Question 1

Which of the following best describes a negative externality in the context of electricity production?

Accepted Answer

The social cost of producing electricity exceeds the private cost due to pollution.

Question 2

Suppose the marginal private cost of producing a good is given by $$MC_p = 10 + 2Q$$ and the marginal external cost is $$MEC = Q. $$What is the marginal social cost?

Accepted Answer

$$MC_s = 10 + 2Q + Q = 10 + 3Q$$

Question 3

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

Accepted Answer

Medical research that leads to new vaccines

Question 4

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 assigned and enforceable, and transaction costs are low.

Question 5

A government imposes a tax on a good equal to the marginal external cost of production. What is the effect on the market?

Accepted Answer

The supply curve shifts upward, reducing quantity to the efficient level.

Question 6

Which of the following best describes a public good?

Accepted Answer

A good that is non-rival and non-excludable.

Question 7

Why do common resources tend to be overused?

Accepted Answer

Because individuals ignore the external cost imposed on others, leading to the tragedy of the commons.

Question 8

A Pigovian tax is designed to:

Accepted Answer

Correct for externalities by aligning private and social costs.

Question 9

Suppose the marginal benefit of pollution reduction is $$MB = 300 - 20Q$$ and the marginal cost is $$MC = 100 + 20Q$$, where $$Q is $$the number of units of pollution reduced. What is the efficient level of pollution reduction?

Accepted Answer

$$Q = 5 ($$where $$MB = MC)$$

Question 10

Which government policy is most appropriate for correcting a positive externality?

Accepted Answer

Providing a subsidy to consumers or producers.

Question 11

In a cap-and-trade system for pollution, what is the main advantage over command-and-control regulation?

Accepted Answer

It allows pollution reduction to occur at the lowest possible cost by letting firms trade allowances.

Question 12

Which of the following is NOT a requirement for the Coase Theorem to hold?

Accepted Answer

Government-imposed taxes.

Question 13

If the market for a good with a positive externality is left unregulated, what will happen to the quantity produced?

Accepted Answer

It will be less than the socially optimal quantity.

Question 14

Which of the following best explains the 'tragedy of the commons'?

Accepted Answer

Common resources are overused because individuals do not bear the full cost of their actions.

Question 15

A good is excludable but non-rival in consumption. Which category does it belong to?

Accepted Answer

Quasi-public good (club good)

Question 16

Which of the following is an example of a government command-and-control policy to reduce pollution?

Accepted Answer

Requiring all firms to install specific pollution control devices.

Question 17

Why might a cap-and-trade system be politically controversial?

Accepted Answer

It is seen as giving firms 'licenses to pollute.'

Question 18

Which of the following statements about Pigovian taxes is TRUE?

Accepted Answer

They can increase economic efficiency by internalizing external costs.

Question 19

If the marginal social benefit of a public good is $$MSB = 20 - Q$$ and the marginal cost is $$MC = 5$$, what is the efficient quantity of the public good?

Accepted Answer

$$Q = 15 ($$where $$20 - Q = 5 \implies Q = 15)$$

Question 20

Which of the following is a reason why markets may fail to provide the efficient level of a public good?

Accepted Answer

Consumers can free ride and do not reveal their true willingness to pay.

Chapter 5: Externalities, Environmental Policy, and Public Goods – Microeconomics Study Notes

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