Externalities Quiz

Give an example of a positive externality.

• Traffic congestion

• Pollution

• Vaccination

• Education

What is a negative externality?

• A negative externality is a cost that is suffered by the seller as a result of an economic transaction.

• A negative externality is a cost that is suffered by a third party as a result of an economic transaction.

• A negative externality is a cost that is suffered by the buyer as a result of an economic transaction.

• A negative externality is a benefit that is enjoyed by a third party as a result of an economic transaction.

Provide an example of a negative externality.

• Second-hand smoke from a smoker affecting non-smokers nearby

• Noise pollution from a construction site disturbing nearby businesses

• Pollution from a factory affecting nearby residents

• Chemical waste from a factory contaminating a nearby river

How do positive externalities affect market equilibrium?

• Positive externalities have no effect on market equilibrium.

• Positive externalities cause an overallocation of resources in the market.

• Positive externalities cause an underallocation of resources in the market.

• Positive externalities cause a decrease in demand in the market.

How do negative externalities impact market efficiency?

• Negative externalities improve market efficiency.

• Negative externalities cause market inefficiency.

• Negative externalities only impact certain industries, not overall market efficiency.

• Negative externalities have no impact on market efficiency.

Explain the concept of external costs.

• External costs are costs that are not directly borne by the parties involved in a transaction or activity, but instead are passed on to society as a whole.

• External costs are costs that are not relevant to economic transactions.

• External costs are costs that are only borne by the government.

• External costs are costs that are directly borne by the parties involved in a transaction or activity.

Refer to the image. Given the position of the marginal social cost curve, one can conclude that

• production of good X creates a negative production externality.

• production of good X creates a negative consumption externality.

• production of good X creates a positive production externality.

• production of good X creates a positive consumption externality.

Explain the concept of market failure.

• Market failure occurs when the price mechanism fails to allocate resources efficiently.

• Market failure occurs when the government intervenes in the market.

• Market failure occurs when there is a surplus of goods in the market.

• Market failure occurs when there is a shortage of goods in the market.

Discuss the concept of positive externalities.

• Positive externalities occur when the production or consumption of a good or service benefits a third party.

• Positive externalities occur when the production or consumption of a good or service harms a third party.

• Positive externalities occur when the production or consumption of a good or service has no impact on a third party.

• Positive externalities occur when the production or consumption of a good or service is neutral to a third party.

When there is a _______ production externality, the free market _________ resources to the production of the good and too ______ of it is produced relative to the social optimum. This is shown by _______and _______ at the point of production, Qm, *

• negative; misallocate; little; Qm > Qopt; MSC < MSB

• positive; underallocate; much; Qm > Qopt; MSB > MSC

• negative; overallocate; much; Qm > Qopt; MSC > MSB

• positive; misallocate; much; Qm > Qopt; MSC > MSB