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

$$MSC = \text{Private Cost} + \text{External Cost}$$

Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on third parties not involved in the transaction.

Question 2

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

Accepted Answer

Right; Less

Question 3

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

Accepted Answer

Vaccination against contagious diseases

Question 4

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

Accepted Answer

$$MSC = 	ext{Private Cost} + 	ext{External Cost}$$

Question 5

A Pigovian tax is designed to:

Accepted Answer

Correct the market outcome by imposing a tax equal to the external cost

Question 6

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 7

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

Accepted Answer

Increasing competition

Question 8

If the assumptions of the Coase theorem are satisfied, then:

Accepted Answer

The assignment of property rights does not matter for efficiency.

Question 9

It is possible to remedy a positive externality by:

Accepted Answer

Introducing a subsidy

Question 10

The socially optimal level of pollution:

Accepted Answer

Is above zero.

Question 11

Suppose the government wants to reduce pollution to the socially optimal level. Which policy would best achieve this goal?

Accepted Answer

Imposing a Pigovian tax equal to the marginal external cost

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

A market-based policy to address externalities could include:

Accepted Answer

Imposing corrective taxes or subsidies

Question 14

If a good generates a positive externality, the market equilibrium quantity will be:

Accepted Answer

Less than the socially optimal quantity

Question 15

Which of the following is a key element of the Coase theorem?

Accepted Answer

The ability to negotiate at a minimal cost

Question 16

The marginal social benefit (MSB) of consuming a good is given by:

Accepted Answer

$$MSB = 	ext{Private Benefit} + 	ext{External Benefit}$$

Question 17

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

Accepted Answer

Requiring firms to install specific pollution-control technology

Question 18

A per-unit subsidy equal to the external benefit will:

Accepted Answer

Result in the socially optimal quantity being produced

Question 19

Which of the following statements about property rights and externalities is correct?

Accepted Answer

Externalities exist when property rights are difficult to enforce or not clearly defined

Question 20

Tradeable pollution permits are an example of:

Accepted Answer

A market-based policy

Externalities: Social Costs, Benefits, and Solutions in Macroeconomics

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