Question 1

Which of the following best describes a negative production externality?

Accepted Answer

A cost imposed on third parties not involved in the production or consumption of a good.

Question 2

Suppose a factory emits pollution as a byproduct of its production. The Marginal Social Cost (MSC) of production is given by $$MSC = MPC + MEC. If $$the Marginal Private Cost (MPC) is $$10$$ and the Marginal External Cost (MEC) is $$5$$, what is the MSC?

Accepted Answer

$$MSC = 15$$

Question 3

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

Accepted Answer

A person receives a flu vaccine, reducing the likelihood of spreading illness to others.

Question 4

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

Accepted Answer

When property rights are clearly defined and transaction costs are low.

Question 5

A Pigovian tax is designed to:

Accepted Answer

Correct the market outcome by internalizing the external cost of negative externalities.

Question 6

If the government imposes an emissions tax equal to the marginal external cost, what is the expected effect on the market equilibrium?

Accepted Answer

The quantity produced will decrease and the price will increase.

Question 7

Which of the following is a potential drawback of using tradable emissions permits to control pollution?

Accepted Answer

It is difficult to determine the optimal number of permits to issue.

Question 8

Suppose the marginal social benefit (MSB) of a good is given by $$MSB = MPB + MEB$$, where $$MPB is $$marginal private benefit and $$MEB is $$marginal external benefit. If $$MPB = 20$$ and $$MEB = 10$$, what is $$MSB$$?

Accepted Answer

$$MSB = 30$$

Question 9

Which of the following government interventions is most appropriate for correcting underproduction due to a positive externality?

Accepted Answer

Providing subsidies to consumers or producers.

Question 10

A technology spillover occurs when:

Accepted Answer

A firm's innovation benefits other firms or industries beyond the innovator.

Question 11

Transaction costs can prevent mutually beneficial trade from occurring. Which of the following best describes a transaction cost?

Accepted Answer

The cost of making and enforcing an agreement.

Question 12

If a government wants to encourage the preservation of farmland, which policy is most likely to address the positive externality?

Accepted Answer

Offering tax subsidies to farmers who do not sell their land to developers.

Question 13

Which of the following is NOT a private solution to externalities?

Accepted Answer

Pigovian taxes.

Question 14

A government issues tradable emissions permits to two firms. If one firm can reduce emissions at a lower cost than the other, what is the likely outcome?

Accepted Answer

The firm with lower abatement costs will sell its permit to the other firm.

Question 15

Which of the following best explains why the market equilibrium quantity of a good with a negative externality is higher than the socially optimal quantity?

Accepted Answer

Firms do not bear the full cost of production, ignoring external costs.

Question 16

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

Accepted Answer

Providing scholarships to university students to encourage innovation.

Question 17

If society ignores external benefits, what is the likely result in the market for a good with positive externalities?

Accepted Answer

The good will be underproduced relative to the socially optimal level.

Question 18

Which of the following policies is NOT typically used to address underproduction due to positive externalities?

Accepted Answer

Pigovian taxes.

Question 19

A government wants to reduce pollution to the socially optimal level. Which equation should be satisfied at the optimal quantity of pollution?

Accepted Answer

$$MSC = MSB$$

Externalities and the Environment: Microeconomic Analysis and Policy Solutions

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