An externality occurs when

A) the costs of producing a good are paid entirely by the producer.

B) some of the costs of producing a good are paid by someone other than the producer.

C) the marginal social cost of an activity increases as that activity is increased.

D) Both answers A and C are correct.

2. The external benefit of a good

A) equals its consumer surplus.

B) equals its producer surplus.

C) equals its total surplus.

D) is a benefit from the good falling on people who are not the consumers of the good.

3. Which of the following does NOT contain an externality?

A) I sell you an ice cream and you drip it all over the person sitting next to you.

B) I sell you an ice cream and it gives you a headache.

C) I sell you an ice cream and you share it with your friend.

D) I give you an ice cream and you share it with a friend.

4. An example of an activity that generates an external cost is

A) dumping soapsuds into a trout stream.

B) national defense services.

C) planting flowers along an interstate highway.

D) eating an apple.

5. An example of an externality occurs when a chemical factory

A) is producing ethanol and dumps waste in a river upstream from a popular fishing spot.

B) produces fertilizers that do not help plants grow.

C) produces fertilizers that kill plants rather than feed them.

D) overworks its employees.

6. When people decorate the exteriors of their homes with colored lights, they create ________ for the motorists who pass by.

A) an external benefit

B) a competitive good

C) a public good

D) an excludable good

7. In which of the following markets are external benefits most likely to exist?

A) in the market for gasoline

B) in the market for ball pens

C) in the market for flu shots

D) in the market for cigarettes

8. Beautification of the national highways through the planting of shrubs and wildflowers will

A) be profitable for a private landscaping company because they can charge passing drivers.

B) benefit even people who do not help pay.

C) provide a flow of services that are rival in consumption.

D) provide a flow of services that involve excludable consumption.

9. The cost of producing one more unit of a good or service that is paid by the producer

A) has to be equal to the benefit that the consumer derives from that good.

B) is equal to the cost borne by people other than the producer.

C) is the marginal private cost.

D) is the marginal external cost.

10. Suppose a firm produces pollution when it generates electricity. The cost of pollution is called the

A) marginal cost.

B) marginal private cost.

C) marginal external cost.

D) marginal social cost.

11. If an external cost exists, then who bears the external cost in an unregulated competitive market transaction?

A) nobody

B) the federal government

C) someone other than the producers

D) the buyers of the product

12. The marginal cost of production that is borne by the entire society is the

A) marginal private cost.

B) marginal social cost.

C) marginal external cost.

D) None of the above answers is correct.

13. The marginal social cost is

A) equal to the marginal private cost plus the marginal external cost.

B) equal to the marginal private cost minus the marginal external cost.

C) the same as the marginal private cost.

D) the same as the marginal external cost.

14. If the marginal external cost of building a children's playground equals zero, then the

A) marginal private cost equals the marginal social cost.

B) marginal social cost equals zero.

C) marginal private cost equals zero.

D) None of the above answers is correct.

15. When production of a good results in an external cost, the unregulated competitive market equilibrium is inefficient because ________.

A) MSC = MC

B) MSC = MSB

C) MSC > MSB

D) MSC

16. When the marginal social cost of the production of Good A is greater than the marginal private cost of the production of Good A, then

A) a competitive, unregulated market produces less than the efficient quantity of Good A.

B) a competitive, unregulated market produces the efficient quantity of Good A.

C) a competitive, unregulated market produces more than the efficient quantity of Good A.

D) the government should levy a tax on the production of Good A that is equal to the horizontal distance between the two marginal cost curves

Quantity of steel Marginal social Marginal social (millions of tons benefit cost (dollars per per week) (dollars per ton ton 40 20 10 35 25 15 30 30 20 25 35 25 20 40Price and cost (dollars per ton of steel) 250 MSC 200 S = MC 150 100 50 D = MSB 4 6 8 10 Quantity (tons of steel per week)