Multiple Choice Questions
1. The presence of negative externalities leads to a misallocation of societal resources because
a. Whenever external costs are imposed on outside parties, the good should not be produced at all.
b. Less of the good than is ideal for society is produced.
c. Some costs are associated with production that the producer fails to take into consideration.
d. The government always intervenes in markets when negative externalities are present, and the government is inherently inefficient.
2. A tax equal to the external cost on firms that emit pollutants would
a. Provide firms with the incentive to increase the level of activity creating the pollution.
b. Provide firms with the incentive to decrease the level of activity creating the pollution.
c. Provide firms with little incentive to search for less environmentally damaging production methods.
d. Not reduce pollution levels at all.
3. In the case of a good whose production generates negative externalities?
a. Those not directly involved in the market transactions are harmed.
b. Internalizing the externality would tend to result in a greater output of the good.
c. Too little of the good tends to be produced.
d. A subsidy would be the appropriate government corrective action.
e. All of the above are true.
4. 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. An increase in production.
b. A decrease in production.
c. A greater misallocation of resources.
d. A decrease in the market price of the product.
5. Which of the following will most likely generate positive externalities of consumption?
a. A hot dog vendor
b. Public education
c. An automobile
d. A city bus
e. A polluting factory
6. 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.
a. Too high; too high
b. Too high; too low
c. Too low; too high
d. Too low; too low
7. 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.
a. Too high; too high
b. Too high; too low
c. Too low; too high
d. Too low; too low
8. Socially inefficient outcomes may occur in markets that have
a. Free riders.
b. Negative externalities.
c. Asymmetric information problems.
d. Positive externalities.
e. Any of the above.
9. In the case of externalities, appropriate government corrective policy would be
a. Taxes in the case of external benefits and subsidies in the case of external costs.
b. Subsidies in the case of external benefits and taxes in the case of external costs.
c. Taxes in both the case of external benefits and the case of external costs.
d. Subsidies in both the case of external benefits and the case of external costs.
e. None of the above; the appropriate thing to do would be to do nothing.