Q: Which of the following equations correctly represents the condition for economic efficiency in the presence of externalities?

$$ \text{Marginal Social Cost} = \text{Marginal Social Benefit} $$

Question 1

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

Accepted Answer

A cost that affects someone who is not directly involved in the production or consumption of a good or service.

Question 2

Suppose a factory emits pollution as a by-product of its production. The marginal private cost of production is $$50 per unit, and the marginal external cost is 20 $$per unit. What is the marginal social cost of production?

Accepted Answer

$70

Question 3

Which of the following equations correctly represents the condition for economic efficiency in the presence of externalities?

Accepted Answer

$$ 	ext{Marginal Social Cost} = 	ext{Marginal Social Benefit} $$

Question 4

A city government is considering a tax on soda to address negative externalities from its consumption. Which of the following best explains the rationale for this policy?

Accepted Answer

Soda consumption imposes health costs on society that are not reflected in the market price, so a tax internalizes the externality.

Question 5

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

Accepted Answer

A person getting vaccinated, reducing the spread of disease to others.

Question 6

According to the Coase Theorem, private bargaining can solve the externality problem if:

Accepted Answer

Property rights are assigned and enforceable, and transactions costs are low.

Question 7

A government wants to encourage more people to get flu vaccinations, which have positive externalities. Which policy is most likely to achieve the efficient outcome?

Accepted Answer

Providing a subsidy to consumers or producers of flu vaccinations.

Question 8

Which of the following best describes a Pigovian tax?

Accepted Answer

A tax imposed to correct for the effects of a negative externality and restore efficiency.

Question 9

Suppose the government introduces a cap-and-trade system for carbon emissions. Which of the following outcomes is most likely?

Accepted Answer

Firms with high costs of reducing pollution will buy allowances from firms with low costs, minimizing the total cost of pollution reduction.

Question 10

Which of the following is NOT a characteristic of a public good?

Accepted Answer

Rival consumption

Question 11

A common resource, such as fish in the ocean, tends to be overused because:

Accepted Answer

Consumption is rival and nonexcludable, leading to the tragedy of the commons.

Question 12

Which equation represents the market demand curve for a private good?

Accepted Answer

$$ Q_D = Q_{D1} + Q_{D2} + \ldots + Q_{Dn} $$

Question 13

Which of the following best explains why markets tend to underprovide public goods?

Accepted Answer

Consumers can free ride, enjoying the benefits without paying.

Question 14

Suppose the marginal benefit of reducing pollution is $$100 per ton, and the marginal cost is 80 $$per ton. According to economic theory, what should be done?

Accepted Answer

Reduce pollution by one more ton.

Question 15

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

Accepted Answer

Cable television

Question 16

If the government wants to correct a negative externality in production, which policy would be most effective?

Accepted Answer

Impose a tax equal to the marginal external cost.

Question 17

Which of the following statements about the Coase Theorem is correct?

Accepted Answer

If transaction costs are low and property rights are well-defined, private bargaining can lead to an efficient outcome regardless of who holds the rights.

Question 18

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

Accepted Answer

A situation where common resources are overused because individuals ignore the external cost imposed on others.

Question 19

Suppose the government provides a subsidy for college education to correct a positive externality. What is the likely effect on the market?

Accepted Answer

The demand curve shifts to the right, increasing equilibrium quantity.

Question 20

Which of the following is a real-world example of a command-and-control policy to address externalities?

Accepted Answer

A law requiring all cars to have catalytic converters.

Externalities, Environmental Policy, and Public Goods – Study Notes

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