Chapter 18 Externalities

Which of the following is the best example of a supply-side market failure?

A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.

Social costs are equal to: When social costs exceed private costs, there is a:

Private costs plus external costs

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

Your neighbor never mows her lawn. You don't have any legal right to force her to mow, but the mess in her front yard is making your neighborhood unsightly and reducing the value of your house. The reduction in the value of your house is $5,000, and the value of her time to mow the lawn once a week is $1,000. Suppose you offer her a deal in which you pay her $3,000 to mow. How does this deal affect surplus?

The deal increases both your surplus and your neighbor's.

Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbon tax while industry groups are pressuring you to implement no carbon tax at all. Both argue that their position makes more sense economically. In fact, the most efficient tax level is:

a tax equal to the external costs

State whether each of the following primarily causes an external cost or an external benefit. a. Fishing at a popular lakeside vacation spot: b. Buying a fax machine: c. Conducting research to find an AIDS vaccine: d. Occupying a seat on a bench in a crowded park: e. Littering: f. Spaying or neutering your pet:

a. external costs b. external benefit C. external benefit d. external cost e. external cost f. external benefitn

Which of the following is an example of a private cost, a private benefit, an external cost, and an external benefit that may result from smoking cigarettes? Second-hand smoke is: Any desirable effect of nicotine is The price of the cigarettes is If smokers paid the social cost of cigarettes, smoking would

an external cost a private benefit a private cost decrease

Refer to the diagram, in which S is the market supply curve (reflects private costs) and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. Without government interference, this market will reach

an overallocation of resources to this product.

Demand-side market failures occur when

demand curves don't reflect consumers' full willingness to pay for a good or service.

The city of Seattle limits each household to one can of free garbage collection per week. There are fees for any extra garbage collected from the curb. Suppose that a neighborhood group in Seattle organizes a group of families so that those who plan to go over their one-can garbage quota can find households that are under their quota and pay them to put out the extra trash. This policy will (blank) efficiency.

increase

Market failure is said to occur whenever

private markets do not allocate resources in the most economically desirable way.

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that

resources are currently underallocated to the provision of holiday lighting in Anytown.

Market failures

result in overproduction or underproduction of a good.

Supply-side market failures occur when

supply curves don't reflect the full cost of producing a good or service.

Suppose the government is considering two policies to limit factory air pollution: taxing all producers, or providing each producer with an allotment of tradable permits. If both policies lead to the same amount of pollution reduction, who of the following is least likely to benefit from the tradable-permit option?

the government