Q: Suppose a factory emits pollution that affects nearby residents. The marginal private cost (MC) of production is $$20 per unit, and the marginal external cost is 10 $$per unit. What is the marginal social cost (MSC) of production?

$$ MSC = MC + \text{Marginal external cost} = 20 + 10 = 30 $$

Q: Suppose the marginal private benefit (MB) of education is $$10, and the marginal external benefit is 5. $$What is the marginal social benefit (MSB)?

$$ MSB = MB + \text{Marginal external benefit} = 10 + 5 = 15 $$

Question 1

Which of the following best describes a negative production externality?

Accepted Answer

A cost imposed on others by the production of a good or service, not borne by the producer.

Question 2

Suppose a factory emits pollution that affects nearby residents. The marginal private cost (MC) of production is $$20 per unit, and the marginal external cost is 10 $$per unit. What is the marginal social cost (MSC) of production?

Accepted Answer

$$ MSC = MC + 	ext{Marginal external cost} = 20 + 10 = 30 $$

Question 3

A flu vaccination provides benefits not only to the person vaccinated but also to others by reducing the spread of disease. This is an example of:

Accepted Answer

A positive consumption externality.

Question 4

In an unregulated market with a negative production externality, what is the relationship between marginal social cost (MSC) and marginal social benefit (MSB) at the market equilibrium?

Accepted Answer

$$ MSC \u003e MSB $$

Question 5

Which of the following government policies is most likely to correct the inefficiency caused by a negative externality in production?

Accepted Answer

Imposing a Pigovian tax equal to the marginal external cost.

Question 6

A city government wants to reduce air pollution from factories. It sets a cap on total emissions and allows firms to buy and sell pollution permits. This policy is known as:

Accepted Answer

Cap-and-trade.

Question 7

If the government provides a subsidy equal to the marginal external benefit for each unit of a good with a positive externality, what is the likely result?

Accepted Answer

The market will produce the efficient quantity where $$ MSB = MSC .$$

Question 8

According to the Coase theorem, private bargaining can solve the problem of externalities if:

Accepted Answer

Property rights are well-defined and transaction costs are low.

Question 9

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

Accepted Answer

A beekeeper's bees pollinate a neighboring farmer's orchard, increasing fruit yield.

Question 10

Suppose the marginal private benefit (MB) of education is $$10, and the marginal external benefit is 5. $$What is the marginal social benefit (MSB)?

Accepted Answer

$$ MSB = MB + 	ext{Marginal external benefit} = 10 + 5 = 15 $$

Question 11

A government issues vouchers to households to purchase education. This policy is intended to:

Accepted Answer

Increase consumption of goods with positive externalities to the efficient level.

Question 12

Which of the following statements about Pigovian taxes is correct?

Accepted Answer

A Pigovian tax is set equal to the marginal external cost to internalize a negative externality.

Question 13

If a market with a negative externality is left unregulated, what is the likely outcome?

Accepted Answer

The market will overproduce the good, resulting in a deadweight loss.

Question 14

Which of the following is NOT a method governments use to address positive externalities?

Accepted Answer

Imposing a tax on the good equal to the marginal external benefit.

Question 15

A city bans smoking in public places to reduce health risks to non-smokers. This policy addresses which type of externality?

Accepted Answer

Negative consumption externality.

Question 16

Which of the following best explains why cap-and-trade can achieve the same efficient outcome as a Pigovian tax?

Accepted Answer

Both policies confront firms with the marginal social cost of their actions.

Question 17

Which of the following is a real-world example of a global externality that requires international cooperation to address?

Accepted Answer

Climate change caused by greenhouse gas emissions.

Question 18

Suppose the government sets a pollution tax so that $$ MC + 	ext{tax} = MSC . $$What is the intended effect of this policy?

Accepted Answer

To internalize the external cost and achieve the efficient quantity where $$ MSC = MSB .$$

Question 19

Which of the following is a key assumption of the Coase theorem?

Accepted Answer

Transaction costs are low.

Question 20

A patent granted to an inventor is intended to:

Accepted Answer

Encourage innovation by granting exclusive rights to use and sell the invention.

Externalities: Microeconomic Analysis and Policy Responses

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