Externalities: Sample Quiz

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1. An example of a positive externality is:

the whaling industry driving whales to the brink of extinction.
a firm that dumps wastes into a river because water is free.
a person who plants a flower garden that makes a neighborhood more pleasant.
a firm that hires an employee whenever his marginal revenue produce exceeds his marginal resource cost.

2. Piracy is a serious problem for the software industry. Computer programs are easily copied and distributed over the Internet. This piracy problem exists because software:
has the problem of adverse selection.
has the problem of path dependency.
as a product is not subject to signaling and screening.
has characteristics very much like a public good.

3. Which of the following ways of avoiding the nuisance of mosquito bites provides the best example of a public good?

A leisurely cruise to Australia
A can of mosquito repellant
The elimination of mosquito breeding grounds
Window screens and a bed covered with mosquito netting
The heavy use of garlic to ward off mosquitoes

4. Economists argue that the optimum amount of pollution is:

whatever the market provides.
whatever level is decided by democratic processes.
the level where extra costs of cleanup just equal extra benefits of cleanup.

5. In your Advanced Business Persuasion course you must do a group project with three other students. All will receive the same grade. The group may find a problem of:

free riders.
the substitution effect.
present value.
rent seeking.

6. Pollution is an example of a:

public good.
moral hazard.
negative externality.

concentration of market power.

7. On the East Coast, some species of fish are now rare because they have been over-fished. An economist will explain over-fishing as an example of:

the problem of the commons.
constrained behavior.
contingent behavior.
the invisible hand.

8. Some creators of computer software sell their software as shareware. The software is made publicly available for people to try, and those who find it useful are supposed to pay. A serious problem facing shareware authors is:

moral hazard.
free riding.

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Copyright Robert Schenk