Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on a third party that is not reflected in the market price.

Question 2

Suppose a factory emits pollution that causes $500,000 in damages to nearby residents each year. If the factory does not pay for these damages, what term best describes this situation?

Accepted Answer

Negative externality

Question 3

The marginal social cost (MSC) of production is defined as:

Accepted Answer

The sum of the marginal private cost and the marginal external cost.

Question 4

A firm produces at the point where price equals marginal cost (MC). If there are negative externalities, what is the result?

Accepted Answer

The firm overproduces relative to the social optimum.

Question 5

Which equation correctly represents the present discounted value (NPV) of a stream of annual net benefits $$B_t$$ over $$N$$ years at discount rate $$r$$?

Accepted Answer

$$NPV = \sum_{t=1}^{N} \frac{B_t}{(1+r)^t}$$

Question 6

Which of the following policies is most likely to achieve the efficient level of emissions at minimum cost when firms have different marginal abatement costs?

Accepted Answer

Tradable emissions permits

Question 7

A public good is characterized by which two properties?

Accepted Answer

Nonrivalry and nonexcludability

Question 8

Suppose the marginal external cost (MEC) of emissions is $$MEC = 2E$$, and the marginal abatement cost (MCA) is $$MCA = 24 - E. $$What is the efficient level of emissions $$E^*$$?

Accepted Answer

$$E^* = 12$$

Question 9

Which of the following is an example of a common property resource?

Accepted Answer

A fishery open to all local fishermen

Question 10

If the government sets an emissions fee equal to the marginal external cost, what is the expected effect on the market?

Accepted Answer

Firms will reduce emissions to the socially optimal level.

Question 11

Which of the following best explains why recycling rates are often lower than socially optimal?

Accepted Answer

The private cost of disposal is lower than the social cost.

Question 12

According to the Coase Theorem, under what condition will bargaining lead to an efficient allocation of resources in the presence of externalities?

Accepted Answer

Property rights are clearly defined and transaction costs are low.

Question 13

Which formula describes the buildup of a pollutant stock $$S$$ after $$N$$ years, given constant annual emissions $$E$$ and dissipation rate $$\delta$$?

Accepted Answer

$$S_N = E \left[1 - (1-\delta)^N \right]/\delta$$

Question 14

Which of the following is NOT a way to correct market failure due to externalities?

Accepted Answer

Ignoring property rights

Question 15

If the marginal social benefit (MSB) of a public good is higher than the marginal private benefit (MB), what does this imply?

Accepted Answer

The good is being underprovided by the market.

Question 16

Which of the following best describes the efficient provision of a public good?

Accepted Answer

The sum of individual marginal benefits equals the marginal cost of provision.

Question 17

A refundable deposit system for glass containers is most likely to:

Accepted Answer

Increase the supply of recycled glass and decrease the price of glass containers.

Question 18

Which of the following is a key difference between a public good and a common property resource?

Accepted Answer

A public good is nonrival and nonexcludable, while a common property resource is rival but nonexcludable.

Question 19

If the government wants to maximize the net present value (NPV) of reducing greenhouse gas emissions, which factor is most important in the calculation?

Accepted Answer

The discount rate applied to future benefits and costs

Chapter 18: Externalities and Public Goods – Microeconomics Study Notes

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