Q: Which equation correctly represents marginal social cost?

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

Q: Which formula represents marginal social benefit in the presence of a positive externality?

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

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 reflected in the producer's private costs.

Question 2

Suppose a factory emits pollution that affects nearby residents. The cost of this pollution to residents is not included in the factory's production costs. What is this cost called?

Accepted Answer

Marginal external cost

Question 3

Which equation correctly represents marginal social cost?

Accepted Answer

$$MSC = MC + 	ext{Marginal external cost}$$

Question 4

A beekeeper places hives next to an apple orchard, increasing the orchard's yield. What type of externality is this?

Accepted Answer

Positive production externality

Question 5

If the market equilibrium quantity of paint is where $$MC = MSB$$, but $$MSC \u003e MSB$$, what is the result?

Accepted Answer

The market overproduces paint, creating a deadweight loss.

Question 6

Which of the following is NOT a method for overcoming inefficiency caused by negative externalities?

Accepted Answer

Providing public subsidies to polluters

Question 7

What is a Pigovian tax?

Accepted Answer

A tax set equal to the marginal external cost to align private and social costs.

Question 8

According to the Coase theorem, under what conditions can private bargaining solve externality problems efficiently?

Accepted Answer

Property rights are well-defined, few parties are involved, and transaction costs are low.

Question 9

Which of the following is an example of the tragedy of the commons?

Accepted Answer

Overfishing in international waters where no one owns the resource.

Question 10

What is the main problem with production quotas as a solution to the tragedy of the commons?

Accepted Answer

There is an incentive for individuals to cheat and overuse the resource.

Question 11

Which formula represents marginal social benefit in the presence of a positive externality?

Accepted Answer

$$MSB = MB + 	ext{Marginal external benefit}$$

Question 12

Which government intervention is most likely to correct underproduction caused by positive externalities in education?

Accepted Answer

Providing subsidies or vouchers to students or schools.

Question 13

A flu vaccination provides benefits to both the vaccinated individual and others in the community. What type of externality is this?

Accepted Answer

Positive consumption externality

Question 14

Which of the following is a key advantage of vouchers over public provision and private subsidies?

Accepted Answer

Vouchers give buying power to consumers, encouraging competition among producers.

Question 15

If a government sets a pollution cap and allows firms to trade permits, what is the expected outcome?

Accepted Answer

Firms with low abatement costs sell permits, and the market achieves efficient pollution reduction.

Question 16

Which of the following best explains why the market underproduces goods with positive externalities?

Accepted Answer

Producers and consumers do not account for the external benefits to others.

Question 17

What is the effect of a Pigovian tax on the supply curve for a good with a negative externality?

Accepted Answer

It shifts the supply curve upward by the amount of the tax, aligning private and social costs.

Question 18

Which of the following is a real-world example of a negative consumption externality?

Accepted Answer

Smoking tobacco in a confined space

Question 19

Why might government intervention be necessary to solve the tragedy of the commons?

Accepted Answer

Because individuals lack incentives to conserve common resources, leading to overuse.

Question 20

Which of the following is a potential problem with public production as a solution to positive externalities?

Accepted Answer

Bureaucrats may engage in budget padding and waste, leading to underproduction.

Chapter 17: Externalities – Microeconomics Study Notes

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