station to lose $10,000 in discounted future profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome? a The radio station puts up a shield, which it pays for b The radio station puts up a shield, which the dentist pays for c The radio station does not put up a shield and the dentist does not buy a new drill d The dentist gets a new drill and it does not matter who pays for it ANSWER: d The dentist gets a new drill and it does not matter who pays for it SECTION: 2 OBJECTIVE: 3 17 Why can’t private individuals always internalize an externality without the help of government? a Legal restrictions prevent side payments between individuals b Transactions costs may be too high c Side payments between individuals are inefficient d Side payments between individuals violate equity standards ANSWER: b Transactions costs may be too high SECTION: 2 OBJECTIVE: 4 Chapter 10/Externalities ✦ 61 18 What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed? a The Coase Theorem b Say’s Law c The Law of Comparative Advantage d The Law of Supply ANSWER: a The Coase Theorem SECTION: 2 OBJECTIVE: 3 19 Assume the production of the product in the figure imposes a cost on society of $7.00 per unit. If the free market equilibrium output is 50 units, the government should a impose a tax of $2.50 per unit b reduce the output of the firm by approximately 39 units c impose a lumpsum tax of $350 per period d impose a tax of $7.00 per unit ANSWER: d impose a tax of $7.00 per unit SECTION: 3 OBJECTIVE: 5 20 A benefit of taxes over regulation to internalize externalities is a it is easier to choose the optimal amount of taxes than the optimal amount of regulation b regulations are more difficult to impose than taxes c taxes equate the social costs with the social benefits d taxes provide incentives to adopt new methods to reduce the externality ANSWER: d taxes provide incentives to adopt new methods to reduce the externality SECTION: INTRO OBJECTIVE: 1 21 If the government wants to tax a polluter, the economically efficient outcome occurs when the a marginal tax equals the marginal cost to other people from the pollution b average tax equals the average cost to other people from the pollution c total tax equals the total cost to other people from the pollution d tax is high enough to stop pollution completely ANSWER: a marginal tax equals the marginal cost to other people from the pollution SECTION: INTRO OBJECTIVE: 1 62 ✦ Chapter 10/Externalities 22 Which of the following is NOT a method that could effectively deal with negative externalities? a relying on voluntary compliance b taxing the output of industries that pollute c creating legal environmental standards d increasing public spending on cleanup and reduction of pollution ANSWER: a relying on voluntary compliance SECTION: 3 OBJECTIVE: 4 23 A common complaint about environmental regulation and enforcement is that it a applies only to firms that produce goods, not services b is politically motivated and so is always misdirected c can be too burdensome to producers who can pay the fines more easily than they can reduce pollution d results in more pollution than without the regulations ANSWER: c can be too burdensome to producers who can pay the fines more easily than they can reduce pollution SECTION: 3 OBJECTIVE: 5 24 The benefit to a pollution tax over other forms of internalizing a pollution externality is that it a eliminates pollution completely b forces cleanup to occur c is imposed only on the market with the externality d creates positive externalities to compensate for negative externalities ANSWER: c is imposed only on the market with the externality SECTION: 3 OBJECTIVE: 5 25 Pollution permits a impose regulations on firms that they must achieve b set a quantity of pollution that will exist c cannot be traded between firms in order to make sure that the worst offenders must clean up their production processes d are efficient because they eliminate all pollution ANSWER: set a quantity of pollution that will exist SECTION: 3 OBJECTIVE: 5 Chapter 10/Externalities ✦ 63 26 This diagram shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium price of pollution here is a $500 b $1000 c $1500 d $2000 ANSWER: b $1000 SECTION: 3 OBJECTIVE: 5 ... the price of a pack of cigarettes ANSWER: a the cost of labor SECTION: 1 OBJECTIVE: 2 Chapter 10/ Externalities ✦ 59 10 This diagram represents the tobacco industry. It is clear that the industry creates...58 ✦ Chapter 10/ Externalities If a perfectly competitive industry is not forced to take account of a negative externality it creates, it ... $1.60 and 42 units d $1.35 and 59 units ANSWER: b $1.80 and 35 units SECTION: 1 OBJECTIVE: 2 60 ✦ Chapter 10/ Externalities 13 This diagram represents the tobacco industry. If the government uses a pollution tax, how much of