Market Externalities

At what level should an allocatively efficient market operate?

• MSC = MSB

• MPC = MPB

• MPB = MSB

• MPC = MSC

What condition best describes a positive externality of consumption?

• MSB > MPB

• MPB > MSB

• MSC > MPC

• MPC > MSC

What condition best describes a negative externality of consumption?

• MSB > MPB

• MPB > MSB

• MSC > MPC

• MPC > MSC

What condition best describes a negative externality of production?

• MSB > MPB

• MPB > MSB

• MSC > MPC

• MPC > MSC

What condition best describes a positive externality of production?

• MSB > MPB

• MPB > MSB

• MSC > MPC

• MPC > MSC

Goods with negative externalities (demerit goods), in a free market, are generally ________

• Overprovided

• Underprovided

The diagram shown represents a _____

• Negative externality of consumption

• Negative externality of production

• Positive externality of consumption

• Positive externality of production

Review the diagram below. Addressing the externality shown by implementing a subsidy, would lead to a ______ (higher/lower) equilibrium price (P), and a ______ (higher/lower) equilibrium quantity (Q).

• Higher price, lower quantity

• Lower price, lower quantity

• Higher price, higher quanity

• Lower price, higher quantity

The diagram shown represents a ______

• Negative externality of production

• Negative externality of consumption

• Positive externality of production

• Positive externality of consumption

Steel production is responsible for about 8% of global CO2 emissions. Which would be the least appropriate solution to help resolve the observed negative externality?

• Indirect tax on steel (carbon tax)

• Subsidizing steel production

• Regulation on the use of coal for steel production

• Tradable emissions permits (cap and trade)