Microeconomics Instructor Miller Practice Problems Externalities and Public Goods

1. An externality is A) a benefit realized by the purchaser of a good or service. B) a cost paid for by the producer of a good or service. C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service. D) anything that is external or not relevant to the production of a good or service.

2. What is a market failure? A) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost. C) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event. D) It refers to a breakdown in a market economy because of widespread corruption in government.

3. Which of the following is a source of market failure? A) unforeseen circumstances which leads to the bankruptcy of many firms B) a lack of government intervention in a market C) incomplete property rights or inability to enforce property rights D) an inequitable income distribution

4. Which of the following activities create a negative externality? A) cleaning up the sidewalk on your block B) graduating from college C) repainting the house you live in to improve its appearance D) keeping a junked car parked on your front lawn

5. A negative externality exists if 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.

6. 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.

7. 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.

8. When a negative externality exists, the private market produces A) more than the economically efficient output level. B) less than the economically efficient output level. C) products at a low opportunity cost. D) products at a high opportunity cost.

9. When a positive externality exists, the private market produces A) more than the economically efficient output level. B) less than the economically efficient output level. C) products at a low opportunity cost. D) products at a high opportunity cost.

10. 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.

11. 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.

The above figure shows a market with a negative externality.

12. Refer to the above figure. The efficient output level is A) Qd. B) Qb. C) Qa. D) Qb - Qd.

13. Refer to the above figure. The private profit maximizing quantity for the firm is A) Qa. B) Qb. C) Qb - Qd. D) Qd.

14. Refer to the above figure. The deadweight loss due to the externality is represented by the area A) abc. B) abf. C) abd. D) ade.

15. Refer to the above figure. The size of marginal external costs can be determined by A) S2 + S1 at each output level. B) S2 - S1 at each output level. C) the supply curve S2. D) the supply curve S1.

16. If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost A) further reductions will make society better off. B) the marginal benefit will rise and the marginal cost will fall as further reductions are made. C) economic efficiency will be achieved when emissions are reduced to zero. D) private businesses, rather the consumers, should be made to pay for the cost of further reductions.

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

18. Some policymakers argue that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption. If the government decided to impose a tax on soda, the government will cause A) consumers to internalize the externality. B) producers to internalize the externality. C) the external cost to drinking soda to become a private cost paid by the government. D) the external cost to drinking soda to become a private cost paid by producers.

19. If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set A) equal to the marginal external cost at the economically efficient level of pollution. B) equal to the marginal private cost of production at the economically efficient level of pollution. C) equal to the amount of the deadweight loss created in the absence of a pollution tax. D) at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.

20. Governments can increase the consumption of a product that creates positive externalities by A) subsidizing the production of the product so that the supply is increased and market price is reduced. B) taxing the production and consumption of the product. C) convincing everyone to consume the good. D) assigning property rights to the producers of the product.

21. State and local governments subsidize college students with grants and low-interest loans. The loans and subsidies are examples of A) positive externalities. B) Coase subsidies. C) Pigovian subsidies. D) emission allowances.

22. A product is considered to be rivalrous if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume. D) it is jointly owned by all members of a community.

23. A product is considered to be excludable if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume. D) it is jointly owned by all members of a community.

24. Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption? A) public goods B) private goods C) quasi-public goods D) common resources

25. Which of the following displays rivalry and excludability in consumption? A) public goods B) private goods C) quasi-public goods D) common resources

26. Common resources differ from public goods in that A) common resources are non-excludable while public goods are excludable to those who do not pay for the good. B) unlike public goods, common resources are rivalrous in consumption. C) common resources are collectively owned by a group of people while public goods are government owned. D) common resources are resources that cannot be renewed but the production of public goods can be increased any time.

27. In economics, the term "free rider" refers to A) a person who evades taxes. B) a supervisor who delegates menial time-consuming activities to others. C) one who volunteers her services. D) one who waits for others to produce a good and then enjoys its benefits without paying for it.

28. Private producers have no incentive to provide public goods because A) the government subsidy granted is usually insufficient to enable private producers to make a profit. B) production of huge quantities of public goods entails huge fixed costs. C) they cannot avoid the tragedy of the commons. D) once produced, it will not be possible to exclude those who do not pay for the good.

29. The "tragedy of the commons" refers to the phenomenon where A) individuals are free riders. B) people overuse a common resource. C) people do not internalize an externality. D) there is rivalry in consumption.

30. The basic cause of deadweight losses from the existence of common resources and externalities is A) a lack of clearly defined and enforceable property rights. B) the self interested rationality of human beings. C) the use of a market system to deal with scarcity. D) the absence of government intervention.

Key

1. C 11. C 21. C 2. A 12. C 22. C 3. C 13. B 23. A 4. D 14. B 24. A 5. C 15. B 25. B 6. C 16. A 26. B 7. B 17. C 27. D 8. A 18. A 28. D 9. B 19. A 29. B 10. C 20. A 30. A