Core Economics 3e

Externalities and Public Goods

Multiple Choice Questions

After watching the Externalities and Public Goods video lecture, consider the question(s) below. Then “submit” your response.

Question

1. An action taken by a person or business that affects the well-being of another individual or firm not involved in the transaction is called a(n):

public good.

common property resource.

externality.

nonrival good.

Question

2. The inability of a market to generate a socially optimal quantity or price of a good is called a(n):

negative consequence.

market failure.

deleterious impact.

inappropriate outcome.

Question

3. Many companies choose to emit pollution instead of using cleaner production methods because of:

cost considerations.

consumer resistance.

government regulations.

competitive leadership.

Question

4. Refer to Figure 13.1. The upper curve (S_S) in the figure represents the _____ supply curve.

private

social

market

seasonal

Question

5. Refer to Figure 13.2. The upper curve (D_S) in the figure represents the _____ demand curve.

private

seasonal

market

social

Question

6. Products that generate external costs are generally _____ or _____.

over-produced; over-consumed

under-produced; under-consumed

well known; frequently ignored

given attention; government regulated

Question

7. Public goods are _____ and _____.

nongeneric; very frequent

neither helpful; not strategic

nonrival; nonexcludable

very common; very dependable

Question

8. A nonrival good is one for which:

one person’s consumption of the good does not diminish another person’s enjoyment of the good.

once the good is provided no one can be prevented from enjoying the good.

various goods do not compete with each other for success in the marketplace.

firms manufacturing competitors of the good in question help to improve the good.

Question

9. “Nonexcludable” means that:

a good has all important product features bundled with the product.

a good is available to very few consumers through very exclusive outlets.

once a good is provided, no one can be prevented from enjoying it.

no firms can be prevented from manufacturing a good.

Question

10. Common property resources tend to be exploited quickly because:

the resource is very attractive compared to available alternatives.

it is not possible to prevent someone from using the resource.

all such resources are commonly held through the government.

consumers want to buy what other consumers have bought so they can have something in common with others.

True/False Questions

After watching the Externalities and Public Goods video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Goods generating positive externalities are over-produced or over-consumed.

True

False

Question

2. Keeping one’s front yard neat and attractive can create a positive externality.

True

False

Question

3. Public goods are both rival and excludable.

True

False

Short Answer/Discussion Questions

After watching the Externalities and Public Goods video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Why might a business choose to emit pollution?

Controlling pollution frequently requires a firm to invest in new and possibly higher cost technology to achieve the desired pollution reductions. These higher costs might cause the firm’s overall production costs to increase. With higher costs, the firm might have difficulty in matching the prices of firms that didn’t make pollution control investments. Thus, the firm might not earn acceptable profits.

Question

2. Is a public beach both nonrival and nonexcludable? Explain.

Suggested solution: A public beach is nonexcludable but it is rival in consumption. Assuming that, because the beach is a public facility, there are no entrance restrictions, the beach would be nonexcludable. Should the beach become severely congested, it would be rival (the opposite of nonrival) in consumption because use of the beach’s facilities by any one person impacts the enjoyment of other beachgoers.

Question

3. Why are public goods usually provided by the government?

Suggested solution: Private markets have difficulty earning profits from the production of many public goods. This is because these goods are both nonrival and nonexcludable. Examples are national defense, public safety, and clean air. In the absence of a profit opportunity, private industry will not produce a good, but in response to the presence of public need for such socially desirable goods, the government can (as a result of its ability to tax) step in to produce these goods.