#1
Which of the following best describes an externality in economic decision-making?
A cost or benefit that affects a party who did not choose to incur that cost or benefit.
ExplanationUnintended impact of economic activity on third parties.
#2
What type of externality occurs when the consumption or production decisions of one party lead to unintended costs or benefits for another party?
Negative externality
ExplanationCosts or benefits not accounted for by those directly involved.
#3
Which of the following is an example of a negative externality?
A factory polluting a nearby river.
ExplanationHarmful impact of industrial activity on surroundings.
#4
How can governments address negative externalities?
By imposing taxes or regulations.
ExplanationGovernment intervention through taxation or regulation.
#5
In the context of externalities, what does 'internalizing' mean?
External costs or benefits are accounted for by those involved in the activity.
ExplanationIncorporating external impacts into decision-making.
#6
Which of the following is NOT a potential solution to externalities?
Free market
ExplanationLack of intervention or regulation.
#7
Which concept is related to the idea that individuals in a market economy pursuing their own self-interest can unintentionally promote the social interest?
Invisible hand
ExplanationMarket forces aligning individual actions with societal benefit.
#8
What is a Pigovian tax?
A tax imposed on the consumers of goods with negative externalities.
ExplanationTax levied to offset negative externalities.
#9
Which of the following is an example of a positive consumption externality?
A homeowner investing in home security, reducing crime in the neighborhood.
ExplanationIndividual action benefiting others.
#10
What is an example of a positive externality?
A company's research and development efforts leading to technological advancements.
ExplanationBeneficial effects not fully recognized by those involved.
#11
What is the Coase theorem?
It suggests that parties can bargain and reach an efficient solution to externalities, regardless of who holds property rights, under certain conditions.
ExplanationPrivate bargaining to resolve externalities.
#12
What is a common critique of relying solely on government intervention to address externalities?
It may lead to inefficient allocation of resources.
ExplanationPotential for government inefficiency in addressing externalities.
#13
What is an example of a solution to the tragedy of the commons?
Privatization of the shared resource.
ExplanationPrivate ownership to prevent overexploitation.
#14
What is the tragedy of the anticommons?
A situation where individuals underuse resources because too many people have the right to exclude others from using them.
ExplanationUnderutilization due to excessive exclusivity.
#15
How does the presence of externalities affect market efficiency?
Externalities can lead to market inefficiencies due to divergence between private and social costs or benefits.
ExplanationDistortion of market outcomes by external impacts.
#16
What is a positional externality?
A type of externality that arises from the relative positions of individuals or firms in a market.
ExplanationImpact of relative positioning on outcomes.