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Internalizing an externality

Offers answers for the following multi-choice questions.

Internalizing an externality refers to making

a. buyers and sellers take into account the external effects of their actions.

b. certain that all market transaction benefits go to only buyers and sellers.

c. certain government does not disrupt the internal workings of the market.

d. buyers pay the full price for the products they purchase.

The government can internalize a positive externality by

a. taxing production which would decrease supply.

b. taxing production which would increase supply.

c. subsidizing production which would decrease supply.

d. subsidizing production which would increase supply.

The Occupational Safety and Health Administration (OSHA) has determined that the probability of a worker dying from exposure to a hazardous chemical used in the production of diet soft drinks is 0.0005. The cost of imposing a regulation that would ban this chemical is $18 million. If each person saved has a value equal to $10 million, how many people must the policy affect for benefits to exceed costs?

a. 301

b. 601

c. 1801

d. 3601

One way to eliminate the Tragedy of the Commons is to

a. increase law enforcement in public areas.

b. limit access to the commons.

c. increase access to the commons.

d. provide more public land for recreation.

Using a toll to reduce traffic when congestion is greatest is an example of a

a. regulation solution.

b. command-and-control policy.

c. Pigovian tax.

d. Coase theorem solution.

Markets fail to allocate resources efficiently when

a. prices fluctuate.

b. those with the property rights abuse their privileges.

c. property rights are not well established.

d. the government refuses to intervene in private markets.

The town of Sointenly does not have any public snow-plows. Anyone who wants their street cleared of snow must hire a private snow-plow company to do it for $75. Curly, Larry and Moe all live on a dead-end street, with Curly living at the very end of it. Each one values snow removal at $50. At present, the snow is never cleared from the street. We can conclude that

a. the current situation is best because the cost of snow removal exceeds what each of them is willing to pay for it.

b. Larry and Moe should wait for Curly to pay for the service because if the snow is cleared all the way to Curly's house, Larry and Moe will get the service for free.

c. the fee charged by the snow removal company is unfairly high.

d. Curly, Larry and Moe could all be better off if they acted collectively.

The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. Which of the following statements about the aquifer is most likely to be true?

a. The aquifer is a public good which must be publicly owned to be used efficiently.

b. The aquifer is a private good which must be privately owned to be used efficiently.

c. The aquifer is a common property resource, which will be overused if nobody owns it.

d. The aquifer is a natural monopoly, which should be left as it is.

Most goods in the economy are

a. natural monopolies.

b. common resources.

c. public goods.

d. private goods.

The market does not provide national defense because

a. it is impossible to prevent any single person from enjoying the benefit of national defense.

b. the fixed cost of national defense is too high.

c. the necessary resources for national defense are not available in the private sector.

d. All of the above are correct.

The fish in the ocean are an example of a

a. common resource.

b. public good.

c. private good.

d. natural monopoly.

A free-rider problem exists for any good that is NOT

a. rival.

b. a private good.

c. free.

d. excludable.

Which of the following goods would satisfy attributes of a natural monopoly?

a. a congested public freeway

b. an airline flight that has been overbooked

c. local cable television

d. public parking

Too few resources are devoted to the creation of knowledge because profit-seeking firms

a. undervalue knowledge in their pursuit of revenues.

b. abuse their patents.

c. tend to free-ride on the knowledge that others have developed.

d. tend to rely on existing employee knowledge.

As with many public goods, determining the appropriate level of government support for the production of general knowledge is difficult because

a. benefits are hard to measure.

b. patents correct for an unknown portion of the externality.

c. members of Congress are often experts in the sciences.

d. the costs always exceed the benefits.

The government provides public goods because

a. private markets would not produce any of the good.

b. private markets would not produce the efficient quantity of the good.

c. private markets would charge too high a price for the good.

d. the government produces public goods more efficiently than private markets can.

Refer to the following information to answer the following questions.

Scenario 13-5
A certain firm produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000.

Refer to Scenario 13-5. The firm's fixed costs amounted to

a. $15,000.

b. $30,000.

c. $40,000.

d. $50,000.

Refer to the following information to answer the following questions.

Scenario 13-5
A certain firm produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000.

Refer to Scenario 13-5. The firm's economic profit for the year was

a. $-35,000.

b. $-5,000

c. $10,000.

d. $40,000.

An example of an implicit cost of production would be

a. the income an entrepreneur could have earned working for someone else.

b. the cost of raw materials for producing bread in a bakery.

c. the cost of a delivery truck in a business that rarely makes deliveries.

d. All of the above are correct.

The length of the short run

a. is different for different types of firms.

b. can never exceed 3 years.

c. can never exceed 1 year.

d. is always less than 6 months.

Use the following information to answer the following questions.

Scenario 13-1
Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $300,000. To finance this purchase, he will use $100,000 of his own money, on which he has been earning 10 percent interest. In addition, he will borrow $200,000, and he will pay 12 percent interest on that loan.

Refer to Scenario 13-1. For the first year of operation, what is the explicit cost of purchasing the factory?

a. $12,000

b. $20,000

c. $24,000

d. $44,000

Use the following information to answer the following questions.

Scenario 13-1
Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $300,000. To finance this purchase, he will use $100,000 of his own money, on which he has been earning 10 percent interest. In addition, he will borrow $200,000, and he will pay 12 percent interest on that loan.

Refer to Scenario 13-1. For the first year of operation, what is the opportunity cost of purchasing the factory?

a. $10,000

b. $20,000

c. $24,000

d. $34,000

The marginal product of an input in the production process is the increase in

a. total revenue obtained from an additional unit of that input.

b. profit obtained from an additional unit of that input.

c. total revenue obtained from an additional unit of that input.

d. quantity of output obtained from an additional unit of that input.

Suppose a certain firm is able to produce 160 units of output per day when 15 workers are hired. The firm is able to produce 176 units of output per day when 16 workers are hired (holding other inputs fixed). Then the marginal product of the 16th worker is

a. 10 units of output.

b. 11 units of output.

c. 16 units of output.

d. 176 units of output.

Average total cost is very high when a small amount of output is produced because

a. average variable cost is high.

b. average fixed cost is high.

c. marginal cost is high.

d. All of the above are correct.

Total cost necessarily rises due to
(i) rising marginal cost.
(ii) falling marginal cost.
(iii) increasing marginal product.

a. (i) only

b. (i) and (ii)

c. (ii) only

d. None of the above are correct.

The efficient scale of the firm is the quantity of output that

a. maximizes marginal product.

b. maximizes profit.

c. minimizes average total cost.

d. minimizes average variable cost.

When marginal cost is less than average total cost,

a. marginal cost must be falling.

b. average variable cost must be falling.

c. average total cost is falling.

d. average total cost is rising.

Solution Preview

Internalizing an externality refers to making
<br>
<br>a. buyers and sellers take into account the external effects of their actions.
<br>
<br>b. certain that all market transaction benefits go to only buyers and sellers.
<br>
<br>c. certain government does not disrupt the internal workings of the market.
<br>
<br>d. buyers pay the full price for the products they purchase.
<br>
<br>a. You internalize an externality when you take put the costs/benefits by your action into the buyer/seller equations.
<br>
<br>The government can internalize a positive externality by
<br>a. taxing production which would decrease supply.
<br>
<br>b. taxing production which would increase supply.
<br>
<br>c. subsidizing production which would decrease supply.
<br>
<br>d. subsidizing production which would increase supply.
<br>d. The externality is positive so it leads to benefit for people. Thus, the producer of the externality gets compensated by the government in terms of subsidy.
<br>
<br>
<br>The Occupational Safety and Health Administration (OSHA) has determined that the probability of a worker dying from exposure to a hazardous chemical used in the production of diet soft drinks is 0.0005. The cost of imposing a regulation that would ban this chemical is $18 million. If each person saved has a value equal to $10 million, how many people must the policy affect for benefits to exceed costs?
<br>a. 301
<br>
<br>b. 601
<br>
<br>c. 1801
<br>
<br>d. 3601
<br>
<br> Total cost = $18 million
<br>Total benefit = 10*.0005* Number of people
<br>If cost = benefit
<br>Then, number of people= 18/(10*.0005) = 3,600
<br>As benefit > cost, hence number of people is 3,600+1 or 3,601.
<br>Thus, answer is d.
<br>
<br>
<br> One way to eliminate the Tragedy of the Commons is to
<br>
<br>a. increase law enforcement in public areas.
<br>
<br>b. limit access to the commons.
<br>
<br>c. increase access to the commons.
<br>
<br>d. provide more public land for recreation.
<br>
<br> a. Will eliminate misuse of the Commons.
<br>
<br>Using a toll to reduce traffic when congestion is greatest is an example of a
<br>
<br>a. regulation solution.
<br>
<br>b. command-and-control policy.
<br>
<br>c. Pigovian tax.
<br>
<br>d. Coase theorem solution.
<br>c. The externality producing agent will pay to reduce the congestion from its optimal level, or if the toll rate is set right, he will reduce his usage of the toll road. (Coase's theorem applies, if we are bargaining).
<br>
<br>Markets fail to allocate resources efficiently when
<br>a. prices fluctuate.
<br>
<br>b. those with the property rights abuse their privileges.
<br>
<br>c. property rights are not well established.
<br>
<br>d. the government refuses to intervene in private markets.
<br>c. When property rights are not well established, then markets need not give an efficient allocation of resources.
<br>
<br>
<br>The town of Sointenly does not have any public snow-plows. Anyone who wants their street cleared of snow must hire a private snow-plow company to do it for $75. Curly, Larry and Moe all live on a dead-end street, with Curly living at ...

Solution Summary

Internalizing an externality is depicted.

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