Question 1

Which of the following best describes a negative externality?

Accepted Answer

A cost imposed on third parties not reflected in the price of the good.

Question 2

Suppose a factory emits pollution that affects nearby residents. Without government intervention, what is likely to happen to the quantity of goods produced?

Accepted Answer

The factory will produce more than the socially optimal quantity.

Question 3

Which equation represents the socially optimal quantity in the presence of a negative externality?

Accepted Answer

$$MSC = MSB$$

Question 4

A Pigovian tax is designed to:

Accepted Answer

Correct market failure by internalizing negative externalities.

Question 5

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

Accepted Answer

A person receives a flu vaccination, reducing the risk of illness for others.

Question 6

According to the Coase Theorem, what is necessary for private bargaining to solve externality problems efficiently?

Accepted Answer

Clearly defined property rights and low transaction costs.

Question 7

Which of the following best describes a public good?

Accepted Answer

A good that is both non-excludable and non-rivalrous.

Question 8

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

Accepted Answer

Public goods

Question 9

Which of the following is a real-world example of a common pool resource?

Accepted Answer

The Ogallala Aquifer used for irrigation

Question 10

If a market produces less than the socially optimal quantity due to a positive externality, what policy could the government use to correct this?

Accepted Answer

Provide a Pigovian subsidy equal to the external benefit

Question 11

Which formula represents the marginal social cost (MSC) in the presence of a negative externality?

Accepted Answer

$$MSC = MPC + MEC$$

Question 12

A club good is characterized by:

Accepted Answer

High excludability and low rivalry

Question 13

Which of the following government actions is an example of addressing a negative externality?

Accepted Answer

Imposing a tax on plastic shopping bags

Question 14

If the marginal external benefit (MEB) of a good is positive, what is the relationship between the marginal social benefit (MSB) and the marginal private benefit (MPB)?

Accepted Answer

$$MSB = MPB + MEB$$

Question 15

Which of the following is NOT a source of market failure discussed in Chapter 5?

Accepted Answer

Perfect competition

Question 16

A government bans single-use plastic bags to reduce environmental damage. This policy is most closely related to which economic concept?

Accepted Answer

Internalizing a negative externality

Question 17

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

Accepted Answer

It suggests that private bargaining can lead to efficient outcomes if transaction costs are low.

Question 18

Which of the following best explains why the Ogallala Aquifer is at risk of depletion?

Accepted Answer

It is a common pool resource subject to overuse due to lack of exclusion.

Question 19

Which of the following is a correct application of a Pigovian tax?

Accepted Answer

A tax on carbon emissions to account for environmental damage.

Question 20

If a good is non-excludable but rivalrous, which category does it fall into?

Accepted Answer

Common pool resource

Externalities, Environmental Policy, and Public Goods: Market Failure in Microeconomics

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