ECON CHAPTER 11

Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a a. negative externality. b. positive externality. c. substitute good. d. complementary good.

B

Which of the following statements is false? a. A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive. b. Internalizing externalities is not the same as adjusting for externalities. c. An externality has been completely internalized if the socially optimal output emerges. d. Assigning property rights is one way to internalize externalities.

B

Which of the following statements is false? a. Externalities can sometimes be internalized through individual voluntary agreements. b. It would be a relatively easy matter to establish property rights in the air. Page 183 of 184 c. Persuasion can be used in some cases to internalize externalities. d. Taxes and subsidies are sometimes used as corrective devices for market failures.

B

. A __________ good is one that once produced and provided to one person, provides benefits to other persons. a. consumption b. investment c. private d. public

D

A negative externality is a. a type of tax. b. a type of subsidy. c. a type of money price. d. linked to external costs. e. linked to external benefits.

D

When a negative externality exists, a. external costs are necessarily greater than private costs. b. social costs equal private costs. c. social costs are less than private costs. d. social costs are greater than private costs. e. none of the above

D

Which of the following statements is true? a. A tax applied to an activity that generates a negative externality always brings about the socially optimal level of output. b. A subsidy applied to an activity that generates a positive externality always brings about the socially optimal level of output. c. a and b d. none of the above

D

An externality is internalized if a. the person(s) or group that generated the externality incorporate into their own private cost-benefit calculations the external benefits (in the case of a positive externality) or the external costs (in the case of a negative externality) that third parties bear. b. people are made aware of it and realize that social benefits are less than private benefits (in the case of a positive externality) and that social costs are less than private costs (in the case of a negative externality). c. the person(s) or group that generated the externality do not incorporate into their own private cost-benefit calculations the external benefits (in the case of a positive externality) or the external costs (in the case of a negative externality) that third parties bear. d. b and c e. none of the above

A

Externalities can be internalized through voluntary agreements as long as a. transaction costs are low relative to expected benefits. b. transaction costs are high relative to expected benefits. c. the agreement is a short-run agreement. d. the agreement is a long-run agreement.

A

Market failure is a situation in which a. the market does not provide the ideal or optimal amount of a particular good. b. there are too many buyers but not enough sellers. c. prices are too high for "average" people to buy necessities. d. there is a question over the quality of a product for sale.

A

Some pollution may be preferable to zero pollution because a. attempting to decrease the level of pollution to zero may cause significant losses in society's welfare. b. we really do not have that much pollution. c. the nation's citizens are against government's involvement in solving the pollution problem. d. no form of regulation that has been shown to be effective at solving the pollution problem

A

Suppose the production of a good results in negative externalities. If all costs are taken into account, then a. output will be at a lower level than if all costs are not taken into account. b. output will be at a lower level than the socially optimal level. c. the marginal private cost curve will lie above and to the left of the marginal social cost curve. d. a and b e. a, b, and c

A

Suppose the production of a good results in negative externalities. If output is at the intersection of the demand curve and the marginal social cost curve, then a. the socially optimal level of output will be produced. b. society will incur a net social cost. c. society will want less output produced, and producers will be willing to satisfy this desire at a price that society deems acceptable. d. b and c

A

Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then a. output will be at a higher level than if all benefits were not taken into account. b. output will be at a lower level than the socially optimal level. c. the marginal private benefit curve will lie above and to the right of the marginal social benefit curve. d. there will be underproduction. e. all of the above

A

Suppose the production of a good results in positive externalities. If output occurs at the intersection of the supply curve and the marginal social benefits curve, then a. the socially optimal level of output will be produced. b. society will incur a net social cost. c. society will want less produced, and producers will be willing to satisfy that desire. d. there is market failure.

A

When negative externalities are connected with the production of a good, a. market output will be greater than the socially optimal output. b. private costs and social costs are equal. c. the government should subsidize the production of the good. d. there will be a shortage of the good.

A

When positive externalities are involved, the market is said to a. fail, because it underproduces the good connected with the positive externality. b. fail, because it overproduces the good connected with the positive externality. c. succeed, because it produces the socially optimal quantity of the good connected with the positive externality. d. be "in optimum," because the equilibrium fully adjusts for the positive externality

A

Which of the following statements is false? a. A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality. b. Ronald Coase stressed the reciprocal nature of externalities. c. One way to deal with negative externalities is for government to apply regulations directly to the activity that generates the externalities. d. Simply because taxes and subsidies are sometimes used to adjust for negative and positive externalities, respectively, it does not necessarily follow that the socially optimal level of output will be reached.

A

Which of the following statements is true? a. The lower transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange. b. The higher transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange. c. Coase agrees with Pigou that taxing those activities associated with negative externalities is a good idea. d. a and c e. none of the above

A

In which of the following situations would a positive externality most likely be involved? a. Ellen is sitting at home one day when she gets a telephone call, informing her that she has won $10,000 in a contest she entered three months ago. b. There are eight houses in the neighborhood where Ronald lives. Ronald likes nicelooking yards, and last week his neighbors began to beautify their yards. c. Willy needs eight hours of sleep each night to feel good. Last night he got eight hours of sleep. d. Patrick received an A on a biology exam. He is feeling better about his chances of getting admitted to medical school.

B

Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called a. Coase effects. b. externalities. c. public goods. d. internalities. e. none of the above

B

Suppose the production of a good results in negative externalities. If society produces the output consistent with the intersection of the demand curve and the marginal private cost curve, then a. the socially optimal level of output will be produced. b. society will incur a net social cost. c. society will want more output produced, and producers will be willing to satisfy this desire at a price that society deems acceptable. d. all of the above e. There is not enough information to answer this question.

B

When a positive externality exists, a. external benefits are necessarily greater than private benefits. b. social benefits are greater than private benefits. c. social benefits are less than private benefits. d. social benefits equal private benefits. e. none of the above

B

When negative externalities are involved, the market is said to a. fail, because it underproduces the good connected with the negative externality. b. fail, because it overproduces the good connected with the negative externality. c. succeed, because it produces the socially optimal quantity of the good connected with the negative externality. d. be "in optimum," because the equilibrium fully adjusts for the negative externality.

B

A consequence of a negative externality is that social costs __________ private costs, and the socially optimal level of output __________. a. equal; is not equal to social costs or private costs b. do not equal; is obtained c. do not equal; is not obtained d. equal; is obtained e. equal; is not obtained

C

A side effect of an action that adversely affects the well-being of others is called a a. complement. b. supplement. c. negative externality. d. marginal cost.

C

If society is experiencing a net social cost from the production of a good, this implies that a. the socially optimal level of output is being produced and society is willing to accept the costs that result. b. producers would rather produce the output at which marginal social cost equals the demand for the good. c. negative externalities are involved in the production of this good. d. none of the above

C

If the consumption of a good by one person reduces the amount of it that can be consumed by others, the good is a. excludable. b. nonexcludable. c. rivalrous in consumption. d. nonrivalrous in consumption

C

Negative externalities that arise from the production of a good a. cause an increase in the demand for the good. b. cause a decrease in the demand for the good. c. impose costs on third parties. d. bring private costs into equality with social costs.

C

Which of the following is not a method to internalize or adjust for externalities? a. persuasion b. assignment of property rights c. unilateral transfers d. voluntary agreements

C

Which of the following situations probably would not yield a negative externality? a. a rock concert in the quad next to the library b. one person who is smoking cigarettes in a closed room where several other people are present c. a tutor instructing a student in economics as a bystander listens in without the tutor knowing it d. mowing your lawn early on a Saturday morning when you live in a densely populated neighborhood e. All of the above situations would yield negative externalities.

C

Which of the following statements is not an example of the use of persuasion to correct (or adjust for) an externality? a. Maggie asks her neighbor to keep his dog quiet at night. b. An environmental group conducts a sit-in at a chemical factory to demand that the firm stop polluting rivers. c. A judicial court imposes a fine on a reckless driver. d. All of the above are examples of the use of persuasion to correct (or adjust for) an externality.

C

If a person who generates a negative externality incorporates into his or her private costbenefit calculations the effects that this externality will have on third parties, the externality has been a. substituted. b. accommodated. c. compounded. d. internalized.

D

Suppose the production of a good results in negative externalities. If all costs are taken into account, then a. output will occur at the socially optimal level. b. the price of the product will be higher than if all costs are not taken into account. c. more output will be produced than if all costs are not taken into account. d. a and b e. a, b, and c

D

Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then a. output will be at the socially optimal level. b. the price of the product will be the same as it was when all benefits were not taken into account. c. more output will be produced than if all benefits were not taken into account. d. a and c e. a, b, and c

D

The primary difference between private goods and public goods is that a. private goods are consumed by private individuals whereas public goods are not consumed by private individuals. b. private goods often yield externalities but public goods do not. c. property rights can be assigned to public goods but not to private goods. d. public goods are nonrivalrous in consumption whereas private goods are rivalrous in consumption.

D

The side effect of an action that increases the well-being of others is called a. an augmentation. b. an elasticity. c. a passive benefit. d. a positive externality.

D

Which of the following statements is true? a. When production of a good yields positive externalities but output is currently at the market level, then a change in output to the socially optimal level will certainly be for the worse. b. When production of a good yields negative externalities but output is currently at the market level, then a change in output to the socially optimal level will cause benefits to increase by an amount greater than costs will increase. c. When production of a good yields positive externalities but output is currently at the market level, then a change in output to the socially optimal level will cause benefits to increase by an amount less than costs will increase. d. a, b, and c e. none of the above

E

A good is a nonexcludable if a. its consumption by one person does not reduce its consumption by others. b. it is impossible to prevent people from obtaining the benefits of the good once it has been produced. c. no negative externalities are associated with its production and consumption. d. it is free in the first place; that is, it is so abundant that people can get all they want at zero price.

B

Given a positive externality, the marginal private benefit curve lies to the __________ of the demand curve, with the market output __________ the socially optimal output. a. right; above b. right; below c. left; above d. left; below

B

If private property rights were established in the air, there would probably be a. more air pollution. b. less air pollution. c. the same amount of air pollution that exists without private property rights in the air. d. better weather

B

In which of the following situations would a negative externality most likely be involved? a. It is night and Kenneth is sitting in his easy chair reading a novel by Somerset Maugham. The lamp he is reading by has only a 40-watt light bulb. He is having a hard time reading. b. Alyson lives near an airport. At five o'clock in the morning she can hear the airplanes taking off. Every other day they awaken her. c. Lucy went to a fancy restaurant last night and ordered the most expensive meal on the menu. She hated it. d. Richard is taking an economics class from Professor Franklin. Professor Franklin often says things that confuse Richard.

B

"Asymmetric information" exists when a. both parties to an exchange have all relevant facts about that exchange. b. a good that is either nonrivalrous or nonexcludable is being sold on a market. c. the two parties to an exchange differ in what they know about the good being exchanged. d. neither party to an exchange is knowledgeable about the quality of the good being exchanged.

C