#1
Which of the following best describes an economic externality?
A situation where the production or consumption of a good or service affects the well-being of a third party who is not directly involved in the production or consumption.
ExplanationExternalities impact third parties not involved in production/consumption.
#2
Which of the following is an example of a negative externality?
A factory polluting a nearby river, affecting the fishing industry downstream.
ExplanationNegative externality: factory pollution harms downstream fishing industry.
#3
Which of the following is an example of a positive externality?
A homeowner installing solar panels, reducing carbon emissions for the neighborhood.
ExplanationPositive externality: solar panels benefit the neighborhood.
#4
What is the main difference between a positive externality and a negative externality?
Positive externalities benefit third parties, while negative externalities harm third parties.
ExplanationPositive externality: benefits third parties, negative externality: harms third parties.
#5
What is the tragedy of the commons?
A situation where common resources are overused or depleted due to lack of property rights and incentives for conservation.
ExplanationTragedy of the commons: overuse/depletion of common resources.
#6
In the presence of negative externalities, what happens to the market equilibrium quantity and price?
Quantity decreases, price increases.
ExplanationNegative externality: quantity decreases, price increases.
#7
Which of the following government policies can be used to address negative externalities?
All of the above
ExplanationVarious government policies can address negative externalities.
#8
In the presence of positive externalities, what happens to the market equilibrium quantity and price?
Quantity and price increase.
ExplanationPositive externality: quantity and price increase.
#9
What is a common example of a positive externality in education?
Higher earnings for individuals with college degrees, leading to increased tax revenue for society.
ExplanationEducation's positive externality: college graduates' higher earnings increase tax revenue.
#10
What is the free rider problem?
A situation where individuals benefit from public goods without contributing to their provision.
ExplanationFree rider problem: benefiting from public goods without contribution.
#11
What is the Coase Theorem?
A theorem that suggests private bargaining can result in an efficient solution to externalities if property rights are well-defined and transaction costs are low.
ExplanationCoase Theorem: Private bargaining solves externalities if costs are low.
#12
Which of the following is NOT a characteristic of a public good?
Excludability
ExplanationPublic goods lack excludability.
#13
What is the difference between a positive externality and a public good?
Positive externalities can be provided by both the public and private sectors while public goods are exclusively provided by the government.
ExplanationPositive externality: both sectors provide, public good: exclusively government provided.
#14
What is the main criticism of the Coase Theorem?
It assumes that transaction costs are always low and bargaining is costless.
ExplanationCriticism: Coase Theorem assumes low transaction costs and costless bargaining.