Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on a third party not involved in the transaction.

Question 2

Suppose a factory emits pollution into a river, harming local fisheries. The market equilibrium quantity of electricity is $$Q_{market}$$, but the socially optimal quantity is $$Q_{optimal} \u003c Q_{market}. $$What does the area between the social marginal cost (SMC) and the demand curve from $$Q_{optimal} to$$ $$Q_{market}$$ represent?

Accepted Answer

Deadweight loss due to the externality

Question 3

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

Accepted Answer

Vaccination against the flu

Question 4

If the marginal social benefit (MSB) of education exceeds the marginal private benefit (MPB), what policy could the government use to achieve the socially optimal quantity of education?

Accepted Answer

Provide a per-unit subsidy to consumers of education

Question 5

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

Accepted Answer

When transaction costs are low and property rights are well-defined

Question 6

A city government imposes a per-unit tax on cigarettes to address the negative externality of second-hand smoke. What is the intended effect of this tax?

Accepted Answer

Decrease the equilibrium quantity of cigarettes

Question 7

Which of the following best explains why market failure occurs in the presence of externalities?

Accepted Answer

Prices do not reflect all social costs and benefits

Question 8

Suppose the government wants to address the negative externality of pollution using a cap-and-trade system. Which of the following is a key advantage of this approach?

Accepted Answer

It allows the market to allocate pollution reduction efficiently

Question 9

If the marginal private cost (MPC) of producing a good is less than the marginal social cost (MSC), what does this imply?

Accepted Answer

There is a negative externality

Question 10

A brewery and a polluting factory are located next to each other. Installing a filter costs the factory $$30 per day but increases the brewery's profit by 50 $$per day. According to the Coase Theorem, what is the efficient outcome?

Accepted Answer

The filter is installed, and the brewery pays the factory between $$30 and 50$$

Question 11

Which of the following is NOT a reason why the Coase Theorem might fail in practice?

Accepted Answer

Perfect information about costs and benefits

Question 12

Suppose the government provides free flu shots to students. What is the economic rationale for this policy?

Accepted Answer

Flu shots have a positive externality

Question 13

Which of the following best describes the deadweight loss from a negative externality?

Accepted Answer

The loss in total surplus due to overproduction relative to the social optimum

Question 14

If a government sets a direct regulation to limit the quantity of a good with a negative externality, what is a major challenge of this approach?

Accepted Answer

The government must know the private marginal cost and the external cost

Question 15

Which of the following is an example of a private solution to an externality?

Accepted Answer

Bargaining between affected parties

Question 16

Suppose the marginal external benefit of a good is $$MEB$$ and the marginal private benefit is $$MPB. $$What is the formula for the marginal social benefit?

Accepted Answer

$$MSB = MPB + MEB$$

Question 17

Which of the following statements about social norms as a solution to externalities is correct?

Accepted Answer

Social norms can internalize externalities by creating social costs for undesirable behavior

Question 18

If the government wants to internalize a negative externality using a market-based policy, which of the following would be appropriate?

Accepted Answer

A per-unit tax on producers

Question 19

Which of the following best describes the difference between private marginal cost (PMC) and social marginal cost (SMC) in the presence of a negative externality?

Accepted Answer

$$SMC = PMC + Marginal\ External\ Cost$$

Externalities and Market Failure: Microeconomics Study Notes

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