Externalities Quiz

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

• Your neighbor’s flower garden makes you smile as you walk past.

• You buy a tomato sandwich and don’t like it.

• You change a flat tire on your car, and your pants get stained.

• Your brother starts learning the saxophone, and the neighbors complain about the noise.

For a good with a negative externality, which of the following is true about the SOCIAL COST of the good?

• The social cost is lower than the private cost.

• The social cost is equal to the private cost.

• The social cost exceeds the private cost.

• When a Pigouvian tax is implemented, the social cost is lower than the private cost.

Which of the following is true about the market equilibrium for a good with a large negative externality?

• The quantity produced at the market equilibrium is lower than the quantity produced at the socially optimal equilibrium.

• The quantity produced at the market equilibrium is greater than the quantity produced at the socially optimal equilibrium.

• The quantity produced at the market equilibrium is the same as the quantity produced at the socially optimal equilibrium, only the price is different.

• Not enough information

What does the deadweight loss area represent in a market with a negative externality?

• Valuable transactions that are socially beneficial but do not occur because the market price is too high to entice buyers

• Valuable transactions that are socially beneficial but do not occur because the market price is too low to incentivize production

• Undesirable transactions that are socially inefficient because the social benefit is greater than the social cost

• Undesirable transactions that are socially inefficient because the social cost is greater than the social benefit

Which of the following is an example of a Pigouvian tax?

• A tax on methane gas emissions to improve air quality

• A tax on income to fund national defense

• A tax on imports to protect domestic industries

• A tax on luxury goods to reduce income inequality

What is the main goal of implementing a Pigouvian tax?

• To increase government revenue

• To solve the free rider problem

• To increase the cost of goods or services that impose a cost on bystanders

• To discourage the consumption of goods or services that directly harm the consumer

Which of the following is TRUE about goods with positive externalities?

• Markets overproduce goods and services that have positive externalities.

• Consumer surplus always exceeds producer surplus at market equilibrium.

• The deadweight loss in a market with a positive externality represents desirable transactions that do not occur.

• Free riders over consume a good with positive externalities, limiting what remains for everyone else.

How does a Pigouvian subsidy work to correct positive externalities?

• It encourages beneficial activities by reducing their cost.

• It discourages harmful behavior by making it more expensive.

• It compensates individuals for the damages caused by negative externalities.

• It limits the total amount of positive externalities in an economy.

Which of the following is included in the social value curve?

• External cost

• External benefit

• Private cost

• Average total revenue

How do tradable permits create an incentive for companies to reduce pollution?

• By forcing companies to reduce pollution to zero

• By imposing fines for any level of pollution

• By allowing companies to sell excess permits if they reduce pollution below their allocated level

• By offering subsidies to companies that pollute less than comparable international producers