Externalities: Practice Questions

• a.

  The total cost to the government for providing public services.

• b.

  The price a consumer pays at the point of sale for a finished good.

• c.

  The costs a business pays for its electricity and raw materials.

• d.

  Costs that are paid by third parties who are not involved in the production or consumption of a product.

• a.\( \text{Social Benefits} = \text{Private Benefits} + \text{External Benefits} \)
• b.\( \text{Social Benefits} = \text{Private Benefits} \times \text{External Benefits} \)
• c.\( \text{Social Benefits} = \text{External Benefits} - \text{Private Benefits} \)
• d.\( \text{Social Benefits} = \frac{\text{Private Benefits}}{\text{External Benefits}} \)

• a.The Marginal Private Benefit must be reduced until it is equal to the Marginal External Benefit.
• b.The quantity consumed must increase to a point where Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC).
• c.The price must increase significantly to reduce the external costs of production.
• d.The supply curve must shift to the left to eliminate the free rider problem.

• a.Social benefit
• b.External benefit
• c.Private benefit
• d.External cost

• a.

  Because private benefits are greater than social benefits, leading to overconsumption.

• b.

  Because the government is forced to ban the production of the good to protect consumers.

• c.

  Because the social cost is always higher than the private cost for these goods.

• d.

  Because the market equilibrium results in a quantity that is lower than the socially optimum level.

Write your answer out first, then check it against the worked solution.