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A situation in which a benefit or cost associated with an economic activity spills over to third parties is called

an externality

an example of third parties in the market of automobiles is

a pedestrian that is affected by the polluted air from automobiles

an externality can best be defined as

a consequence of a transaction that spills over to affect third parties

all of the following illustrate how government can correct for positive externalities EXCPET


which of the following leads to an underallocation of resources to a specific economic activity

external benefits

a result of a positive externality in the production of a good is that

the price system will under-allocate resources to the production of that good or service

which of the following is an example of a negative externality

there is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers

Suppose teh XYZ industry produces a product that results in negative external costs to society. this information suggest that

resources are over-allocated to the industry

when an external cost exists in the production of a good, firms tend to

over-produce the good

if production of an item results in negative external costs, then

the market price is below the socially preferred price that reflects the external costs

which of the following will LEAST likely generate positive external benefits to society?

the use of cell phone services

suppose that the market price of good X equals cost of producing that good, but it does not reflect any costs imposed on society. which of the following is FALSE?

an external benefit is associated with good X

when a good causes positive external benefits to accrue to third parties, an unfettered market will

under-allocate resources to the good causing the benefit.

society is likely to over-allocate resources to produce goods that

generate negative externalities

which of the following often involves positive external benefits?

immunization programs

a negative externality is a situation in which

a cost associated with an economic activity is borne by a third party

when a paper producer pollutes the air, economists argue that there is

an external cost

an external cost, such as the cost generated by pollution, is

a cost paid by a third party or by society at large

pollution is causes by a market failure, in an industry in which there is

an over-allocation of resources in production

a negative externality such as pollution can be corrected by

a tax on producers

an externality exists when

some of the benefits or costs associated with a good are borne by third parties

according to the above figure, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be


according to the above figure, if steel mills are charged an effluent fee in order to bear the cost of pollution, what happens to the equilibrium price and quantity?

they change from P1 and Q1 to P2 and Q2

government can correct for negative externalities by

increasing taxes or regulation

in graphical form, the effect of imposing a tax on a good is shown as

a leftward shift of the market supply curve

if the production of a product results in significant eternal costs, an appropriate government policy might be to

tax producers and thus shift the supply curve to the left

to correct for the underproduction of products with positive externalities, the government must

provide the incentives for the private sector to produce and consume the good

assume the production of a good gives rise to extermal benefits. the government may increase efficiency by

subsidizing consumption of the good

a government subsidy is typically used

to correct a positive externality

a subsidy is sometimes used by the government to correct the problems associated with

positive externalities

when costs spill over to third parties, there is a

negative externality

which of the following is NOT an example of a negative externality?

inoculation against disease

which of the following is an example of a positive externality

a lower crime rate for a community in which residents recieve more education
increased purchase of landscaping services by a homeowner that boost a neighbor's property

A paint firm has just announced that it will be building a new plant in a small town that is currently experiencing a high level of unemployment. the new plant will create 500 new jobs in the area and will occupy unused land at the edge of town. the plant will also dump some harmful chemicals into the towns river. from an economic standpoint this dumping of chemicals

creates a negative externality.

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