Externalities

An industry will produce more than the socially efficient level of output under which of the following conditions?

• The production or consumption of a good generates a positive externality.

• The production or consumption of a good generates a negative externality.

• The industry is a monopoly.

• The industry produces a public good.

If the production of a good results in a positive externality, the government might be able to improve economic efficiency in this market by

• eliminating private production of the good

• imposing a tax on private producers

• initiating antitrust action

• granting a subsidy to private producers

Imposing taxes that increase as a firm's pollution increases is often recommended by economists as a means to reduce pollution. The reason for this recommendation is that such taxes would likely

• eliminate pollution completely

• encourage firms to use the most efficient method to reduce pollution

• increase the government's revenues

• encourage firms to increase production

There are negative externalities associated with the use of a freeway in a major city at rush hour because during this time

• drivers slow down other drivers because of the high traffic volume

• drivers value their time more

• government revenues from toll roads increase

• revenues of bus companies increase

To correct for positive externalities, the government should

• do nothing, since no harm is done by positive externalities

• levy a tax on the output of the good or service

• pay a subsidy equal to the marginal external benefit

• impose a price ceiling on the good to discourage its production

Under an efficient policy to address the problem of pollution created from manufacturing good X, which of the following is true?

• Pollution is completely eliminated.

• The marginal private cost of producing good X equals the marginal revenue from its sale.

• The marginal social benefit of pollution reduction exceeds the marginal social cost of pollution reduction.

• The marginal social benefit of pollution reduction equals the marginal social cost of pollution reduction.

Whenever the production of a good creates negative externalities, an unregulated market will result in

• too little of the good being produced

• an optimal amount of the good being produced as long as the market is perfectly competitive

• society's marginal cost being higher than the firm's marginal cost

• the firm's marginal cost being higher than society's marginal cost

Which of the following is the best example of a negative externality?

• An increase in the price of oil due to the imposition of environmental regulations

• An increase in the price of oil due to action taken by the Organization of Petroleum Exporting Countries (OPEC)

• A decline in oil stock prices as a result of bad management

• Oil leakages from drilling platforms in the Gulf of Mexico

Which of the following is true when the production of a good results in negative externalities?

• The government must produce the good.

• The private market will produce too little of the good.

• The private market price will be too low.

• The government must prevent the production of the good.

Which of the following would create a positive externality?

• Water pollution

• A neighbor’s loud music that wakes you up

• Flu vaccination

• The greenhouse effect and global warming