Defining Negative Externality

14. The diagram below represents the case of a polluting steel factory where S_Social represents the supply curve when the firm takes into consideration the social costs of its production and S_Private represents the case when the firm takes into consideration its own cost of production. It creates pollution in the course of producing steel, and thereby generates a negative externality for those living in its vicinity. What should be a socially efficient level of output? 

a. OQ₁ level of output.

b. OQ level of output.

c. Both of the above.

d. None of the above

6. A perfectly competitive paper mill that produces large amounts of pollution (a negative externality) will, from a social point of view,

a. produce too little paper.

b. produce the socially optimal quantity of paper.

c. produce too much paper.

d. produce too much paper only if it installs pollution control equipment.

7. Because externalities represent a case where markets no longer consider all social costs, but only some of them, economists commonly refer to externalities as an example of

a. state failure

b. society failure

c. market failure

d. none of the above

8. In case of market failure, the private market fails to achieve efficient output because:

a. firms do not account for all costs incurred in the production of output

b. consumers do not account for all benefits obtained (a positive externality).

c. both of the above

d. none of the above

9. In the case of pollution(a negative externality), at the market output, 

a. social benefits of consumers exceed the social costs of production.

b. private costs of production exceed the private benefits to consumers.

c. private costs of production exceed the social benefits to consumers.

d. social costs of production exceed social benefits to consumers.

10. In the context of comprehensive environmental laws, command-and-control regulation specifies:

a. the allowable quantities of output that can be produced by private firms.

b. the allowable quantities of pollution and which also may detail which pollution-control technologies companies must use. 

c. the price which can be charged for an environment-friendly commodity.

d. the taxes which the private producers are supposed to pay for polluting.

11. Command-and-control regulation is inflexible. It means:

a. it usually requires the same standard for all polluters, and often the same pollution-control technology as well.

b. it draws no distinctions between firms that would find it easy and inexpensive to meet the pollution standard and firms that might find it difficult and costly to meet the standard.

c. firms have no reason to rethink their production methods in fundamental ways that might reduce pollution even more and at a lower cost.

d. all of the above

12. Pollution, a negative externality, is regarded as a form of market failure because:

a. market prices sometimes rise or fall.

b. the market cannot be used to tackle the problem of pollution. 

c. firms fail to respond to regulatory controls imposed by the government.

d. the market does not always reflect the true costs of the economic behavior of the agents.

13. In a market where the external costs of production(a negative externality) are represented in the supply curve then:

a. market price would tend to be higher and the quantity traded lower.

b. market price would tend to be lower and the quantity traded higher.

c. market price would tend to be lower and the quantity traded lower.

d. market price would tend to be higher and the quantity traded higher.

15. Which of the following illustrates the concept of external cost?

a. Bad weather decreases the size of the cotton crop.

b. An increase in the demand for coke raises the price paid by consumers of pasta, thereby harming these consumers.

c. Smoking harms the health of the smoker.

d. Smoking harms the health of nearby nonsmokers.

1. Which of the following statement(s) is/are related to ‘externalities’?

a. They are always responsible for a welfare loss. 

b. They are the private costs of economic behavior.  

c. They are always negative.

d. They are not normally reflected in the market price of a product.

3. If pollution by one firm results in higher production costs for another firm, this would be classified as a:

a. negative production externality.

b. marginal private cost of production.

c. positive production externality

d. free good

4. The social costs of production are equivalent to:

a. the private external costs of production.

b. the private costs of production plus the additional external costs of production.

c. the marginal private costs of production. 

d. none of the above.

5. In the case of a negative externality, the social cost of production will

a. exceed the private cost of production.

b. be equal to the private cost of production.

c. fall short of private cost of production.

d. bear no significant relation to the private cost of production.

2. An externality can be a cost or benefit arising from the production of a good that falls upon

a. consumers but not producers.

b. producers but not consumers.

c. the consumer and the producer both.

d. someone other than the consumer or producer.