Module 6.2

If a positive externality exists in the consumption of a good, the private market equilibrium quantity will be

• the same as the socially optimal quantity, since the marginal private benefit equals the marginal social

  benefit

• greater than the socially optimal quantity, since the marginal social cost exceeds the marginal private

  cost

• greater than the socially optimal quantity, since the marginal private benefit exceeds the marginal social

  benefit

• less than the socially optimal quantity, since the marginal social benefit exceeds the marginal private

  benefit

• less than the socially optimal quantity, since the marginal private benefit exceeds the marginal private

  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

• Declining restrictions on the importation of foreign-made cars.

Which of the following describes the type of externality generated by the unregulated private market and the

resulting deadweight loss?

• Positive externality with deadweight loss egh

• Positive externality with deadweight loss ehf

• Negative externality with deadweight loss egh

• Negative externality with deadweight loss ehf

• Negative externality with deadweight loss P4ghP2

Which of the following is true if the production of a good imposes external costs?

• A competitive market would produce more than the socially optimal amount.

• The market supply curve lies above the social supply curve.

• An appropriate government policy would be to subsidize production of the good.

• A competitive market would not provide the good at all.

• A persistent market surplus would occur.

If the production of a good generates a positive externality, the government can increase allocative efficiency by

• taxing the producer of the good

• subsidizing the producer of the good

• prosecuting firms that produce the good without proper permits

• setting a price ceiling to encourage production of the good

• setting a price floor to discourage production of the good

Given the position of the marginal social cost curve, one can conclude that the

• private cost of producing good X exceeds the social cost of production at all levels of output

• production of good X creates a negative externality

• production of good X occurs in an imperfectly competitive market

• market quantity, Q3, is socially optimal quantity

• free market will produce too little of good X

The table shows the total cost and the total benefit of cleaning up pollution in a community. Which of the following cleanup levels is socially optimal?

• 1

• 2

• 3

• 4

• 5

Which of the following is always true about a negative externality?

• It can be corrected by the government subsidizing the good or activity that creates the externality.

• It results in a market output that is smaller than the socially optimal output.

• It results in a market output that is greater than the socially optimal output.

• It results in a larger deadweight loss than a positive externality does.

• It results in a smaller deadweight loss than a positive externality does.

Assume that the firms in an industry pollute a river. If there is no government intervention, the firms will

• produce more output than is socially efficient

• pay production costs that are higher than actual social costs

• charge a lower price than is necessary to maximize profit

• charge a higher price to pay for the pollution

• increase production to achieve allocative efficiency

What are the socially efficient and market equilibrium quantities?

• Socially efficient quantity is 6, and market equilibrium quantity is 12.

• Socially efficient quantity is 9, and market equilibrium quantity is 9.

• Socially efficient quantity is 9, and market equilibrium quantity is 12.

• Socially efficient quantity is 12, and market equilibrium quantity is 12.

• Socially efficient quantity is 12, and market equilibrium quantity is 9.