Question

21. By including the costs from negative externalities imposed on society, an efficient level of output will be produced when:

1. (a) marginal benefit equals opportunity cost.

2. (b) marginal private benefit equals marginal private cost.

3. (c) market demand equals marginal private cost.

4. (d) marginal private cost equals marginal social cost.

5. (e) marginal benefit equals marginal social cost.

22. What is NOT an example of a positive externality?

1. (a) Improved educational outcomes in society.

2. (b) Winning $1 million dollars at the casino with your friends.

3. (c) Your neighbour painting their old wooden house.

4. (d) Your neighbour enjoying you practicing the piano at 6am.

5. (e) Bees pollinating flowers in an orchard.

23. When negative externalities exist, an economist would argue that:

1. (a) there are no winners at all.

2. (b) more output needs to be produced to achieve an efficient outcome.

3. (c) an efficient outcome can be achieved if a reduction in output occurs.

4. (d) governments are always needed to intervene and rectify the externality.

5. (e) negative impacts on society will always be solved by market forces and the invisible hand.

24. Suppose the assumptions of the Coase Theorem do not apply. Severe air pollution occurs in cities because:

1. (a) the factory owners causing the pollution do not live in the polluted areas of the city.

2. (b) people in cities prefer higher income and lower air quality, compared to lower income and higher air quality.

3. (c) people in cities prefer driving their cars over breathing clean air.

4. (d) negotiation over the rights to clean air is too costly in practice.

5. (e) both (b) and (d).

25. Economists would argue governments can justify taxing the carbon dioxide pollution from coal fired power stations because it:

1. (a) allows governments to be seen to be doing the right thing and win more votes.

2. (b) will shift the demand for consumers.

3. (c) reflects the social cost of producing electricity.

4. (d) is the right thing to do in a world where global warming is not a problem.

5. (e) shift the supply curve for power stations to the right and help reduce pollution.

Answer 1

21. (d) marginal private cost equals marginal social cost.

Explanation: The difference between the marginal social cost and the marginal private cost is the negative external cost. When negative externality is taken into account, the marginal private cost equals marginal social cost.