In a market where there are external or spillover costs associated
with consumption and production, the equilibrium will not be efficient
because:
a)price will be greater than MC.
b)firms will be shut down until costs are reduced.
c)costs of production will, on average, be too high.
d)too many resources will be allocated to production of the good.

11)Suppose that the ABC industry produces a product which results in a
significant spillover costs to society. Such production suggests that:
a)resources are underallocated to the industry.
b)resources are overallocated to the industry.
c)the firms in this industry aren't maximaizing profits.
d)at the market price, quantity demanded is less than quantity
supplied.

12)The lojack is an example of a product that:
a)produces a positive externality.
b)produces a negative externality.
c)contributes to global warming.
d)contributes to the tragedy of the commons.

13)When an extenal or spillover benefits occur in the production of a
particular product, the private market tends to provide:
a)none of the product.
b)too much of the product.
c)too little of the product.
d)the socially optimal amount of the product.

14) When producing a good generates external of spillover costs, the
private market for that good tends to produce too:
a)much of the product at too low a price.
b)much of the product at too high a price.
c)little of the product at too low a price.
d)little of the product at too high a price.

15)When the production of a product creates external costs greater
than external benefits, a market economy will:
a)not produce the product without government intervention.
b)produce a socially optimal allocation of resources.
c)allocate too few resources to production of the product.
d)allocate too many resources to production of the product.

16) Which is an example of spillover cost?
a)an increase in the value of the land you own when a nearby
development is completed.
b)the costs paid by a company to build an automated factory.
c)decreased property values in a neighborhood where several houses are
burglarized.
d)the higher price you pay when you buy a heavily advertised product.

Dear k9queen-ga,

Good day!

Definitions
===========

1. An externality is a cost or benefit accruing to a person or group
of people who are external to a market transaction. When this occurs,
the market fails to provide an allocatively efficient quantity of the
good or service. Too little is produced in the case of spillover
benefits; too much in the case of spillover costs. In some instances,
government intervention may be required to correct the market failure.

2. Spillover Costs or Negative Externalities are defined as the costs
imposed without compensation on third parties by the production or
consumption of other parties.  Example: A manufacturer dumps toxic
chemicals into a river, killing the fish sought by sport fishers

3. Spillover Benefits or Positive Externalities are the benefits
obtained without compensation by third parties from the production or
consumption of other parties.  Example: A bee keeper benefits when the
neighboring farmer plans clover.

Answers
=======

10) (d) Too many resources will be allocated to production of the
good.

11) (b) Resources are overallocated to the industry.

12) (a) Produces a positive externality.

13) (c) Too little of the product.

14) (a) Too much of the product at too low a price.

15) (d) Allocate too many resources to production of the product.

16) (c) Decreased property values in a neighborhood where several
houses are burglarized.


Brief Explanations
==================

An industry or a factory pays private costs for the materials it uses.
While it has no cost to itself for the pollution that it generates,
other citizens suffer spillover costs. Therefore, the industry or the
factory is not paying all the costs of its production. Instead, some
of these costs—the pollution of its waste—are being passed on to
others. Since only the private costs of production are being paid, the
industry or the factory gains more profits than it would if it
realized its true total costs. The result is an over-allocation of
resources to making this product.

Economists Ian Ayres and Steven Levitt have examined the effects of
the Lojack in about a dozen cities over the past 10 years and found
that although it costs only about $100 a year to have a Lojack, each
individual Lojack prevents about $1,500 a year in losses due to theft.
More imoprtantly, the $1,500 benefit accrues not to the strangers and 
not to the Lojack owner!

As the firm does not pay for the spillover cost, it will tend to think
that the costs to itself are lower and oversupply that product which
is polluting. Resources will be over allocated to the production of
that good.

I hope that I have answered yuor questions satisfactorily :) Please do
not hesitate to ask for any further clarifications / information
regarding the amswers. I wait for your ratings and comments.

Thanks & regards,
reeteshv-ga


Additional Links:
The Short Run provides a nice introduction to the concepts of
spillover costs and benefits:
http://www.theshortrun.com/classroom/glossary/micro/externalities.html

A good article that focuses on market failure & externatlities:
http://www.worldgameofeconomics.com/Lesson8.htm

A very interesting article on Lojack, written by Steven E. Landsburg
is available at:
http://www.calbaptist.edu/dskubik/theft.htm

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