Q: Which equation represents the social cost of production when there is a negative externality?

$$ \text{Social Cost} = \text{Private Cost} + \text{External Cost} $$

Question 1

Which of the following best describes a negative externality, as illustrated by the image of a congested highway?

Accepted Answer

A cost imposed on a third party not involved in the transaction, such as increased travel time and pollution from traffic jams.

Question 2

Suppose a factory emits pollution that harms nearby residents. Which policy would best internalize this negative externality?

Accepted Answer

Imposing a Pigovian tax equal to the external cost per unit of pollution.

Question 3

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

Accepted Answer

A homeowner installs smog-eating tiles, reducing air pollution for the neighborhood.

Question 4

Why do public goods tend to be underprovided in a free market?

Accepted Answer

Because of the free-rider problem, where individuals benefit without paying.

Question 5

Which of the following best describes the Coase Theorem?

Accepted Answer

If transaction costs are low and property rights are well-defined, private parties can negotiate to solve externalities without government intervention.

Question 6

A common resource is characterized by which of the following properties?

Accepted Answer

It is rival but not excludable.

Question 7

The Tragedy of the Commons is most likely to occur with which type of good?

Accepted Answer

Common resources, such as fish in the ocean.

Question 8

Which of the following is a market-based policy to address pollution?

Accepted Answer

Tradable pollution permits.

Question 9

Suppose the government wants to reduce pollution from two firms, Acme and Creative Chemicals, from 200 tons to 50 tons. If Acme's cost of reduction is $$10/ton and Creative's is 100/$$ton, what is the most cost-effective allocation of reductions?

Accepted Answer

Acme should reduce 150 tons, Creative should reduce none.

Question 10

Which equation represents the social cost of production when there is a negative externality?

Accepted Answer

$$ 	ext{Social Cost} = 	ext{Private Cost} + 	ext{External Cost} $$

Question 11

Which of the following is NOT a reason why private solutions to externalities may fail?

Accepted Answer

Low transaction costs.

Question 12

Patent laws are designed to address which economic problem?

Accepted Answer

Under-provision of innovative activity due to positive externalities.

Question 13

Which of the following best explains why governments may subsidize education?

Accepted Answer

Education generates positive externalities, so the social value exceeds the private value.

Question 14

If a good is non-excludable and non-rival, what type of good is it?

Accepted Answer

Public good.

Question 15

Which of the following is an example of the free-rider problem?

Accepted Answer

People watching a public fireworks display without paying.

Question 16

How does the government determine the optimal quantity of a public good?

Accepted Answer

By summing the reservation prices (willingness to pay) of all users for each quantity.

Question 17

Which of the following best describes the effect of tradable pollution permits?

Accepted Answer

They allocate pollution reduction to firms with the lowest abatement costs.

Question 18

Which of the following is a key insight from Elinor Ostrom's work on common resources?

Accepted Answer

Communities can sometimes manage common resources effectively without government intervention.

Question 19

Which of the following equations represents the demand for a public good?

Accepted Answer

$$ D_{	ext{public}} = D_1 + D_2 + \ldots + D_n $$

Question 20

Which of the following is a reason why property rights are important for efficient resource allocation?

Accepted Answer

They provide incentives for owners to manage resources efficiently.

Externalities, Public Goods, and the Environment: Microeconomics Study Notes

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