Federal Reserve Bank of Boston Economic Quiz
1. What do economists mean by an 'externality'?
An unusual year-end expense that must be appended to a firm's balance sheet.
A satellite office of a firm.
An unintended consequence or benefit to others due to an individual or firms actions that is not corrected by market forces.
An unexpected political or social change that affects a country's money supply.
2. Which of the following is NOT an example of an 'externality'?
Secondhand smoke inhaled by nearby people.
Renovating a home in a neighborhood.
Buying out homeowners to build a highway.
Dumping toxic pollutants into a community water system.
3. Externalities often occur because there are not specified property rights given to any one group. In the following example, giving property rights could eliminate the externality. To whom should the rights be granted to minimize the harm done?
Jan and Bob both live on a river which has no rules regarding usage. Jan lives downstream from Bob. Bob does his laundry in the river and Jan fishes in the river. The soap from Bob's laundry is killing Jan's fish and therefore making it impossible for both parties to use the river in the way they would like to - Bob's laundering is causing a negative externality. Who should be given rights to the river to fix the problem?
It doesn't matter.
4. Externalities are an example of a breakdown in the free market system. Which of the following government actions can be taken to correct externalities?
Establishment of property rights.
All of the above.
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Economic quiz written by: Mary Fitzgerald - December 2, 2002
Views expressed in the economic quiz are those of the individual author.