Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on third parties not involved in a transaction.

Question 2

Suppose the marginal private cost (MPC) of producing steel is $$3 per unit, and the marginal external cost (MEC) is 2 $$per unit. What is the marginal social cost (MSC)?

$$MSC = MPC + MEC$$

Accepted Answer

$$MSC = 5$$

Question 3

A competitive market is efficient only if all of the following conditions are met EXCEPT:

Accepted Answer

There are significant barriers to entry and exit.

Question 4

Which policy is most closely associated with Pigou’s solution to negative externalities?

Accepted Answer

Imposing a tax equal to the marginal external cost.

Question 5

If a government sets a cap-and-trade system for emissions, what will be true in equilibrium?

Accepted Answer

Each firm emits until its marginal abatement cost equals the permit price.

Question 6

According to Coase’s theorem, what is required for the assignment of property rights to result in an efficient outcome?

Accepted Answer

No transaction costs and no income effects.

Question 7

A public good is characterized by which two properties?

Accepted Answer

Non-rivalry and non-excludability.

Question 8

Suppose a city is considering building a bridge. The total cost is $$2,500. Five residents have willingness to pay of 800$$, $$700, 600$$, $$500, and 400. $$Should the bridge be built for efficiency?

Accepted Answer

Yes, because the total willingness to pay ($3,000) exceeds the cost.

Question 9

Which of the following is an example of a good that is excludable but non-rival?

Accepted Answer

A toll road with no congestion.

Question 10

In the presence of a positive externality, the unregulated market will:

Accepted Answer

Produce less than the socially optimal amount.

Question 11

A government wants to reduce SO$$_2$$ emissions from 12 tons to 6 tons. The marginal abatement costs for three firms are increasing. What is the socially efficient way to allocate abatement?

Accepted Answer

Firms with the lowest marginal abatement costs should reduce more.

Question 12

Which of the following is NOT a solution to externalities discussed in the materials?

Accepted Answer

Setting a price ceiling.

Question 13

A good is indivisible when:

Accepted Answer

Its utility depends on the number of users.

Question 14

Which of the following best describes adverse selection in insurance markets?

Accepted Answer

Insurers cannot observe the risk type of buyers before selling insurance.

Question 15

If the government imposes a tax equal to the marginal external cost, what happens to the supply curve?

Accepted Answer

It shifts upward by the amount of the tax.

Question 16

Which of the following is an example of moral hazard?

Accepted Answer

A person drives more recklessly after buying car insurance.

Question 17

Which of the following is true about the equilibrium in a cap-and-trade system?

Accepted Answer

Firms emit until the permit price equals their marginal abatement cost.

Question 18

Which of the following is a common pool resource?

Accepted Answer

A public park with limited space.

Question 19

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

Accepted Answer

A person getting vaccinated and reducing disease spread.

Question 20

If a good is non-excludable and rival, what type of good is it?

Accepted Answer

Common pool resource

Market Failure: Externalities, Public Goods, and Asymmetric Information

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