Externalities, Social Costs and Benefits
160 questions· page 1 of 16
The diagram shows the private and social costs and benefits of production in a free market that result in market failure.
Which change in output would be necessary to overcome this market failure?
Options
A from K to M
B from M to N
C from M to L
D from N to L
What is not a reason for imposing a tax on producers based on the amount of pollution caused in the production process?
Options
A Firms have a financial incentive to reduce pollution.
B It is relatively hard to administer and monitor this tax scheme.
C Some firms cause less pollution than others.
D Taxes on pollution reduce negative production externalities.
The diagram shows the marginal private costs (MPC) and marginal private benefits (MPB) of a product. Consumers initially estimate that marginal private costs are at MPC1 and marginal private benefits are at MPB1.
What is the impact on the market demand for the product if the consumer realises they have underestimated the MPC of buying the product but not the MPB?
Options
A The consumer underconsumes the product by Q1Q2.
B The consumer underconsumes the product by Q1Q3.
C The consumer overconsumes the product by Q1Q3.
D The consumer overconsumes the product by Q1Q4.
Good X is a popular product that creates a negative externality when it is consumed.
The government wants to reduce the consumption of good X significantly.
Under which circumstances is the government most likely to meet its aim?
Options
| government policy | price elasticity of demand for good X | |
|---|---|---|
| A | subsidy | more than 1 |
| B | subsidy | less than 1 |
| C | indirect tax | more than 1 |
| D | indirect tax | less than 1 |
When might a moral hazard occur?
Options
A When a consumer does not have full information about a product.
B When a person undertakes an activity that causes harm to another person.
C When a person undertakes a risky activity, knowing another person bears the risk.
D When the seller of a product has more information than the buyer.
The marginal social benefit of consuming a drink is less than the marginal private benefit.
What would be the best policy to improve resource allocation in this market?
Options
A give a subsidy to the producers of the drink
B increase competition in the drink industry
C impose a maximum price for the drink above the market equilibrium price
D impose a per unit tax on the drink
The diagram shows the marginal private costs (MPC) and marginal private benefits (MPB) of a product. Consumers initially estimate that marginal private costs are at MPC1 and marginal private benefits are at MPB1.
What is the impact on the market demand for the product if the consumer realises they have underestimated the MPC of buying the product but not the MPB?
Options
A The consumer underconsumes the product by Q1Q2.
B The consumer underconsumes the product by Q1Q3.
C The consumer overconsumes the product by Q1Q3.
D The consumer overconsumes the product by Q1Q4.
Good X is a popular product that creates a negative externality when it is consumed.
The government wants to reduce the consumption of good X significantly.
Under which circumstances is the government most likely to meet its aim?
Options
| government policy | price elasticity of demand for good X | |
|---|---|---|
| A | subsidy | more than 1 |
| B | subsidy | less than 1 |
| C | indirect tax | more than 1 |
| D | indirect tax | less than 1 |
What is the most likely combination of circumstances leading to a good being under-consumed?
Options
| the good is a demerit good | there are external benefits in consumption | |
|---|---|---|
| A | no | no |
| B | no | yes |
| C | yes | yes |
| D | yes | no |
A cost–benefit analysis is carried out on the construction of a hydroelectric power station.
Under which circumstances would the scheme be most likely to be approved?
Options
A Private benefits are greater than private costs.
B Social benefits are greater than social costs.
C Social benefits are greater than external costs.
D External costs are greater than external benefits.