Externalities and Market Failures Quiz

What is a negative externality?

• A benefit enjoyed by third parties

• A cost incurred by the buyer and seller only

• A cost suffered by third parties due to an economic transaction

• A government subsidy for harmful goods

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

• Air pollution from cars

• A free vaccination program

• A school improving community literacy

• A company recycling its waste

What causes market failure in the presence of negative externalities?

• Overproduction compared to the socially optimal level

• Underproduction compared to the socially optimal level

• Efficient allocation of resources

• Perfect competition

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

• A vaccination reducing disease spread

• Water pollution harming fish

• Traffic congestion in a city

• Noise pollution from a construction site

How do governments correct negative externalities?

• Providing subsidies

• Imposing taxes or regulations

• Allowing markets to self-regulate

• Increasing consumer demand

What happens in a market with positive externalities?

• Overproduction of goods

• Underproduction of goods

• Perfect market efficiency

• Elimination of third-party benefits

Which formula determines marginal social cost (MSC)?

• Private cost - external cost

• Private cost + external cost

• Private benefit - external benefit

• Private benefit + external cost

Why does pollution represent a negative externality?

• It creates additional benefits for society

• It imposes a cost on society not reflected in the market price

• It encourages economic growth

• It increases producer revenue

What type of policy encourages positive externalities?

• Subsidies

• Penalties

• Taxation

• Monopolies

Which of the following is an example of a government intervention to correct negative externalities?

• Reducing subsidies for renewable energy

• Taxing industries that emit harmful pollutants

• Encouraging overproduction of harmful goods

• Allowing harmful activities to continue unchecked