Question 1

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

Accepted Answer

A cost imposed on someone not directly involved in the production or consumption of a good or service.

Question 2

Suppose the marginal private cost of producing electricity is given by $$MC_p = 20 + 2Q$$, and the marginal external cost is $$MC_e = Q. $$What is the marginal social cost?

Accepted Answer

$$MC_s = 20 + 2Q + Q = 20 + 3Q$$

Question 3

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

Accepted Answer

A college education increasing the productivity of society.

Question 4

If a market is left unregulated and there is a negative externality in production, what will happen to the equilibrium quantity and price compared to the socially optimal level?

Accepted Answer

Quantity will be too high and price will be too low.

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 assigned and transaction costs are low.

Question 6

A government imposes a tax equal to the marginal external cost of pollution. What is the effect on the supply curve?

Accepted Answer

The supply curve shifts upward by the amount of the tax.

Question 7

Which of the following equations represents the condition for the efficient level of pollution reduction?

Accepted Answer

$$MB_{reduction} = MC_{reduction}$$

Question 8

Why might command-and-control policies be less efficient than market-based policies for reducing pollution?

Accepted Answer

They do not allow firms with lower costs to reduce more pollution.

Question 9

Which of the following best describes a public good?

Accepted Answer

A good that is nonrival and nonexcludable.

Question 10

What is the main cause of the tragedy of the commons?

Accepted Answer

Lack of clearly defined and enforced property rights.

Question 11

Suppose the government wants to encourage more people to get vaccinated, which generates positive externalities. Which policy would be most effective?

Accepted Answer

Providing a subsidy for vaccines.

Question 12

Which of the following is a characteristic of a common resource?

Accepted Answer

Rival and nonexcludable.

Question 13

A cap-and-trade system for pollution is designed to:

Accepted Answer

Allow firms to trade emissions allowances to achieve pollution reduction at the lowest cost.

Question 14

If the marginal benefit from reducing pollution is $$MB = 300 - 20Q$$ and the marginal cost is $$MC = 100 + 10Q$$, what is the efficient quantity of pollution reduction?

Accepted Answer

$$Q = 6.67$$

Question 15

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

Accepted Answer

Government-imposed Pigovian taxes.

Question 16

Why do markets tend to underprovide public goods?

Accepted Answer

Because people can free ride on the benefits without paying.

Question 17

Which of the following best describes a Pigovian tax?

Accepted Answer

A tax designed to internalize the external cost of a negative externality.

Question 18

If the government uses a subsidy to correct a positive externality, what happens to the demand curve?

Accepted Answer

It shifts upward by the amount of the subsidy.

Question 19

Which of the following is an example of a quasi-public good?

Accepted Answer

Toll road during non-rush hour.

Question 20

Which of the following best explains why common resources tend to be overused?

Accepted Answer

Individuals ignore the external cost imposed on others when consuming the resource.

Externalities, Environmental Policy, and Public Goods: Microeconomics Study Notes

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