Externalities in Microeconomics: Learn About External Effects

Question 1

Which government intervention is NOT used to correct negative externalities?

Accepted Answer

Property rights

Answer

Pigouvian tax

Answer

Command-and-control regulation

Question 2

How do negative externalities contribute to market failures?

Accepted Answer

They cause overproduction and under-consumption.

Answer

They reduce producer surplus.

Answer

They increase demand for the good.

Question 3

Which of the following is a way in which governments can correct for market failures caused by negative externalities?

Accepted Answer

Impose a tax on the activity that creates the externality

Answer

Provide free healthcare to those affected by the externality

Answer

Subsidize the activity that creates the externality

Question 4

Which of the following is an example of a positive externality?

Accepted Answer

Education

Answer

Pollution

Answer

Noise

Answer

Traffic congestion

Question 5

Which of the following is a characteristic of a negative externality?

Accepted Answer

It imposes a cost on a third party who is not involved in the activity that creates the externality

Answer

It creates a benefit for a third party who is not involved in the activity that creates the externality

Answer

It is always intentional

Question 6

Which of the following is NOT a potential consequence of a negative externality?

Accepted Answer

Increased economic growth

Answer

Reduced welfare

Answer

Environmental damage

Answer

Health problems

Question 7

Which of the following is an example of a government policy that could be used to correct for a positive externality?

Accepted Answer

Provide a subsidy for the activity that creates the externality

Answer

Do nothing and let the market resolve the issue

Answer

Impose a tax on the activity that creates the externality

Question 8

Which of the following is a potential benefit of government intervention to correct for externalities?

Accepted Answer

Improved market efficiency

Answer

Reduced government spending

Answer

Increased economic growth

Answer

Reduced consumer choice

Question 9

Which of the following situations best exemplifies a negative externality?

Accepted Answer

A factory releases pollutants that harm the health of nearby residents.

Answer

Government subsidies make renewable energy sources more affordable.

Answer

A new park enhances property values in the surrounding neighborhood.

Question 10

What type of externality occurs when the consumption of a good or service benefits others?

Accepted Answer

Positive externality

Answer

Pecuniary externality

Answer

Negative externality

Answer

Technological externality

Question 11

Which government policy instrument is designed to address negative externalities?

Accepted Answer

Pigouvian tax

Answer

Price ceiling

Answer

Import tariff

Answer

Subsidy

Question 12

What is the primary advantage of employing a Pigouvian tax to mitigate negative externalities?

Accepted Answer

It compels producers to internalize the social costs of their activities.

Answer

It is straightforward to implement and enforce.

Answer

It minimizes government expenditure.

Question 13

What is a potential undesirable outcome of utilizing government subsidies to correct positive externalities?

Accepted Answer

Over-provision of the good or service

Answer

Under-provision of the good or service

Answer

Increased government spending

Answer

Reduced consumer demand

Question 14

How can property rights influence the incidence of externalities?

Accepted Answer

Establishing clear property rights can reduce the negative impacts of externalities

Answer

Property rights have no effect on externalities.

Answer

Property rights worsen the negative impacts of externalities.

Question 15

Provide a real-world instance of a negative externality that can be addressed through government regulations.

Accepted Answer

Environmental pollution resulting from industrial operations.

Answer

Traffic congestion during peak hours

Answer

The development of consumer-friendly technologies

Answer

Rising property costs in sought-after neighborhoods

Question 16

Which of the following is an example of a positive externality resulting from an economic activity?

Accepted Answer

Education

Answer

Traffic accidents

Answer

Pollution

Answer

Congestion

Question 17

What is the primary reason for market failures due to externalities?

Accepted Answer

Incorrect pricing of goods and services

Answer

Technological advancements

Answer

Government intervention

Answer

Changing consumer preferences

Question 18

Which of the following is a policy tool commonly employed by governments to address negative externalities?

Accepted Answer

Pigouvian tax

Answer

Price ceiling

Answer

Import tariff

Answer

Subsidy

Question 19

What is the primary objective of implementing a Pigouvian tax?

Accepted Answer

To discourage activities that generate negative externalities

Answer

To increase government revenue

Answer

To protect domestic industries

Question 20

Which of the following is a potential limitation or challenge associated with government intervention in correcting externalities?

Accepted Answer

Unintended consequences

Answer

Increased economic efficiency

Answer

Improved environmental outcomes

Question 21

What is the central idea behind the Coase Theorem?

Accepted Answer

Under specific conditions, private negotiations between the parties involved can lead to an efficient outcome, even in the presence of externalities.

Answer

Governments should always intervene to correct externalities.

Question 22

How can the concept of property rights contribute to managing externalities?

Accepted Answer

Well-defined property rights can help internalize externalities, leading to more efficient outcomes.

Answer

Property rights are irrelevant when it comes to externalities.

Answer

Only negative externalities can be addressed through property rights.

Question 23

Which of the following is an example of a technological solution that can be used to mitigate externalities?

Accepted Answer

Emission control devices

Answer

Government subsidies

Answer

Pigouvian taxes

Answer

Command-and-control regulations

Question 24

What is the fundamental distinction between a positive externality and a negative externality?

Accepted Answer

Positive externalities generate benefits for third parties, while negative externalities impose costs on third parties.

Answer

Positive externalities are always intentional, while negative externalities are unintentional.

Question 25

Which of the following activities results in a negative externality?

Accepted Answer

A factory releasing harmful chemicals into the air

Answer

A local council maintaining a public park

Answer

A fireworks display organized for a community event

Answer

A school providing education to its students

Question 26

Which of the following government interventions can be used to address a negative externality?

Accepted Answer

Imposing a tax on the producer of the negative externality

Answer

Setting a maximum price below the equilibrium price

Answer

Restricting imports of the good associated with the externality

Answer

Providing subsidies to consumers affected by the externality

Question 27

Which of the following activities is an example of a positive externality?

Accepted Answer

Vaccinating children against infectious diseases

Answer

Traffic congestion during rush hour

Answer

Pollution from industrial activities

Answer

Illegal activities like theft

Question 28

Which of the following is NOT a characteristic of externalities?

Accepted Answer

They are always deliberately created by individuals or organizations.

Answer

They can lead to inefficiencies in the allocation of resources.

Answer

They can be either beneficial or harmful to third parties.

Answer

They affect parties who are not directly involved in the activity creating the externality.

Question 29

Which of the following scenarios best illustrates the Coase theorem?

Accepted Answer

A farmer and a neighboring factory reach an agreement where the factory pays the farmer to reduce its noise levels.

Answer

A court orders a polluting factory to shut down its operations.

Answer

The government sets strict environmental regulations for industries.

Question 30

Which of the following is NOT a potential limitation of the Coase theorem?

Accepted Answer

It requires that all affected parties are aware of the externality.

Answer

It can be challenging to identify all parties impacted by the externality.

Answer

Negotiating a mutually acceptable solution can be time-consuming and costly.

Question 31

Which of the following is a key characteristic of an externality?

Accepted Answer

It affects third parties who are not directly involved in the economic activity generating it.

Answer

It is always positive.

Answer

It is always internalized by the market.

Answer

It is always negative.

Question 32

A negative externality occurs when:

Accepted Answer

The actions of one party impose a cost on a third party.

Answer

The actions of one party benefit both themselves and a third party.

Answer

The actions of one party have no impact on third parties.

Answer

The actions of one party benefit a third party.

Question 33

Which of the following is an example of a positive externality?

Accepted Answer

Vaccinations

Answer

Noise pollution

Answer

Air pollution

Answer

Traffic congestion

Question 34

Market failure occurs primarily due to:

Accepted Answer

Externalities not being reflected in market prices.

Answer

Excessive government intervention.

Answer

Irrational consumer behavior.

Question 35

Which policy option is commonly used to correct negative externalities?

Accepted Answer

Pigouvian tax

Answer

Price ceiling

Answer

Quota

Answer

Subsidy

Question 36

A limitation of the Coase theorem is that:

Accepted Answer

Transaction costs can hinder efficient bargaining.

Answer

Property rights are always clearly defined.

Answer

Courts can always guarantee efficient outcomes.

Question 37

The social cost of a negative externality includes:

Accepted Answer

Both the private cost and the external cost imposed on third parties.

Answer

Only the external cost.

Answer

The private cost minus the external cost.

Answer

Only the private cost.

Question 38

A potential benefit of government intervention to address externalities is:

Accepted Answer

Enhancing market efficiency by internalizing externalities.

Answer

Decreasing overall government spending.

Answer

Increasing consumer choice beyond market options.

Answer

Reducing tax burdens on businesses.

Question 39

Which of the following is a negative externality?

Accepted Answer

Pollution from a factory

Answer

Government subsidies for healthcare

Answer

Positive externalities from education

Answer

Knowledge spillovers from research and development

Question 40

What is a common cause of market failures due to externalities?

Accepted Answer

Divergence between private marginal cost and social marginal cost

Answer

High levels of competition

Answer

Government intervention in the market

Question 41

What is the primary purpose of a Pigouvian tax?

Accepted Answer

To correct for negative externalities by imposing a tax on activities that generate social costs

Answer

To increase government revenue

Answer

To stimulate economic growth

Question 42

Which of the following is an example of a non-rival good that generates a positive externality?

Accepted Answer

Education

Answer

Food consumption

Answer

Private car ownership

Answer

Healthcare

Question 43

What is the main rationale for government intervention to correct for positive externalities?

Accepted Answer

Private markets may underprovide goods or services with positive externalities

Answer

Government intervention is always the most effective way to correct externalities

Answer

Positive externalities always lead to market inefficiencies

Question 44

How do pecuniary externalities differ from technological externalities?

Accepted Answer

Pecuniary externalities impact prices, while technological externalities affect production possibilities

Answer

Pecuniary externalities are always positive, while technological externalities are always negative

Question 45

What does the Coase theorem suggest?

Accepted Answer

Private bargaining can lead to an efficient outcome in the presence of externalities, given well-defined property rights and low transaction costs

Answer

Government intervention is always necessary to correct externalities

Question 46

Provide a real-world example of the application of the Coase theorem.

Accepted Answer

The resolution of noise pollution disputes between neighbors through private negotiation

Answer

The provision of free healthcare

Answer

The implementation of carbon taxes

Question 47

Which of the following is an example of a negative externality?

Accepted Answer

Pollution from a factory

Answer

A public park

Answer

Healthcare

Answer

Education

Question 48

When a firm's production process generates costs that are borne by society, it is known as:

Accepted Answer

Negative externality

Answer

Market failure

Answer

Positive externality

Answer

Public good

Question 49

Which of the following is a policy option that governments can use to correct negative externalities?

Accepted Answer

Pigouvian tax

Answer

Subsidies

Answer

Quotas

Answer

Price controls

Question 50

When a firm's production process generates benefits that are enjoyed by society, it is referred to as:

Accepted Answer

Positive externality

Answer

Public good

Answer

Market failure

Answer

Negative externality

Question 51

Which of the following is an example of a positive externality?

Accepted Answer

Education

Answer

Pollution

Answer

Traffic congestion

Answer

Crime

Question 52

What is the main reason why externalities can lead to market failures?

Accepted Answer

They are not reflected in the prices of goods and services.

Answer

They are difficult to measure.

Answer

They are too small to have a significant impact.

Question 53

Which of the following is NOT a type of externality?

Accepted Answer

Intentionality

Answer

Negative

Answer

Pecuniary

Answer

Positive

Question 54

What is the purpose of a Pigouvian tax?

Accepted Answer

To internalize a negative externality by making the polluter pay for the costs they impose on society.

Answer

To subsidize positive externalities.

Question 55

Which of the following is an example of a market failure caused by a negative externality?

Accepted Answer

Overproduction of pollution

Answer

Underproduction of public goods

Answer

Overconsumption of education

Answer

Underproduction of healthcare

Question 56

What is the difference between a positive and a negative externality?

Accepted Answer

Positive externalities benefit third parties, while negative externalities impose costs on third parties.

Answer

Positive externalities are always intentional, while negative externalities are always unintentional.