Externalities

The presence of negative externalities leads to a misallocation of societal resources because

• some costs are associated with production that the producer fails to take into consideration.

• less of the good than is ideal for society is produced.

• whenever external costs are imposed on outside parties, the good should not be produced at all.

• the government always intervenes in markets when negative externalities are present, and the government is inherently inefficient.

A tax equal to the external cost on firms that emit pollutants would

• not reduce pollution levels at all.

• provide firms with the incentive to increase the level of activity creating the pollution.

• provide firms with the incentive to decrease the level of activity creating the pollution.

• provide firms with little incentive to search for less environmentally damaging production methods.

In the case of a good whose production generates negative externalities,

• a subsidy would be the appropriate government corrective action.

• too little of the good tends to be produced.

• internalizing the externality would tend to result in a greater output of the good.

• those not directly involved in the market transactions are harmed.

• all of the above are true.

If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be a(n)

• greater misallocation of resources.

• increase in production.

• decrease in the market price of the product.

• decrease in production.

Which of the following will most likely generate positive externalities of consumption?

• A city bus

• A polluting factory

• An automobile

• Public education

• A hot dog vendor

Assume that production of a good imposes external costs on others. The market equilibrium price will be ___ and the equilibrium quantity ___ for efficient resource allocation.

• too high; too high

• too low; too high

• too low; too low

• too high; too low

Assume that production of a good generates external benefits of consumption. The market equilibrium price of the good will be ___ and the equilibrium quantity ___ for efficient resource allocation.

• too low; too low

• too high; too high

• too high; too low

• too low; too high

In the case of externalities, appropriate government corrective policy would be

• subsidies in both the case of external benefits and the case of external costs.

• taxes in both the case of external benefits and the case of external costs.

• taxes in the case of external benefits and subsidies in the case of external costs.

• subsidies in the case of external benefits and taxes in the case of external costs.

• none of the above; the appropriate thing to do would be to do nothing.