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 the marginal private cost of producing electricity is given by $S_1$, and the marginal social cost is given by $S_2$. If $S_2 > S_1$, what does this imply?

Accepted Answer

There are negative externalities in production, and the market produces too much electricity.

Question 3

Which equation represents the condition for the efficient level of pollution reduction?

Accepted Answer

$MB_{reduction} = MC_{reduction}$

Question 4

A college education is considered to have positive externalities. What is the likely market outcome without government intervention?

Accepted Answer

Too little college education will be produced.

Question 5

Which of the following is NOT a requirement for the Coase theorem to hold?

Accepted Answer

Government must set a Pigovian tax.

Question 6

If the government imposes a tax equal to the external cost of pollution, what happens to the supply curve for electricity?

Accepted Answer

It shifts upward, reducing the equilibrium quantity to the efficient level.

Question 7

Which of the following is an example of a Pigovian tax?

Accepted Answer

A tax on carbon dioxide emissions.

Question 8

Why might command-and-control policies be less efficient than market-based policies for pollution reduction?

Accepted Answer

They do not account for differences in firms' costs of reducing pollution.

Question 9

In a cap-and-trade system, what determines the total amount of pollution allowed?

Accepted Answer

The government sets an allowable amount of emissions.

Question 10

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

Accepted Answer

Overconsumption of a common resource due to lack of property rights.

Question 11

Which category of goods is both nonrival and nonexcludable?

Accepted Answer

Public goods

Question 12

If the marginal social benefit of a good exceeds the marginal private benefit, what type of externality is present?

Accepted Answer

Positive externality in consumption

Question 13

Which of the following policies is most likely to address underproduction caused by a positive externality?

Accepted Answer

Providing a subsidy to producers or consumers

Question 14

Consider a market for a common resource, such as fish in the ocean. What is the likely outcome without regulation?

Accepted Answer

The resource will be overused, leading to deadweight loss.

Question 15

Which formula represents the deadweight loss caused by a negative externality?

Accepted Answer

$DW = \frac{1}{2} (Q_{Market} - Q_{Efficient}) (P_{Efficient} - P_{Market})$

Question 16

Which of the following is a plausible reason why Pigovian taxes are favored by economists?

Accepted Answer

They increase efficiency while generating tax revenue.

Question 17

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

Accepted Answer

Cable television

Question 18

If Ford can reduce pollution cheaply and GM faces high costs, what is the efficient solution according to economic theory?

Accepted Answer

Have Ford reduce more pollution and GM compensate Ford.

Question 19

Which of the following best explains why public goods are underprovided in a free market?

Accepted Answer

People can freeride, enjoying benefits without paying.

Question 20

Which of the following statements about market failure is correct?

Accepted Answer

Market failure is a situation in which the market fails to produce the efficient level of output.

Chapter 5: Externalities, Environmental Policy, and Public Goods – Study Notes

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