#1
Which of the following best describes an externality?
A cost or benefit that affects a party who did not choose to incur that cost or benefit.
ExplanationAn externality refers to impacts, whether positive or negative, on parties not directly involved in a transaction.
#2
What is a negative externality?
An externality that causes harm to third parties.
ExplanationNegative externality results in adverse effects imposed on individuals or entities not directly involved in the activity.
#3
Which of the following is an example of a positive externality?
Education leading to a more informed and productive workforce.
ExplanationPositive externality involves benefits accruing to unrelated parties due to certain activities, like education enhancing overall societal productivity.
#4
What is the Coase Theorem?
A theorem that states that in the presence of externalities, parties can bargain and reach an efficient outcome regardless of who has property rights.
ExplanationThe Coase Theorem suggests that through negotiation, parties affected by externalities can resolve conflicts and achieve efficient outcomes.
#5
What is a Pigovian tax?
A tax levied on firms to discourage the production of a good with negative externalities.
ExplanationPigovian tax is imposed to internalize the external costs associated with the production or consumption of certain goods or services.
#6
What is the difference between a private cost and a social cost?
Social cost includes both private and external costs while private cost includes only internal costs.
ExplanationPrivate costs represent expenses borne by individuals or firms, while social costs encompass both private costs and external costs imposed on society.
#7
What is the tragedy of the commons?
A situation where individuals overuse or deplete a shared resource because they do not bear the full cost of their actions.
ExplanationThe tragedy of the commons occurs when individuals exploit communal resources without considering the long-term consequences, leading to depletion or degradation.
#8
What is the Coasean solution to externalities?
Market participants bargaining to reach an efficient outcome.
ExplanationThe Coasean solution suggests resolving externalities through negotiation among affected parties, leading to mutually beneficial agreements.
#9
What is the concept of Pareto efficiency in the context of externalities?
A situation where the market achieves an efficient allocation of resources without any externalities.
ExplanationPareto efficiency implies an allocation of resources where no one can be made better off without making someone else worse off, including considering externalities.
#10
What is the tragedy of the anticommons?
A situation where resources are underused due to excessive fragmentation of property rights.
ExplanationThe tragedy of the anticommons arises when the presence of numerous property rights holders results in the underutilization of resources due to difficulties in reaching agreements.