M icro Part II

Question 1

externality

Answer 1

the uncompensated impact of one person’s actions

on the well-being of a bystander.

Question 2

Externalities cause ___

Answer 2

markets to be inefficient, and thus fail to maximize total

surplus.

Question 3

An externality arises when

Answer 3

a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.

Question 4

negative externality occurs when ____

lead markets to produce __

Answer 4

When the impact on the bystander is adverse.
Negative externalities lead markets to produce a larger quantity than is
socially desirable.

Question 5

positive externality occurs when ____

lead markets to produce__

Answer 5

When the impact on the bystander is beneficial.
Positive externalities lead markets to produce a smaller quantity than is
socially desirable.

Question 6

the social cost includes

Answer 6

the private costs of the producers plus the cost to those bystanders adversely
affected by the pollution

Question 7

optimal output level

Answer 7

The intersection of the demand curve and the social-cost curve

Question 8

Internalizing an externality involves ____

Answer 8

Internalizing an externality involves altering incentives so that people take
account of the external effects of their actions

Question 9

The government can internalize an externality by

Answer 9

imposing a tax on the
producer to reduce the equilibrium quantity to the socially desirable
quantity.