AP Microeconomics: Understanding Externalities

Open Ended

Why is it important for economists and policymakers to understand externalities when analyzing markets?

Multiple Choice

Which of the following is an example of a positive production externality?

• Factory pollution

• Research and development spillovers

• Secondhand smoke

• Littering

Open Ended

Explain how positive consumption externalities can benefit society. Provide at least one example from the slide.

Multiple Select

Which of the following are examples of negative production externalities?

• Water contamination

• Vaccinations

• Noise pollution

• Home maintenance

Fill in the Blank

Negative consumption externalities impose costs on third parties from ___.

Fill in the Blank

The supply curve shifts right when there are ___ production externalities.

Open Ended

Compare and contrast the effects of negative production externalities and positive production externalities on the supply curve and social costs/benefits.

Multiple Choice

Which of the following statements best describes the impact of negative consumption externalities on the demand curve?

• The demand curve shifts left because social cost exceeds private cost.

• The demand curve shifts right because social benefit exceeds private benefit.

• The demand curve remains unchanged because there is no externality.

• The demand curve shifts left because private cost exceeds social cost.

Open Ended

Explain how deadweight loss represents a consequence of market failure. Use the concepts of economic inefficiency and lost social surplus in your answer.

Multiple Select

Which of the following are components required to calculate deadweight loss?

• Social cost/benefit curve

• Private cost/benefit curve

• Market equilibrium point

• Government intervention

Fill in the Blank

Deadweight loss is calculated as ½ × (change in price) × (change in ___).

Multiple Choice

Which of the following is NOT a private market solution to externalities?

• Coase theorem

• Private negotiations

• Subsidies

• Mergers

Open Ended

How do government solutions such as taxes and subsidies address externalities in the market?

Multiple Choice

Which of the following is NOT a key characteristic of an externality?

• It is always reflected in the market price

• It impacts uninvolved parties

• It can be positive or negative

• It leads to market inefficiency

Open Ended

Summarize in your own words what an externality is and why it is important in microeconomics.

Multiple Choice

Which of the following statements about externalities is NOT correct?

• Externalities always have a positive effect on markets.

• Externalities can affect either production or consumption.

• Externalities require intervention for correction.

• Understanding externalities is crucial for policy decisions.