#1
Which of the following best defines an economic externality?
A cost or benefit that affects a party who did not choose to incur that cost or benefit
ExplanationAn externality is an unintended consequence affecting someone not involved in a transaction.
#2
What is a common example of a negative externality?
Pollution from a factory
ExplanationNegative externality: when a factory's pollution affects surrounding communities.
#3
What is the difference between a positive externality and a negative externality?
Positive externalities benefit society, while negative externalities harm society.
ExplanationPositive externalities enhance societal welfare, while negative ones diminish it.
#4
What is the concept of 'externality' in economics?
A situation where the production of one good affects the production or consumption of another good
ExplanationExternality: unintended impact of one economic agent's actions on another's welfare.
#5
Which of the following is a characteristic of a public good?
Non-excludability and non-rivalry
ExplanationPublic goods are non-excludable and non-rivalrous, meaning all can benefit without diminishing others' access.
#6
What is one way to internalize externalities?
Through government intervention, such as taxes or subsidies
ExplanationInternalizing externalities involves adjusting incentives through government actions.
#7
What is the Coase theorem?
A theorem that suggests parties can bargain to solve externalities if property rights are well-defined and transaction costs are low
ExplanationCoase theorem: parties can negotiate solutions if property rights and transaction costs are clear and low.
#8
What is the tragedy of the commons?
A situation where a common resource is overused and depleted due to individual self-interest
ExplanationTragedy of the commons: overuse of shared resources due to individual gain, leading to depletion.
#9
Which of the following is an example of a positive externality?
Vaccinations
ExplanationPositive externality: vaccinations not only benefit individuals but also contribute to herd immunity.
#10
What is the difference between a private good and a public good?
Private goods are rivalrous and excludable, while public goods are non-rivalrous and non-excludable
ExplanationPrivate goods can be owned and consumed exclusively, while public goods are available to all and consumption by one doesn't diminish availability to others.
#11
Which of the following is NOT a typical policy tool used to address environmental externalities?
Laissez-faire economics
ExplanationLaissez-faire economics advocates minimal government intervention, contrary to typical policies addressing externalities.
#12
Which of the following is a potential problem with using Pigovian taxes to address negative externalities?
They may disproportionately affect low-income individuals
ExplanationPigovian taxes can impact low-income individuals more, potentially exacerbating inequality.
#13
What is the concept of 'market failure' in the context of externalities?
When markets fail to allocate resources efficiently due to externalities
ExplanationMarket failure: when market forces alone cannot achieve efficient allocation due to externalities.
#14
What is the 'tragedy of innovation'?
A situation where innovation leads to negative externalities
ExplanationTragedy of innovation: unintended negative consequences resulting from innovation.
#15
Which of the following is an example of a positional externality?
Advertising by competing firms
ExplanationPositional externality: when actions aimed at gaining relative advantage have unintended negative effects on others.