Question 1

Which of the following best describes an externality in microeconomics?

Accepted Answer

An action by one economic agent that directly affects the welfare of another, causing private and social costs to diverge.

Question 2

Suppose a steel factory pollutes a river, increasing the costs for a downstream fishery. What type of externality is this?

Accepted Answer

Negative production externality

Question 3

According to the Coase Theorem, which condition is necessary for private bargaining to resolve externalities efficiently?

Accepted Answer

Property rights must be clearly defined and transaction costs must be low.

Question 4

In the Edgeworth Box analysis of a consumption externality, what does the contract curve represent?

Accepted Answer

The locus of Pareto-efficient outcomes where $MRS_A = MRS_B$.

Question 5

If Bart has the legal right to clean air (no smoke) and Alex wants to smoke, what is the Pareto-efficient way to resolve their conflict?

Accepted Answer

Alex pays Bart for the right to smoke, resulting in a mutually beneficial trade.

Question 6

Which of the following is an example of a non-depletable externality?

Accepted Answer

Atmospheric pollution affecting everyone equally.

Question 7

In the context of open-access resources, what does the 'Tragedy of the Commons' refer to?

Accepted Answer

Overuse and depletion of resources due to lack of property rights.

Question 8

Which policy approach is most likely to address the overuse of open-access resources?

Accepted Answer

Assigning individual transferable quotas (ITQs) to users.

Question 9

If a government imposes a Pigouvian tax on pollution, what is the intended effect?

Accepted Answer

To increase the private cost of pollution to match the social cost.

Question 10

Consider a fishery with open access. If the outside wage is $w$ and the average product of fishing is $AP$, what is the equilibrium number of fishers?

Accepted Answer

Where $AP = w$

Question 11

In a merged firm that internalizes a production externality, what condition must hold for efficient pollution production?

Accepted Answer

The sum of the marginal costs of pollution for both departments must be zero: $\frac{\partial C_f}{\partial x} + \frac{\partial C_s}{\partial x} = 0$

Question 12

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

Accepted Answer

It guarantees an efficient outcome even with high transaction costs.

Question 13

Why might private bargaining fail to resolve public externalities?

Accepted Answer

Because there are often large numbers of affected parties and free-riding problems.

Question 14

If preferences are quasilinear, what is true about the efficient amount of an externality?

Accepted Answer

It is independent of the initial allocation of property rights.

Question 15

Which of the following is a real-world example of a positive production externality?

Accepted Answer

A beekeeper's bees pollinating a neighboring fruit farm.

Question 16

What is the main reason that open-access resources are overused?

Accepted Answer

Individuals consider only their private costs and benefits, ignoring the social costs imposed on others.

Question 17

Which equation represents the condition for profit maximization in the steel firm with a production externality?

Accepted Answer

$\frac{\partial C_s(s,x)}{\partial s} = p_s$

Question 18

Which of the following is NOT a policy approach to address externalities?

Accepted Answer

Ignoring the externality

Question 19

What is the effect of internalizing an externality within a merged firm?

Accepted Answer

The firm takes into account the social costs and produces efficient quantities of all goods.

Externalities: Theory, Analysis, and Policy Approaches (Varian Ch. 34/35)

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