Ch. 8

Question 1

Sometimes the market system fails to produce efficient outcomes because of side effects

Answer 1

externalities

Question 2

Benefit or cost from consumption or production that spills over onto those who are not consuming or producing the good.

Answer 2

Externality

Question 3

Occurs when benefits spill over to an outside party who is not involved in producing or consuming the good.

Answer 3

Positive externality

Question 4

Occurs when costs spill over to an outside party who is not involved in producing or consuming the good.

Answer 4

Negative externality

Question 5

What graph is this?

Answer 5

Negative Externalities in Production

Question 6

•The government cant intervene in market decisions in an attempt to take account of negative externalities.

Answer 6

False

Question 7

If the government could impose a pollution tax equal to the exact size of the external cost then what?

Answer 7

•the firm would produce at the socially desired level of output.

Question 8

How could regulation be used?

Answer 8

•simply forcing firms to reduce their emissions or prohibit certain pollution causing activities.

Question 9

Most economists agree that a pollution tax is more…..

Answer 9

efficient than regulation?

Question 10

The pollution tax is good because of what two things?

Answer 10

• it gets rid of the externality
• moves society closer to the efficient level of output.

Question 11

The tax also gives firms an incentive to what?

Answer 11

•to find and apply new technology to further reduce pollution levels in their plant.

Question 12

Under regulation, a firm has little incentive to further reduce emissions once it reaches what?

Answer 12

•the predetermined level set by the regulated standard.

Question 13

•For some goods, the individual consumer does not receive all of the benefits.

Answer 13

True

Question 14

The benefits not received by the consumer are called…….

Answer 14

•positive externalities.

Question 15

At the market equilibrium for goods providing external benefits, output is less than the efficient level why?

Answer 15

•because many people that benefit do not have to pay for those benefits.

Question 16

If we could add the benefits that are derived by nonpaying consumers

Answer 16

•the demand curve would shift to the right, increasing output.

Question 17

What does the graph represent?

Answer 17

Positive Externalities in Consumption

Question 18

Because producers are unable to collect payments from all of those that are benefiting from the good or service, the market has a tendency to

Answer 18

•under-produce goods with external benefits, causing an efficiency loss.

Question 19

What Can the Government Do to
Correct for Positive Externalities?

2 things

Answer 19

•A subsidy benefit would shift the demand curve to the right, and result in an efficient level of output.

• Government Regulation

Question 20

•Sometimes externality problems can be handled by individuals without the intervention of government.

Answer 20

True