Question 1

If there are externalities present in a market, resources are allocated efficiently when marginal social cost equals marginal social benefit.

Accepted Answer

Externalities cause a divergence between private and social costs/benefits. Efficient allocation occurs when marginal social cost equals marginal social benefit, accounting for these externalities.

Question 2

A common resource is used efficiently if marginal social benefit equals marginal social cost.

Accepted Answer

Efficient use of a common resource occurs when the marginal social benefit (MSB) equals the marginal social cost (MSC), ensuring that resources are allocated optimally without overuse or underuse.

Question 3

One way of overcoming the problem of the commons is to make it private property.

Accepted Answer

Privatizing common resources can lead to better management and conservation, as owners have an incentive to maintain and sustainably use their property.

Question 4

In the case of an external benefit generated by an activity, such as education, a private subsidy for that activity can achieve an efficient outcome.

Accepted Answer

A private subsidy can help internalize the external benefit, aligning private incentives with social benefits, leading to a more efficient allocation of resources.

Question 5

For a common resource, the marginal private benefit of the resource is greater than the marginal social benefit.

Accepted Answer

For a common resource, the marginal social benefit is typically greater than the marginal private benefit because the resource is shared and its use by one individual can reduce its availability to others, leading to a situation known as the "tragedy of the commons."

Question 6

For a common resource, the marginal private cost of the resource is equal to the marginal social cost.

Accepted Answer

For a common resource, the marginal social cost is typically higher than the marginal private cost due to externalities not accounted for by individual users.

Question 7

-A paper mill dumps waste into a lake used by a catfish farmer. The table above shows costs and benefits arising from the production of paper.
a) Draw the paper mill's marginal private cost curve, the marginal social cost curve, and the marginal social benefit of paper curve.
b) What is the efficient level of paper production? If no one owns the lake and there is no regulation of pollution, what is the quantity of paper produced per week? Illustrate the deadweight loss in your figure.
c) If the government introduces a Pigovian tax, what is the tax per ton of paper produced that achieves an efficient outcome? What is the amount of the tax?
d) If the catfish farmer owns the lake, how much paper is produced per week and what does the paper mill pay the farmer per ton? Explain you answer.
e) If the paper mill owns the lake, how much paper is produced per week? Explain.
f) Compare the quantities of paper produced in (c) and (d) and explain the relationship between these quantities.

Accepted Answer

The answer of 
-A paper mill dumps waste into a...

Question 8

-The table above shows costs and benefits arising from college education. There is no government involvement and the schools are competitive.
a) Draw the marginal social cost, marginal private benefit, and marginal social benefit curves.
b) How many students are enrolled and what is the tuition?
c) What is the efficient level of enrollment?
d) What is the deadweight loss? Why does it arise?
e) If the government provides the efficient amount of education, how many school places does it offer and what is the tuition? Explain your answer.
f) If the government provides the efficient amount of education, of the tuition paid by a student what does the government pay and what does what a student pay?

Accepted Answer

The answer of 
-The table above shows costs and benefits...

Question 9

In an unregulated competitive market, the presence of marginal external benefit from a good or service results in less than the efficient quantity being produced.

Accepted Answer

In an unregulated competitive market, producers do not account for marginal external benefits, leading to underproduction relative to the socially optimal level where these benefits are considered.

Question 10

The problem of the commons is the absence of incentives to prevent overuse and depletion of the common resource.

Accepted Answer

The problem of the commons arises when individuals, acting in their own self-interest, overuse and deplete a shared resource, as there are no incentives or regulations to manage its sustainable use.

Question 11

If an activity has an external benefit, such as education, a tax on that activity can lead to the efficient level of output being produced.

Accepted Answer

A tax on an activity with external benefits, like education, would reduce its consumption or production, moving it further away from the efficient level. Instead, subsidies are typically used to increase the activity to the efficient level.

Question 12

One way that government can encourage the production of goods or services that have external benefits is to subsidize the good or service.

Accepted Answer

Subsidies lower the cost of production, encouraging producers to supply more of the good or service, thus increasing its availability and consumption, which can enhance external benefits.

Question 13

Subsidizing education can lead an efficient level of production because education has external benefits.

Accepted Answer

Subsidizing education can lead to an efficient level of production because it accounts for the positive externalities, such as a more educated workforce, which benefits society beyond the individual receiving the education.

Question 14

The marginal social benefit is the sum of the benefit enjoyed by the consumer of an additional unit of a good or service plus the marginal benefit enjoyed by others.

Accepted Answer

The marginal social benefit includes both the private benefit to the consumer and any external benefits to others, reflecting the total benefit to society from consuming an additional unit.

Question 15

When people make decisions about the quantity of education to undertake, they balance the marginal social benefit against the marginal private cost.

Accepted Answer

When individuals decide on the amount of education to pursue, they typically weigh the marginal private benefit against the marginal private cost, not the marginal social benefit.

Question 16

The government can aid in reducing pollution by using a policy of cap-and-trade, which means that polluters are taxed on the amount of pollution they discharge.

Accepted Answer

Cap-and-trade is a system where the government sets a limit (cap) on the total amount of pollution and allows companies to buy and sell permits to emit a certain amount, rather than taxing them directly on emissions.

Question 17

In an unregulated competitive market, the presence of marginal external benefit from a good or service results in overproduction.

Accepted Answer

In an unregulated competitive market, the presence of marginal external benefits typically results in underproduction because the market fails to account for the additional benefits to society, leading to a lower quantity produced than is socially optimal.

Quiz 17: Externalities