Q: Which of the following equations correctly represents the social cost of producing a good with a negative externality?

$\text{Social Cost} = \text{Private Cost} + \text{External Cost}$

Question 1

Which of the following best defines a negative externality?

Accepted Answer

A cost imposed on a bystander who is not compensated.

Question 2

Suppose a factory emits pollution that harms nearby residents, but the factory does not pay for this harm. Which curve must be adjusted to reflect the true social cost of production?

Accepted Answer

The supply curve should be shifted upward by the value of the external cost.

Question 3

If the government imposes a corrective tax equal to the external cost of pollution, what is the resulting market outcome?

Accepted Answer

The market equilibrium quantity will equal the socially optimal quantity.

Question 4

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

Accepted Answer

Being vaccinated against contagious diseases.

Question 5

A market with a positive externality will, without government intervention, produce:

Accepted Answer

Less than the socially optimal quantity.

Question 6

Which of the following policies is most likely to efficiently reduce pollution at the lowest cost to society?

Accepted Answer

A corrective tax equal to the external cost per unit of pollution.

Question 7

Suppose the government issues tradable pollution permits. Which firms will buy permits, and which will sell them?

Accepted Answer

Firms with high abatement costs will buy permits; firms with low abatement costs will sell permits.

Question 8

Which of the following equations correctly represents the social cost of producing a good with a negative externality?

Accepted Answer

$	ext{Social Cost} = 	ext{Private Cost} + 	ext{External Cost}$

Question 9

A corrective (Pigovian) tax on pollution:

Accepted Answer

Raises government revenue and increases total surplus.

Question 10

According to the Coase theorem, under what condition can private parties solve the problem of externalities on their own?

Accepted Answer

If private parties can bargain without cost over the allocation of resources.

Question 11

Which of the following is NOT a reason why private solutions to externalities may fail?

Accepted Answer

The absence of any external effects.

Question 12

Suppose the government wants to increase the number of people getting flu shots, which generate positive externalities. What is the most efficient policy?

Accepted Answer

Subsidize flu shots by an amount equal to the external benefit.

Question 13

If the external benefit of a good is $10 per unit, what is the ideal corrective subsidy per unit?

Accepted Answer

$10$

Question 14

Which of the following statements about tradable pollution permits is TRUE?

Accepted Answer

The initial allocation of permits among firms does not affect economic efficiency.

Question 15

A city values clean lake water at $100,000. A factory can install non-polluting equipment for $50,000. According to the Coase theorem, what is the efficient outcome if bargaining is costless?

Accepted Answer

The factory installs the equipment, and the city pays up to $100,000 for clean water.

Question 16

Which of the following best explains why a pollution tax is generally more cost-effective than a regulation requiring all firms to reduce pollution by the same amount?

Accepted Answer

A tax allows firms with lower abatement costs to reduce more pollution, minimizing total costs.

Question 17

Which of the following is the correct formula for the social value of a good with a positive externality?

Accepted Answer

$	ext{Social Value} = 	ext{Private Value} + 	ext{External Benefit}$

Question 18

Which of the following is NOT a market-based policy for addressing externalities?

Accepted Answer

Command-and-control regulation

Question 19

A gasoline tax is considered a corrective tax because it addresses which of the following externalities? (Select all that apply)

Accepted Answer

All of the above

Chapter 10: Externalities – Market Failure and Public Policy

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