BR12A: Bridge: Externalities
Question 1
Which is an example of a positive externality?
An example would be
A. buying a gift for your sister.
B. receiving a great deal at the local store.
C. making improvements to your house.
D. None of these choices are examples of a positive externality.
Hint
A positive externality occurs when a third party receives a benefit from a transaction occurring.Answer
C. making improvements to your house. When you make improvements to your house, your neighbors are able to appreciate the improved look and feel of the neighborhood. Note that your neighbors were not involved in the purchasing of supplies for the improvements or the work itself.Question 2
When Lin receives a flu vaccination, it reduces his chance of catching the flu as well as the chance that his sister will get sick. His flu vaccination creates a(n):
A. external benefit.
B. deadweight loss.
C. marginal social cost.
D. external cost.
Hint
An external cost exists when an individual who is not involved in a transaction is harmed by its occurrence. An external benefit exists when an individual who is not involved in a transaction benefits from its occurrence.Marginal social costs are the summation of private marginal costs–the costs that accrue to the private producer–and external costs, or the costs that are not realized by the producer but are, instead, borne by society.
Deadweight loss is the reduction in economic surplus that results from the existence of an unaddressed positive or negative externality.
Answer
A. external benefit. When Lin receives a flu vaccination, his increased immunity to the flu reduces the likelihood that his sister will contract the virus. Thus, Lin's sister derives protection against the flu even though she did not receive the vaccine.Question 3
The private consumption of services that generate positive externalities, such as getting a college education, is usually _____ the socially optimal level of consumption.
A. less than
B. greater than
C. unrelated to
D. equal to
Hint
The efficient level of a good or activity that generates a positive externality is where the marginal social benefit is equal to the marginal cost. If this is ignored, the cost of college is borne solely by the student. Since they reap none of the additional benefits realized by society, students will only continue to seek out education until the private marginal benefit is equal to the marginal cost.Answer
A. less than Individuals incur a private cost when engaging in activities that generate positive externalities. These activities are underprovided since individuals are not compensated for the benefits they provide to society.Question 4
Jase always texts while he drives. He is generating _______ to others.
A. external cost
B. more supply
C. internal cost
D. external benefit
Hint
Does Jase's texting benefit others, bestow on them a cost, or have no effect?Answer
A. external cost Jase's texting while driving puts other drivers and pedestrians at risk. To account for this externality, society would benefit by reducing the activity.Question 5
Which is NOT a common method by which the government controls pollution?
The government does not
A. advertise the harmful effects of pollution to encourage firms to pollute less.
B. impose taxes on pollution emitted.
C. set a strict limit on the amount of pollution each firm can generate.
D. issue tradable permits to pollute.