Externalities

What aspect of demerit goods means they are overproduced?

• clear product information

• high external costs

• high product taxes

• low customer demand

China has built a new railway in Kenya from the capital, Nairobi, to the seaport of Mombasa. Kenya must repay the cost of the railway to China. Journey time has been reduced significantly but fares have increased and farmers have lost agricultural land along the new line.

Who bears the external costs of this operation?

• China who built the new railway

• farmers who have lost agricultural land

• Kenya who must repay the cost to China

• passengers who pay the higher fare

A major highway has been built at a cost of US$175 million between Nairobi, Kenya and its suburbs. This reduces travel time and increases safety, but there are environmental problems for small enterprises along its route.

Who bears the external costs of this project?

• the authorities who paid for the highway

• the commuters who travel to work in Nairobi

• he construction companies that built the highway

• the small enterprises along the route

Coal production in the UK has declined in recent years. One reason given for this is that the social cost of coal production is too high.

What best describes the social cost of coal production?

• all the benefits of coal production minus all the costs of coal production

• the cost of the environmental damage caused by coal production

• the cost to the government of subsidising the coal industry

• the private costs of coal production plus the external costs of coal production

A government approved the construction of a new railway line connecting major cities. It would be built by a private company but be funded partly through taxation. It would create many jobs. People living on the route worried about the harm to their environment.

Which concepts are directly involved in this statement?

• excess demand and public corporation

• government subsidies and perfect competition

• market system and income distribution

• private benefit and external cost

A private firm is one of a few suppliers of electricity in an economy. It is fined by the government for pollution from its coal-fired power stations which affect the health of those living nearby.

What does this situation involve?

• a government policy of nationalising an electricity supplier

• a market structure for electricity that is perfect competition

• a monopoly electricity supplier that ignores government controls

• external costs that are the result of electricity production

What is an external cost of mining coal?

• the cost of purchasing mining equipment

• the extra cleaning costs of local residents’ houses because of coal dust

• the extra cleaning costs of the mine buildings because of coal dust

• the cost to the mine owners to remove waste

A government needs to decide how much to fine firms for causing the external costs of air pollution in industrial areas. Which external cost would be the most difficult to measure in monetary terms?

• the discomfort associated with breathing

• the expenditure on additional healthcare

• the loss of earnings due to illness

• the medical research into respiratory disease

Which of the effects of economic development is an external cost?

• higher employment

• higher fixed costs

• increased production

• increased traffic congestion

What might be an external cost of drinking alcohol?

• the risk of street violence

• the cost of a bottle of wine

• the risk of illness from drinking alcohol

• the tax paid to the government