Chapter 18: Externalities and Public Goods

In the case of a negative externality, the social marginal cost will
1. exceed the private marginal cost.
2. be equal to private marginal cost.
3. fall short of private marginal cost.
4. bear no significant relation to private marginal cost.
A perfectly competitive steel mill that produces large amounts of pollution (a negative externality) will, from a social point of view,
1. produce too little steel.
2. produce the socially optimal quantity of steel.
3. produce too much steel.
4. produce too much steel only if it installs pollution control equipment.
In the case of a positive externality, social marginal cost will
1. exceed private marginal cost.
2. be equal to private marginal cost.
3. fall short of private marginal cost.
4. have no specific relation to private marginal cost.
Each of the following provides incentives to reduce a negative externality except:
1. a merger with affected firms.
2. subsidizing consumption of the good being produced.
3. bargaining among firms.
4. taxation of the externality.
To reach an economically efficient output level, the size of an excise tax imposed on a firm generating a negative externality should be
1. the firm’s marginal cost.
2. the social marginal cost.
3. the difference between the social marginal cost and the firm’s marginal cost.
4. the sum of the social marginal cost and the firm’s marginal cost.
In perfect competition, environmental externalities need not distort the allocation of resources providing
1. transactions costs are zero.
2. average costs are constant for all output levels.
3. firms install pollution control equipment.
4. the government sets realistic pollution standards.
In drilling a new oil well in an existing oil field, the fact that output on existing wells is reduced means that
1. existing wells have negatively sloped marginal cost curves.
2. existing wells and new wells are owned by different people.
3. existing wells and new wells are owned by the same people.
4. there is a discrepancy between private and social marginal costs.
Bargaining costs are generally high in cases involving environmental externalities because
1. there are strong incentives to be a free rider.
2. many individuals may be affected by the externalities.
3. it is difficult to measure the costs of the externalities.
4. all of the above.
Externalities between two firms can be “internalized” if:

I. The two firms merge.
II. Bargaining costs are zero.
III. The externalities affect each firm equally.
IV. Marginal costs for both firms are constant.

Which statement(s) correctly complete(s) the sentence?
1. Only II.
2. All except III.
3. I and II, but not III and IV.
4. I and IV, but not II and III.
5. Only I.
Common property
1. is owned by specific people.
2. is inexhaustible.
3. refers strictly to land resource.
4. refers to goods “owned” by society at large and freely usable by anyone.

Chapter 18: Externalities and Public Goods

Multiple Choice Questions