If a good that generates spillover costs were priced to take into
account these spillover costs, then its:
a)price would decrease and its output would increase.
b)output would increase but its price would remain constant.
c)price would increase and its output would decrease.
d)price would increase but its output would remain constant.

4)If an activity results in a spillover benefit, then in a pure market
economy the:
a)quantity produced is too low
b)quantity produced is too high
c)market supply is too low
d)market supply is too high

5)If some activity creates exteranl (spillover) benefits as well as
private benefits, then economic theory suggests that the activity
ought to be:
a)taxed
b)prohibited
c)subsidized
d)left alone

6)If the production of a product or service involves external or
spillover benefits, then the government can improve efficiency in the
market by?
a)providing a subsidy to correct for an overallocation of resources.
b)providing a subsidy to correct for an underallocation of resources.
c)imposing a corrective tax to correct for an overallocation of
resources.
d)imposing a corrective tax to correct for an underallocation of
resources.

7) If there are external spillover benefits associated with
consumption and production of a product, it can be said that the:
a)governement should consider placing a special tax on producers.
b)governement should consider prohibiting the production of the
commodity.
c)supply curve for the product lies too far to the right to provide an
efficient allocation of resources.
d)demand curve underestimates the total benefit from the product and
resources are underallocated to its production.

8)If there are external or spillover benefits associated with the
consumption of a good or service:
a)the private demand curve will overestimate the true demand curve.
b)the private demand curve will underestimate the true demand curve.
c)consumers will be willing to pay for all these benefits in private
markets.
d)the market demand curve will be the vertical summation of the
individual demand costs.

9) In a free market economy, a product which entails a spillover
benefit will be:
a)overproduced
b)underproduced
c)produced at the optimal level
d)associated only with goods and services provided by the government

Hi k9queen!
Here are the answers to your set of questions:

3) C) price would increase and its output would decrease

Recall that if producing a good has associated spillover costs, then
the social cost is higher. If the producer were to take into account
the social cost, then his costs would be higher, thus shifting the
supply curve to the left. In equilibrium, this results in a higher
price and lower output.

4) A)quantity produced is too low

Either if there is a consumption or a production positive externality,
in both cases, in a pure market equilibrium the good is underproduced.
For an explanation, refer either to the following page (it has some
nice interactive graphics)

Chapter Notes
http://www.lclark.edu/~bekar/Mankiw/ch10/notes.htm

or refer to my previous answer to you:

http://answers.google.com/answers/threadview?id=265971

5) C) subsidized

A subsidy is like an "inverse tax": consumers or producers get paid by
the government for consuming or producing something. This clearly
shifts the supply or the demand curve to the right. The demand curve
shifts to th right because demand for a good rises if consumers get
paid by the government for consuming the good. The supply curve shifts
to the right because supply rises because of the same reason. In
either case, the equilbrium quantity will be higher. This is desirable
if there are spillover benefits, because the pure market equilibrium
will result in underproduction of the good. So this policy will
correct the market inefficiency.

6) B) providing a subsidy to correct for an underallocation of
resources

The explanation is the same as (5)

7) D) demand curve underestimates the total benefit from the product
and
resources are underallocated to its production

Again, this follows from the explanations before.

8) B) the private demand curve will underestimate the true demand
curve

Since an individual doesn't take in account the social value derived
by his consumption of the good, the demand given by the private value
will be lower than the one given by the social value.

9) B) underproduced

Again, the explanation is the same as for previous questions.


I hope this helps! If you have any dpubt regarding my answer, please
request a clarification before rating it. Otherwise I await your
rating and final comments.

Best wishes!
elmarto