Market failure & Externalities

When consumption of a good generates a positive externality, which of the following must be true at the market equilibrium? 

• Marginal social benefit is less than marginal private cost. 
• Marginal social benefit is greater than marginal private benefit. 
• Marginal social cost is greater than marginal social benefit. 
• Marginal social cost is less than marginal private benefit. 

If the production of a good generates a negative externality, which of the following is true at the private market equilibrium? 

• The private market equilibrium quantity is equal to the socially optimal quantity. 
• The marginal private cost is greater than the marginal social cost. 
• The price of the product equals the marginal social cost. 
• The private market equilibrium quantity is greater than the socially optimal quantity. 

If the production of a good generates a positive externality, the government can increase allocative efficiency by: 

• taxing the producer of the good
  
• setting a price ceiling to encourage production of the good
  
• subsidizing the producer of the good 
• prosecuting firms that produce the good without proper permits
  

Refer to the image. The socially optimal quantity and the per-unit tax that will achieve the socially optimal quantity are which of the following? 

• Quantity = Q1
  Tax = P4-P2
• Quantity = Q2
  Tax = P3-P2
• Quantity = Q2
  Tax = P3-P1
• Quantity = Q3
  Tax = P4-P2

Which of the following best represents a positive externality? 

• Purchasing a pass for an amusement park 
• Being disturbed by neighboring construction noise 
• Dumping waste on someone else’ s property 
• Enjoying watching birds at a neighbor’s bird feeder 

Which of the following is true when there are negative externalities associated with the production of a good? 

• The market will adjust automatically to equate marginal social costs and marginal social benefits. 
• Marginal social costs will exceed marginal private costs unless businesses are forced to internalize the external costs. 
• Marginal private costs will exceed marginal social costs, but the government can correct the problem. 
• Producers should be subsidized so that they will produce more of the good. 

If the production of good X creates a positive externality, then from society’s perspective, the industry that produces good X tends to produce:

• less than the socially optimal amount of good X 
• greater than the socially optimal amount of good X 
• the socially optimal amount of good X 
• a shortage of good X, unless taxed 

Which of the following is true based on the graph shown? 

• Quantity of education in the private market is more than the socially optimal quantity 
• Producers of education could be taxed in order to achieve the socially optimal quantity 
• Consumption of education has a negative externality 
• Consumers of education could be subsidized in order to achieve the socially optimal quantity 

A negative externality results due to firms

• being very, very , bad.

• not paying the full cost of production.

• firms internalizing production costs.

• firms not realizing they are polluting.

The Government seeks to encourage __________ Externalities.

• Negative
• Neutral
• Positive