Economic Externalities Quiz

A medical team provides vaccinations for children to prevent an outbreak of an infectious disease. Why would this be described as a positive externality?

• Additional benefit might be gained as the disease no longer spreads.

• Any kind of medical help will improve the condition of the children.

• No action would be taken unless the medical team intervened.

• The social benefits of vaccination are less than the social costs.

An economic activity definitely creates a net social benefit when the value of social benefit minus

• private benefit is zero.

• private benefit is negative.

• social cost is positive.

• social cost is negative.

A city council is considering building a passenger terminal at its port so that the city can benefit from large cruise ships that could then dock there. It undertakes a cost-benefit analysis. What would be included as an external cost in the city council's cost-benefit analysis?

• the cost of a ticket for a passenger to travel on a cruise ship

• the cost of fuel to operate the cruise ships

• the costs paid by cruise ships when they dock at the port

• the cost to a fishing fleet of relocating to another port

Some multinational oil companies extracting oil in developing countries are now required to repair the damage they do to the environment. What best describes the total costs incurred by the oil companies in such circumstances?

• external costs

• private costs plus external costs

• social costs plus external costs

• social costs plus private costs

Negative externalities, such as air pollution due to car emissions, can cause damage to people's health in cities. Which response is most likely to occur from this situation?

• car manufacturers will automatically bear any external costs

• market failure will be resolved when private costs equal external costs

• most people will decide to use buses rather than cars

• some form of government intervention to improve economic efficiency

What is not an example of a moral hazard?

• People with a higher risk of unemployment are more likely to undertake training.

• People with free dental care are less likely to take care of their teeth with good oral hygiene.

• People with insurance against car theft are more likely to park their car in high crime areas.

• People with unemployment benefits are less likely to undertake retraining if they become unemployed.

In recent years, the fuel cost of operating a jet aircraft has declined. Over the same period, improved design has led to much quieter aircraft. How would this affect the marginal private cost (MPC) and the marginal external cost (MEC) of air travel?

• a downward shift of both the MPC and the MEC curves

• a downward shift of the MPC curve and a movement left along the MEC curve

• a movement left along both the MPC and the MEC curves

• a movement left along the MPC curve and a downward shift of the MEC curve

What is an example of an external cost?

• distribution costs

• energy costs

• labour costs

• road congestion costs

1. What would definitely result from the divorce of ownership and control?

• 1. A decreased moral hazard

• 1. B the principal agent problem

• 1. C greater productive efficiency

• 1. D increased profit maximization

1. Studies show that some dentists replace patients’ teeth more often than is necessary. Which factor helps to explain why excessive dental treatment may take place?

• 1. A the existence of asymmetric information

• 1. B the existence of dynamic efficiency

• 1. C the existence of positive externalities

• 1. D the existence of social benefits