Question 1

Which of the following best describes a negative externality?

Accepted Answer

An economic activity that imposes costs on others not captured by the market price.

Question 2

Suppose a factory emits pollution into a river, harming a nearby microbrewery. If the factory only considers its own costs, what is the likely market outcome?

Accepted Answer

The factory will produce at a quantity where its private marginal cost equals market demand, ignoring the external cost imposed on the brewery.

Question 3

Which equation correctly represents the social marginal cost (SMC) in the presence of a negative externality?

Accepted Answer

$$SMC = MC + MEC$$

Question 4

A positive externality is best illustrated by which of the following scenarios?

Accepted Answer

Getting a flu shot, which reduces the chance of spreading illness to others.

Question 5

If the marginal social benefit (MSB) of education exceeds the private marginal benefit (PMB), what does this imply about the market equilibrium quantity of education?

Accepted Answer

The market equilibrium quantity is less than the socially optimal quantity.

Question 6

Which of the following government policies is most appropriate for correcting a negative externality?

Accepted Answer

Imposing a per-unit tax equal to the marginal external cost.

Question 7

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

Accepted Answer

When transaction costs are low and property rights are well-defined.

Question 8

Which of the following is a real-world example of a market-based policy to address a negative externality?

Accepted Answer

A cap-and-trade system for carbon emissions.

Question 9

If the government provides a per-unit subsidy for flu shots, what is the intended effect on the market?

Accepted Answer

Increase the quantity of flu shots to the socially optimal level.

Question 10

Which area on a supply and demand graph represents the deadweight loss from a negative externality?

Accepted Answer

The triangle between the social marginal cost curve and the market equilibrium quantity.

Question 11

A city is considering banning smoking in public spaces. What type of solution to externalities does this represent?

Accepted Answer

Direct government regulation.

Question 12

Which of the following best explains why market failure occurs in the presence of externalities?

Accepted Answer

Prices do not reflect the full social costs or benefits of production and consumption.

Question 13

Suppose the government wants to internalize the external benefit of education. Which policy would be most effective?

Accepted Answer

Providing a per-unit subsidy to students or educational institutions.

Question 14

If the marginal external cost of pollution is $$10 per unit and the government imposes a tax of 10 $$per unit, what is the expected outcome?

Accepted Answer

The market will produce the socially optimal quantity of the good.

Question 15

Which of the following is NOT a reason why the Coase Theorem might fail in practice?

Accepted Answer

Low transaction costs.

Question 16

A brewery and a polluting factory are negotiating over river pollution. If the brewery has the property rights, what is the likely outcome?

Accepted Answer

The factory will install a filter, and no payment is necessary.

Question 17

Which of the following best describes the role of social norms in addressing externalities?

Accepted Answer

They can encourage individuals to internalize external costs or benefits due to social pressure.

Question 18

If the government uses a cap-and-trade system to address pollution, what is the main advantage over direct regulation?

Accepted Answer

It allows the market to allocate pollution reduction efficiently without the government needing detailed information about each firm.

Question 19

Which formula represents the deadweight loss (DWL) from a negative externality?

Accepted Answer

$$DWL = \frac{1}{2} 	imes (Q_{market} - Q_{optimal}) 	imes (MSC - MPC)$$

Externalities and Market Failure: Microeconomics Study Notes

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