Externalities and Public Goods Quiz

What is an externality in the context of market failure?

• A benefit received by the government

• A cost or benefit to a third party outside the market mechanism

• A profit made by a company

• A tax imposed by the government

What are private costs/benefits?

• Costs/benefits to society as a whole

• Costs/benefits to a third party

• Costs/benefits to the individual participating in the economic activity

• Costs/benefits to the government

What are external costs/benefits?

• Costs/benefits to the government

• Costs/benefits to the individual

• Costs/benefits to a third party not involved in the economic activity

• Costs/benefits to a single firm

What is a demerit good?

• A good with external benefits

• A good with no externalities

• A good with external costs

• A good that is underprovided by the market

What is the marginal private benefit (MPB)?

• The extra cost to society from producing one more good

• The extra satisfaction gained by the individual from consuming one more of a good

• The extra cost to the individual from producing one more of the good

• The extra gain to society from the consumption of one more good

What does the marginal social cost (MSC) represent?

• The extra satisfaction gained by the individual from consuming one more of a good

• The extra gain to society from the consumption of one more good

• The extra cost to society from the production of one more good

• The extra cost to the individual from producing one more of the good

In the context of negative production externalities, what happens when social costs are greater than private costs?

• The market will produce at the social optimum position

• The market will ignore the external costs involved in producing a good

• The market will reduce production to minimize costs

• The market will increase production to maximize benefits

Where does the market produce when left to operate freely in the presence of negative production externalities?

• Where MSB = MSC

• Where MPB = MSC

• Where MPB = MPC

• Where MSC = MPC

What is the result at Q1 when costs to society are higher than benefits?

• Increase in welfare

• Loss of welfare

• No change in welfare

• Maximum welfare

What should the economy produce to achieve the social optimum position?

• Where MPB = MPC

• Where MSB = MSC

• Where MSC = MPC

• Where MPB = MSB