Question 1

Which of the following best describes a negative production externality?

Accepted Answer

A cost imposed on a third party from the production of a good.

Question 2

Suppose a factory emits pollution that affects nearby residents. The cost of this pollution to residents is not reflected in the factory's production costs. What is this cost called?

Accepted Answer

Marginal external cost

Question 3

Which equation correctly represents marginal social cost?

Accepted Answer

$$MSC = MC + Marginal\ external\ cost$$

Question 4

A city has two riverside neighborhoods: one next to a clean river and one next to a polluted river. If the only difference is pollution and the rent difference is $500 per month for 10 homes, what is the total external cost of pollution per month?

Accepted Answer

$$5,000$$

Question 5

In an unregulated market with a negative externality, what is the likely outcome?

Accepted Answer

The market produces too much of the good and creates a deadweight loss.

Question 6

Which of the following is NOT a method for overcoming the inefficiency caused by negative externalities?

Accepted Answer

Providing public goods

Question 7

According to the Coase Theorem, when will private bargaining lead to an efficient outcome?

Accepted Answer

When property rights exist, few parties are involved, and transaction costs are low.

Question 8

A Pigovian tax is set to correct a negative externality. What is the optimal amount of this tax?

Accepted Answer

Equal to the marginal external cost

Question 9

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

Accepted Answer

A person getting a flu vaccination, reducing the risk for others.

Question 10

Which equation correctly represents marginal social benefit?

Accepted Answer

$$MSB = MB + Marginal\ external\ benefit$$

Question 11

Which government policy is most appropriate for encouraging positive externalities in education?

Accepted Answer

Providing subsidies or vouchers for education

Question 12

What is the main purpose of a cap-and-trade system for pollution?

Accepted Answer

To set an upper limit on pollution and allow firms to trade permits

Question 13

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

Accepted Answer

Smoking tobacco in a confined space

Question 14

If the marginal private cost of producing a good is $$10, and the marginal external cost is 4$$, what is the marginal social cost?

Accepted Answer

$$MSC = 10 + 4 = 14$$

Question 15

Which of the following best explains why the market produces too much of a good with a negative externality?

Accepted Answer

Producers do not bear the full social cost of their actions.

Question 16

Which of the following is NOT a characteristic of the Coase Theorem?

Accepted Answer

A large number of parties must be involved.

Question 17

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

Accepted Answer

A beekeeper's bees pollinating nearby crops

Question 18

A government wants to increase the consumption of a good with positive externalities. Which policy would be most effective?

Accepted Answer

Providing a subsidy equal to the marginal external benefit

Question 19

Which of the following statements about deadweight loss from externalities is correct?

Accepted Answer

Deadweight loss from negative externalities results from overproduction.

Externalities in Microeconomics: Types, Impacts, and Policy Solutions

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