Understanding Externalities Quiz

What is an externality?

• A cost or benefit that affects only the producer

• A cost or benefit incurred by a third party due to an economic transaction

• A payment made by the government to firms

• The price of goods in a competitive market

Which of the following is an example of a negative externality?

• Improved public health from vaccinations

• Air pollution caused by a factory

• Increased property value due to a new park

• Profits earned by a private business

What is a positive externality?

• A benefit enjoyed exclusively by producers

• A benefit that spills over to third parties

• An unintended cost imposed on society

• A surplus in government revenue

Which of these is NOT a characteristic of externalities?

• They are not reflected in market prices

• They only involve private costs and benefits

• They can be positive or negative

• They lead to market failure

What happens when negative externalities are not addressed?

• The market produces the socially optimal quantity

• The market produces more than the socially optimal quantity

• Producers incur higher private costs

• Consumers experience only positive benefits

What is an example of a positive externality in education?

• Lower tuition fees for students

• Increased earnings for graduates

• A more educated workforce that benefits society

• Higher profits for private schools

How can governments address negative externalities?

• By providing subsidies

• By imposing taxes

• By reducing market demand

• By eliminating competition

Which of the following is a government action to encourage positive externalities?

• Taxing polluters

• Providing public goods

• Subsidizing education

• Imposing tariffs

What is the relationship between externalities and market failure?

• Externalities always lead to perfect market outcomes

• Externalities disrupt efficient resource allocation

• Externalities reduce government intervention

• Externalities increase consumer surplus

What is the marginal social cost (MSC)?

• The cost borne only by the producer

• The private cost plus external cost

• The external benefit of consumption

• The cost of producing one additional unit