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 there is a negative externality, which of the following is true at the market equilibrium?

Accepted Answer

The quantity produced is greater than the socially optimal quantity.

Question 3

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

Accepted Answer

Education increasing the productivity of society.

Question 4

Market failure due to externalities occurs when:

Accepted Answer

There are incomplete property rights or difficulty enforcing them.

Question 5

According to the Coase Theorem, private bargaining can solve the externality problem if:

Accepted Answer

Property rights are assigned and transaction costs are low.

Question 6

A Pigovian tax is designed to:

Accepted Answer

Correct for externalities by aligning private and social costs.

Question 7

If the government wants to encourage more consumption of a good with positive externalities, which policy is most appropriate?

Accepted Answer

Providing a subsidy to consumers or producers.

Question 8

Which of the following best describes a command-and-control policy for pollution?

Accepted Answer

A government-imposed limit on the amount of pollution a firm can emit.

Question 9

In a cap-and-trade system for pollution control:

Accepted Answer

The government sets a maximum allowable level of emissions and distributes permits that can be traded among firms.

Question 10

Which of the following goods is both nonrival and nonexcludable?

Accepted Answer

National defense.

Question 11

The tragedy of the commons occurs because:

Accepted Answer

Individuals have little incentive to conserve common resources, leading to overuse.

Question 12

Suppose the marginal benefit from reducing pollution is given by $MB = 100 - 2Q$ and the marginal cost is $MC = 20 + Q$. What is the efficient quantity of pollution reduction?

Accepted Answer

$Q = 26.67$

Question 13

Which of the following is a quasi-public good?

Accepted Answer

A toll road.

Question 14

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

Accepted Answer

It shifts upward by the amount of the tax.

Question 15

Which of the following statements about the Coase Theorem is correct?

Accepted Answer

Private bargaining can lead to efficient outcomes regardless of who holds the property rights, as long as transaction costs are low.

Question 16

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

Accepted Answer

Consumption by one person reduces the amount available for others.

Question 17

A government wants to reduce carbon dioxide emissions by 10 million tons. Firm A can reduce emissions at a cost of $10 per ton, while Firm B's cost is $50 per ton. Which policy achieves the reduction at the lowest total cost?

Accepted Answer

Allow Firm A to reduce all 10 million tons and compensate Firm B.

Question 18

Which of the following best explains why markets tend to underprovide public goods?

Accepted Answer

Individuals can free ride, benefiting without paying.

Question 19

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

Accepted Answer

It internalizes the externality, leading to the efficient level of emissions.

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

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