1) An externality is

A) a cost paid for by the producer of a good or service.

B) a benefit or cost experienced by someone who is not a producer or consumer of a good or service.

C) anything that is external or not relevant to the production of a good or service.

D) a benefit realized by the purchaser of a good or service.

2) If an externality exists, it will be experienced by

A) some people not directly involved in the production or consumption of the product.

B) the consumers of the product only.

C) the producers of the product only.

D) the government only.

3) A free market fails when

A) firms that produce goods which create negative externalities earn high profits.

B) firms that produce goods which create positive externalities go bankrupt.

C) there is government intervention.

D) there is an external effect in either production, consumption, or both.

4) Which of the following is a source of market failure?

A) unforeseen circumstances which leads to the bankruptcy of many firms

B) incomplete property rights or inability to enforce property rights

C) a lack of government intervention in a market

D) an inequitable income distribution

5) What is a market failure?

A) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event.

B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost.

C) It refers the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.

D) It refers to a breakdown in a market economy because of widespread corruption in government.

6) Which of the following could be evidence of a market failure?

A) Market prices do not reflect true production costs.

B) The market price of a product is above the average cost of production.

C) Resources in an economy are not fully utilized.

D) There are only a handful of firms competing against each other in an industry.

7) What are property rights?

A) the title to ownership of any physical asset

B) the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

C) a legal document verifying ownership of intangible assets

D) the right of the government to appropriate private assets for the good of society

8) Which of the following activities create a negative externality?

A) cleaning up the sidewalk on your block

B) keeping a junked car parked on your front lawn

C) repainting the house you live in to improve its appearance

D) graduating from college

9) Which of the following is an example of a negative externality?

A) closing down a segment of a beach because of an oil spill

B) purchasing a home that has an unobstructed view of rolling hills

C) receiving a failing grade in a college course

D) not qualifying for financial aid because your parents make too much money

10) If your neighbor burns auto tires in the yard and you can smell them and cannot see sunlight because of the black smoke, you are experiencing

A) a private cost.B) a positive externality.

C) a negative externality.D) a private benefit.

11) A negative externality exists if

A) the marginal private cost of producing a good or service exceeds the social cost.

B) the marginal social cost of producing a good or service exceeds the private cost.

C) there are quantity controls in a market.

D) there are price controls in a market.

12) Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

A) the private cost of productionB) the external cost of production

C) the social cost of productionD) the explicit cost of production

13) Private costs

A) are borne by producers of a good while social costs are borne by those who cannot afford to purchase the good.

B) are borne by producers of a good while social costs are borne by government.

C) are borne by producers of a good while social costs are borne by society at large.

D) are borne by consumers of a good while social costs are borne by government.

14) An external cost is created when you

A) litter on the side of the road.

B) buy a sandwich for lunch.

C) buy flowers for your mother on Mother's Day.

D) graduate from college.

15) An external cost can be calculated as the difference between

A) the private cost of production and the social benefit of production.

B)a producer's cost of production and the price at which the good is sold.

C) the social cost of production and the social benefit of production.

D) the social cost of production and the private cost of production.

16) What is a "social cost" of production?

A) the cost of the environmental damage created by production

B) the total costs of producing a product, both implicit and explicit costs

C) the cost of the natural resources used up in production

D) the sum total of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product

17) If you burn your trash in the back yard in spite of regulations against it, then you are

A) acting economically irrationally and creating a social cost.

B) saving landfill space and creating a social benefit.

C) acting rationally and creating a positive externality.

D) avoiding the private costs associated with disposing your trash some other way and creating a social cost.

18) The social cost of cutting trees for firewood in a government forest is

A) the marginal costs of cutting the last tree.

B) the increased likelihood of flooding as more trees are cut plus the private cost of cutting the trees.

C) opportunity cost to the individual of cutting the wood.

D) the increased likelihood of flooding as more trees are cut.

19) Which of the following is an example of a positive externality?

A) forbidding the use of cell phones in public

B) planting trees along a sidewalk which add beauty and creates shade

C) prohibit street parking in all residential neighborhoods

D) banning the sale of candy in elementary schools

20) Which of the following represents the economic benefit of production when firms produce goods that create positive externalities?

A) the external benefits created by the goods

B) the sum of private benefits and external benefits created by the goods

C) the sum of private benefits from consumption

D) the difference between social benefits and private benefits created by the goods

21) When there is a positive externality, at the free market equilibrium,

A) the marginal private benefit is greater than the marginal social benefit.

B) the marginal private benefit is equal to the marginal social benefit.

C) the marginal private benefit is less than the marginal social benefit.

D) the marginal private costs are minimized.

22) A positive externality causes

A) the marginal private benefit to exceed the marginal social cost of the last unit produced.

B) the marginal social benefit to be less than the marginal private cost of the last unit produced.

C) the marginal social benefit to be equal to the marginal private cost of the last unit produced.

D) the marginal social benefit to exceed the marginal private cost of the last unit produced.

23) When a negative externality exists, the private market produces

A) products at a high opportunity cost.

B) more than the economically efficient output level.

C) less than the economically efficient output level.

D) products at a low opportunity cost.

Figure 1

Figure 1 shows a market with an externality. The current market equilibrium output of Q1is not the economically efficient output. The economically efficient output is Q2.

24)Refer to Figure 1.Suppose the current market equilibrium output of Q1is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, diagram shows

A) the effect of an external cost imposed on a producer.

B) the effect of a positive externality in the production of a good.

C) the effect of an external benefit such as a subsidy granted to consumers of a good.

D) the effect of a negative externality in the production of a good.

25)Refer to Figure 1. If, because of an externality, the economically efficient output is Q2and not the current equilibrium output of Q1, what does S1represent?

A) the market supply curve reflecting private cost

B) the market supply curve reflecting social cost

C) the market supply curve reflecting external cost

D) the market supply curve reflecting implicit cost

26)Refer to Figure 1. If, because of an externality, the economically efficient output is Q2and not the current equilibrium output of Q1, what does S2represent?

A) the market supply curve reflecting private cost

B) the market supply curve reflecting implicit cost

C) the market supply curve reflecting social cost

D) the market supply curve reflecting external cost

27) When there is a negative externality in a free market,

A) too much of the good is produced and consumed.

B) a productively efficient level of the good is produced and consumed.

C) an economically efficient level of the good is produced and consumed.

D) too little of the good is produced and consumed.

28) A market supply curve reflects the

A) external benefits of producing a good or service.

B) external costs of producing a good or service.

C) social costs of producing a good or service.

D) private costs of producing a good or service.

29) Which of the following is true when a negative external effect creates a deadweight loss?

A) The marginal benefit to consumers is above the marginal private cost of the last unit produced.

B) The marginal benefit to consumers is below the marginal social cost of the last unit produced.

C) The marginal benefit to society is below the marginal private cost of the last unit produced.

D) The marginal benefit to consumers is equal to the marginal social cost of the last unit produced.

30) Which of the following conditions holds in an economically efficient competitive market equilibrium?

A) The deadweight loss is positive but at a minimum.

B) There are no positive and no negative external effects from consumption and production.

C) Producer and consumer surplus are exactly equal in size.

D) The marginal benefit of the last unit produced and consumed is maximized.