Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on someone not directly involved in a transaction.

Question 2

Suppose a factory emits pollution that affects nearby residents. The cost of this pollution to residents is not reflected in the market price of the factory’s product. What is this an example of?

Accepted Answer

A negative externality

Question 3

If the production of a good causes a negative externality, then the social-cost curve will lie ________________ the supply curve, and the socially optimal quantity is _________________ than the equilibrium quantity.

Accepted Answer

Above; Less

Question 4

Which of the following is an example of a positive externality?

Accepted Answer

Jim’s freshly cut hedges make the neighborhood more beautiful.

Question 5

Which of the following statements about externalities is correct?

Accepted Answer

Both positive and negative externalities are not efficient.

Question 6

What is the effect of a Pigovian tax on a market with a negative externality?

Accepted Answer

It reduces the equilibrium quantity to the socially optimal level.

Question 7

Which of the following is NOT a way of dealing with externalities?

Accepted Answer

Increasing competition

Question 8

According to the Coase theorem, an efficient solution to an externality can be reached if:

Accepted Answer

Property rights are clearly defined and transaction costs are low.

Question 9

Which of the following is true if the assumptions of the Coase theorem are satisfied?

Accepted Answer

The assignment of property rights does not matter for efficiency.

Question 10

The marginal social cost (MSC) of producing a good is given by:

Accepted Answer

$$MSC = MPC + MEC$$

Question 11

A per-unit subsidy is most appropriate for which type of externality?

Accepted Answer

Positive externality

Question 12

Which of the following best describes the concept of internalizing an externality?

Accepted Answer

Forcing the full cost or benefit of a transaction to be included in the market transaction.

Question 13

If the government issues tradeable pollution permits up to the socially optimal quantity, what is the likely result?

Accepted Answer

Pollution will be reduced to the socially optimal level.

Question 14

Which of the following is a key element for the Coase theorem to work in practice?

Accepted Answer

The ability to negotiate at a minimal cost.

Question 15

The socially optimal level of pollution:

Accepted Answer

Is above zero.

Question 16

Which of the following is an example of a market-based policy to address externalities?

Accepted Answer

Imposing a Pigovian tax.

Question 17

If a good generates a positive externality, what is the relationship between the marginal social benefit (MSB) and the marginal private benefit (MPB)?

Accepted Answer

$$MSB \u003e MPB$$

Question 18

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

Accepted Answer

A person getting vaccinated, reducing the spread of disease.

Question 19

Deadweight loss from externalities occurs because:

Accepted Answer

The market fails to account for all costs and benefits.

Question 20

Which of the following policies would best address a negative externality from chemical dumping?

Accepted Answer

A Pigovian tax equal to the external cost per unit dumped.

Externalities in Microeconomics: Concepts, Solutions, and Applications

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