Exercises 5.1
1. Which of the following statements about negative externalities is/are TRUE?
I. At the social-surplus maximizing level of output, external costs equal zero. II. At the unregulated competitive equilibrium, marginal social cost is greater than marginal social benefit. III. At any output level, social costs are greater than private (market) costs.
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a) I, II, and III. b) II only. c) III only. d) II and III.
2. Which of the following statements about external costs is TRUE?
a) Economics uses the term “external cost” to describe a spillover effect from market activity that is too small to matter to society. b) Economics ignores the environmental impact of market activities by calling such impact an “external cost.” c) Economics does not provide guidance for environmental policy since its treats any environmental cost as an “external cost”. d) None of the above statements are true.
3. If a competitive market is characterized by a negative externality, then which of the following statements is true?
a) Social surplus is greater than market surplus. b) Social surplus is less than market surplus. c) Social surplus is equal to market surplus. d) Social surplus may be greater than or less than market surplus, depending on the size of the externality.
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The following TWO questions refer to the diagram below, which illustrates the market for a good whose production results in a negative externality.
4. If there is no regulation in place to correct the externality, which area represents MARKET surplus?
a) a. b) a – d. c) a + b. d) a + b + e.
5. If there is no regulation in place to correct the externality, which area represents SOCIAL surplus?
a) a. b) a – d. c) a + b. d) a + b + e.
6. Suppose that each kilowatt-hour (kwh) of electricity produced using natural gas results in 0.2kgs of carbon dioxide emissions. If each ton of carbon dioxide emissions results in environmental costs of $360, then the marginal external cost per kwh of electricity produced is equal to (0.2kg is equal to about 0.000220462 tons):
a) 10 cents. b) 8 cents. c) 4 cents. d) 2 cents.
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The following THREE question refer to the diagram below, which illustrates the marginal private cost, marginal social cost, and marginal social benefits for a goods whose production results in a negative externality.
7. Which are represents the deadweight loss due to the externality?
a) j. b) h. c) h+j. d) There is no deadweight loss.
8. Which are represents external costs at the unregulated competitive equilibrium?
a) g + h + j + m + k. b) g + h + j. c) g + m. d) g.
9. Which are represents social surplus at the unregulated competitive equilibrium?
a) f – j. b) f. c) f + g + h. d) f + g + h – j.
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