Government Goals and Market Failure

What is a consequence of negative externalities?

• Under consumption of goods

• Qm < Qs

• MSC > MSV

• MSB > MSC

Which of the following best describes the market outcome when negative externalities are present?

• No effect on market output

• Overproduction of goods

• Equilibrium at socially optimal level

• Underproduction of goods

What is the relationship between Marginal Social Cost (MSC) and Marginal Private Cost (MPC) in the presence of negative externalities?

• MSC = MPC

• MSC < MPC

• MSC is unrelated to MPC

• MSC > MPC

Which policy can help correct the inefficiency caused by negative externalities?

• Subsidies

• Taxes

• Price floors

• Quotas

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

• Vaccination against diseases

• Pollution from a factory

• Private consumption of a sandwich

• Education benefits to society

What happens to social welfare when negative externalities are not addressed?

• It increases to the maximum level

• It remains unchanged

• It decreases due to overproduction

• It is unaffected by externalities

Which curve shifts when a negative externality is internalized through a tax?

• Marginal Social Cost (MSC)

• Marginal Private Cost (MPC)

• Marginal Social Benefit (MSB)

• Demand curve

Efficiency in markets occurs when the social optimum is achieved, where MPB = MPC, maximising society's welfare

• True

• False

Answer explanation

It should be MSB= MSC

What is the effect of a Pigovian tax on a good that generates negative externalities?

• It increases the quantity produced

• It leads to underproduction

• It reduces the marginal private cost

• It aligns private cost with social cost

Which of the following is most likely to result if a government fails to regulate negative externalities?

• There is a welfare loss to society

• Firms internalize all external costs

• Resources are allocated efficiently

• Market output matches the social optimum