Question 1

Which of the following best describes a negative externality in the context of electricity production?

Accepted Answer

A cost imposed on bystanders that is not reflected in the market price.

Question 2

Suppose the marginal private cost (MPC) of producing a good is $$10, and the marginal external cost (MEC) is 4. $$What is the marginal social cost (MSC)?

$$MSC = MPC + MEC$$

Accepted Answer

$$MSC = 10 + 4 = 14$$

Question 3

A city introduces a congestion charge (tax) for driving in downtown. What type of government solution to externalities is this?

Accepted Answer

Market-based policy

Question 4

Which equation correctly represents the condition for market efficiency in the presence of externalities?

Accepted Answer

$$MSB = MSC$$

Question 5

A positive externality exists in the market for education. If the marginal external benefit (MEB) is $20,000, what is the optimal government intervention?

Accepted Answer

Provide a Pigouvian subsidy of $20,000 per unit

Question 6

Which of the following is NOT a reason why the Coase Theorem might fail in practice?

Accepted Answer

The government sets the optimal tax

Question 7

If a good is nonrival and nonexcludable, which type of good is it?

Accepted Answer

Public good

Question 8

The free rider problem is most likely to occur with which type of good?

Accepted Answer

Nonexcludable and nonrival

Question 9

Suppose the government is considering reducing fracking in Oklahoma. Each resident values earthquake reduction at $$100/year, and there are 4 million residents. The cost to the oil industry is 1 $$billion per year. Should the government proceed?

$$Total\ Benefit = 4,000,000 	imes 100 = 400,000,000$$

Accepted Answer

No, because the total benefit is less than the cost.

Question 10

Which of the following is an example of a common pool resource?

Accepted Answer

Fish in the ocean

Question 11

What is the main cause of the 'tragedy of the commons'?

Accepted Answer

Goods are nonexcludable and rival

Question 12

Which of the following is a market-based government solution to a negative externality?

Accepted Answer

Imposing a Pigouvian tax equal to the marginal external cost

Question 13

If the market for a good with a positive externality is left unregulated, what will happen?

Accepted Answer

The good will be underproduced.

Question 14

How is the market demand for a public good constructed?

Accepted Answer

By vertically summing individual marginal benefits at each quantity

Question 15

Which of the following is NOT a characteristic of a club good?

Accepted Answer

Rival

Question 16

A pecuniary externality differs from other externalities because:

Accepted Answer

It only affects market prices and does not create deadweight loss.

Question 17

Which of the following is a reason why private charity alone cannot efficiently provide public goods?

Accepted Answer

Charity may not target the areas of greatest need and is too variable.

Question 18

If the government wants to address overfishing (a common pool resource problem), which of the following is NOT an appropriate solution?

Accepted Answer

Providing a Pigouvian subsidy to fishers

Question 19

Suppose a Pigouvian tax is set equal to the marginal external cost (MEC) of pollution. What is the effect on the supply curve?

Accepted Answer

It shifts left, reducing quantity to the efficient level.

Question 20

Which of the following best explains why bison nearly went extinct while cows did not?

Accepted Answer

Bison were common pool resources, cows were private property.

Chapter 9: Externalities and Public Goods – Microeconomics Study Notes

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