Q: Which equation correctly represents the marginal social benefit (MSB) in the presence of a positive externality?

$$ MSB = MB + \text{Marginal external benefit} $$

Q: Suppose the marginal private benefit (MB) of a good is $$8, and the marginal external benefit is 3. $$What is the marginal social benefit (MSB)?

$$ MSB = MB + \text{Marginal external benefit} = 8 + 3 = 11 $$

Question 1

Which of the following best describes a negative production externality?

Accepted Answer

A paper mill discharging waste into a river, harming fish populations downstream.

Question 2

Suppose the marginal private cost (MC) of producing a good is $$10, and the marginal external cost (MEC) is 4. $$What is the marginal social cost (MSC)?

Accepted Answer

$$ MSC = MC + MEC = 10 + 4 = 14 $$

Question 3

Which of the following is most likely to result in a market failure due to underproduction?

Accepted Answer

A positive consumption externality, such as herd immunity from vaccinations.

Question 4

According to the Coase Theorem, under what conditions can private bargaining lead to an efficient outcome in the presence of externalities?

Accepted Answer

When property rights are clearly defined, there are only a few parties involved, and transaction costs are low.

Question 5

A government wants to correct a negative production externality by imposing a Pigovian tax. If the marginal external cost is $6 per unit, what should the tax per unit be to achieve allocative efficiency?

Accepted Answer

$6

Question 6

Which equation correctly represents the marginal social benefit (MSB) in the presence of a positive externality?

Accepted Answer

$$ MSB = MB + 	ext{Marginal external benefit} $$

Question 7

A city is considering two policies to reduce air pollution: (1) a command-and-control regulation requiring all firms to install scrubbers, and (2) a marketable permit system (cap-and-trade). Which statement is most accurate?

Accepted Answer

The marketable permit system provides incentives for firms to innovate and reduce pollution at lower cost.

Question 8

Which of the following is an example of the tragedy of the commons?

Accepted Answer

Overfishing in the open ocean where no one owns the fish stocks.

Question 9

If a government wants to increase the production of a good with positive externalities, which policy is most appropriate?

Accepted Answer

Provide a subsidy to producers equal to the marginal external benefit.

Question 10

Suppose the marginal private benefit (MB) of a good is $$8, and the marginal external benefit is 3. $$What is the marginal social benefit (MSB)?

Accepted Answer

$$ MSB = MB + 	ext{Marginal external benefit} = 8 + 3 = 11 $$

Question 11

Which of the following best explains why the tragedy of the commons occurs?

Accepted Answer

Common resources are rival but non-excludable, so users have no incentive to conserve and tend to overuse them.

Question 12

A government issues individual transferable quotas (ITQs) for fishing. What is the main economic effect of this policy?

Accepted Answer

It creates a market for fishing rights, aligning individual incentives with the efficient use of the resource.

Question 13

Which of the following is NOT a necessary condition for the Coase Theorem to hold?

Accepted Answer

A large number of parties are involved.

Question 14

If the government pays a subsidy equal to the marginal external benefit for each unit of a good produced, what is the effect on the market?

Accepted Answer

The market quantity increases to the allocatively efficient level where $$ MSC = MSB .$$

Question 15

Which of the following is an example of a command-and-control policy to address externalities?

Accepted Answer

A law requiring all factories to install a specific pollution control device.

Question 16

Suppose a fishery is overexploited because no one owns the fish stocks. Which policy would best address this market failure?

Accepted Answer

Assign property rights or implement individual transferable quotas (ITQs).

Question 17

Which of the following statements about Pigovian taxes is correct?

Accepted Answer

A Pigovian tax internalizes a negative externality by making the private cost equal to the social cost.

Question 18

Which of the following is a real-world example of a positive production externality?

Accepted Answer

A beekeeper's bees pollinating nearby crops, increasing crop yields.

Question 19

If the marginal social cost (MSC) of fishing exceeds the marginal private cost (MC), what does this imply about the use of the resource?

Accepted Answer

There is an external cost, and the resource is being overused relative to the efficient level.

Question 20

Which of the following best describes the effect of external benefits on market outcomes?

Accepted Answer

Markets underproduce goods with external benefits because the private benefit is less than the social benefit.

Chapter 9: Externalities – Microeconomics Study Notes

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