Q: Which of the following equations correctly represents marginal social cost?

$$\text{MSC} = \text{MC} + \text{Marginal External Cost}$$

Question 1

Which of the following best describes a negative production externality?

Accepted Answer

A cost from production that is borne by someone other than the producer.

Question 2

Suppose a factory produces paint and emits pollution. The marginal private cost of producing a gallon is $$1.00, and the marginal external cost is 1.25. $$What is the marginal social cost of producing one gallon of paint?

Accepted Answer

$2.25

Question 3

If a market is left unregulated and a negative externality exists, what is the likely outcome?

Accepted Answer

The good will be overproduced relative to the efficient quantity.

Question 4

Which of the following equations correctly represents marginal social cost?

Accepted Answer

$$	ext{MSC} = 	ext{MC} + 	ext{Marginal External Cost}$$

Question 5

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

Accepted Answer

Property rights are well-defined, there are few parties involved, and transaction costs are low.

Question 6

A government wants to reduce pollution from factories. Which policy would directly confront producers with the external cost of their actions?

Accepted Answer

Imposing a pollution tax equal to the marginal external cost.

Question 7

If the government sets a pollution tax equal to the marginal external cost, what happens to the supply curve?

Accepted Answer

It shifts upward by the amount of the tax, aligning with the marginal social cost curve.

Question 8

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

Accepted Answer

Receiving a flu vaccination, which reduces the risk of others getting sick.

Question 9

Suppose the marginal private benefit of college education is $$10,000 per student, and the marginal external benefit is 15$$,000 per student. What is the marginal social benefit?

Accepted Answer

$$25,000$$

Question 10

In the presence of a positive externality, such as education, what is the likely market outcome if left unregulated?

Accepted Answer

The good will be underproduced relative to the efficient quantity.

Question 11

Which government intervention is most appropriate to correct the underproduction caused by a positive externality?

Accepted Answer

Providing a subsidy to consumers or producers.

Question 12

A cap-and-trade system for pollution control works by:

Accepted Answer

Setting a total emissions cap and allowing firms to buy and sell emission permits.

Question 13

Which of the following best describes the deadweight loss associated with negative externalities?

Accepted Answer

It is the loss in total surplus due to overproduction of the good.

Question 14

Suppose the government provides a $$15,000 subsidy per student for college education, and the market price of tuition falls to 10$$,000. What is the total amount paid per student, and who covers the difference?

Accepted Answer

Students pay $$10,000, and taxpayers cover the remaining 15$$,000.

Question 15

Which of the following is NOT a method governments use to address externalities?

Accepted Answer

Price floors

Question 16

If the marginal social benefit of a good exceeds its marginal cost at the current market quantity, what does this imply?

Accepted Answer

The good is underproduced and increasing production would increase total surplus.

Question 17

Which of the following statements about the global challenge of limiting carbon emissions is correct?

Accepted Answer

Developing economies are projected to account for most emissions by 2050, making global agreement difficult.

Question 18

A voucher system to address positive externalities in education works by:

Accepted Answer

Giving households tokens to purchase education, increasing demand to the efficient level.

Question 19

Which of the following best explains why command-and-control regulation may not always achieve an efficient outcome?

Accepted Answer

It may not allow firms to choose the least-cost method of reducing pollution.

Question 20

Suppose a country implements a cap-and-trade system for carbon emissions. If the market price of permits rises, what is the likely response from firms?

Accepted Answer

Firms will invest more in abatement technology to reduce the need for permits.

Chapter 10: Externalities – Microeconomics Study Notes

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