#1
What is an economic externality?
A cost or benefit that affects a party who did not choose to incur that cost or benefit
ExplanationUnintended impact on others from economic activities.
#2
Which of the following is an example of a negative externality?
A factory emitting pollution into the air and nearby residents experiencing health issues
ExplanationCost imposed on third parties from a market transaction.
#3
What is the Coase theorem?
It proposes that if property rights are well-defined and transaction costs are low, affected parties can negotiate and solve externality problems on their own
ExplanationPrivate bargaining can solve externality problems without government intervention.
#4
What is a Pigovian tax?
A tax designed to correct the negative externality caused by a market activity
ExplanationTax to align private costs with social costs.
#5
What is the tragedy of the commons?
A scenario where individuals exploit shared resources for their own gain, leading to depletion or degradation
ExplanationOveruse of common resources due to lack of property rights.
#6
What is the free rider problem?
A condition where all market participants benefit from a positive externality without paying for it
ExplanationBenefiting from a good without contributing to its costs.
#7
What is the concept of internalizing externalities?
It means incorporating the costs or benefits of an externality into the decision-making process of individuals or firms
ExplanationIncluding external costs or benefits in decision-making.
#8
Which of the following is NOT a corrective measure for externalities?
Price controls
ExplanationNot an effective method for addressing externalities.
#9
What is the difference between a positive externality and a negative externality?
Positive externalities benefit individuals who create them, while negative externalities harm individuals who create them
ExplanationBeneficial vs harmful impacts on third parties.
#10
What is the concept of market failure?
It refers to the inability of markets to allocate resources efficiently on their own
ExplanationInefficient allocation of resources by markets.
#11
What is the tragedy of the anticommons?
A condition where property rights are so fragmented that valuable resources are underused
ExplanationUnderuse of resources due to excessive fragmentation of property rights.
#12
What is the concept of moral hazard in the context of externalities?
It refers to the tendency of individuals to take on more risk when they are protected from the consequences
ExplanationIncreased risk-taking due to reduced personal responsibility.