A-Level - Cost & Benefit Analysis

How is external cost calculated?

• A. Social cost – social benefit

• B. Social cost – private cost

• C. Social cost + private cost

• D. Social cost – external benefit

The government funds a new barrier to protect residents from flooding from a nearby river.

Which of these is a positive externality of this action?

• A. The government can now spend money on other flood barriers.

• B. Residents are now better protected from flooding.

• C. Residents can now get flood insurance.

• D. Residents who previously had to stay at home due to flooding can now go to work.

The diagram shows some cost and benefit curves in a market.

If output is at Q and price is at P, what type of market failure does this represent?

• A. negative externality of production

• B. negative externality of consumption

• C. positive externality of production

• D. positive externality of consumption

The diagram shows the marginal social benefit (MSB) and the marginal social cost (MSC) of production by a firm.

What is the socially efficient level of output?

• A. 0

• B. 5

• C. 10

• D. 20

A cost–benefit analysis of four public sector investment projects produces the following results.

Which project is most likely to be funded?

• A

• B

• C

• D

The deadweight welfare loss occurs when there is:

• A. over production of a good.

• B. a socially efficient allocation of resources.

• C. marginal private cost = marginal social cost.

• D. marginal external cost = marginal external benefit.

Which of the following best defines cost benefit analysis?

• A. A technique for determining the economic feasibility of a project or plan

• B. A method for calculating the total cost of a project

• C. An approach for evaluating the environmental impact of a project

• D. A process for estimating the market demand for a product

A government gives its approval for the building of a private airport because the airport would be socially beneficial.

In making its decision it calculates private costs at $700 m, private benefits at $800 m and external costs at $200 m.

What does this suggest must be true about the external benefits of the scheme?

• A. External benefits equal private benefits.

• B. External benefits exceed $100 m.

• C. External benefits exceed external costs.

• D. There are no external benefits.

Asymmetric information is present in a market when:

• A. there is no information available on what is being bought or sold.

• B. the buyer and seller have an equal share of information.

• C. the buyer and seller do not have an equal share of information.

• D. the buyer or seller is prepared to take more risk.

1. Which of the following is an example of moral hazard?

• A. A person buys a car insurance policy and drives more carefully.

• B. A person buys a car insurance policy and drives more recklessly.

• C. A person buys a car insurance policy and saves more money.

• D. A person buys a car insurance policy and buys a new car.