Question 1

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

Accepted Answer

A cost imposed on someone who is not directly involved in the production or consumption of a good or service.

Question 2

Suppose a factory produces widgets and emits pollution as a by-product. If the marginal social cost of production exceeds the marginal private cost, what is the likely market outcome?

Accepted Answer

The market will overproduce widgets relative to the efficient quantity.

Question 3

Which equation correctly represents the relationship between social cost, private cost, and external cost?

Accepted Answer

$Social\ Cost = Private\ Cost + External\ Cost$

Question 4

Education is often cited as an example of a positive externality in consumption. What does this mean for the market equilibrium quantity of education?

Accepted Answer

The market will produce less education than is socially optimal.

Question 5

Which of the following policies is most likely to address a negative externality such as pollution?

Accepted Answer

A Pigovian tax equal to the external cost.

Question 6

According to the Coase Theorem, under what conditions can private bargaining solve the problem of externalities?

Accepted Answer

When property rights are assigned and enforceable, and transaction costs are low.

Question 7

A cap-and-trade system for pollution control is best described as:

Accepted Answer

A market-based policy where firms can buy and sell pollution permits.

Question 8

If the marginal benefit of pollution reduction is greater than the marginal cost, what should society do?

Accepted Answer

Reduce pollution further until marginal benefit equals marginal cost.

Question 9

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

Accepted Answer

Tuna in the ocean.

Question 10

The tragedy of the commons occurs primarily because:

Accepted Answer

Individuals overconsume a rival, non-excludable resource.

Question 11

Which formula is used to construct the market demand curve for a private good?

Accepted Answer

$Market\ Demand = \sum_{i=1}^{n} Q_i$

Question 12

Which of the following is NOT a necessary condition for the Coase Theorem to hold?

Accepted Answer

Government must set a Pigovian tax.

Question 13

A Pigovian tax is designed to:

Accepted Answer

Correct market inefficiency caused by externalities.

Question 14

Which of the following best explains why public goods are often underprovided by markets?

Accepted Answer

Because people can free ride and enjoy benefits without paying.

Question 15

Suppose the government wants to encourage consumption of a good with positive externalities, such as vaccinations. Which policy is most appropriate?

Accepted Answer

Provide a subsidy to consumers or producers of vaccinations.

Question 16

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

Accepted Answer

It shifts upward (to the left).

Question 17

Which of the following is a quasi-public good?

Accepted Answer

Toll road.

Question 18

Why might a command-and-control approach to pollution reduction be inefficient?

Accepted Answer

It does not account for differences in firms' costs of reducing pollution.

Question 19

Which of the following statements about property rights and externalities is correct?

Accepted Answer

Incomplete or unenforced property rights lead to externalities and market failures.

Question 20

If the marginal social cost of carbon dioxide emissions is estimated at $49 per metric ton, what is the rationale for a carbon tax set at this level?

Accepted Answer

To internalize the external cost and achieve the efficient level of emissions.

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

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