MCQs of Economics - Externality & Internality – Multiple Choice Question

Question 1 of 20

1. Question

An externality is:

the benefit that accrues to the buyer in a market
the cost that accrues to the seller in a market
none of these answers
the compensation paid to a firm's external consultants.
The uncompensated impact of one person's actions on the well-being of a bystander

Question 2 of 20

2. Question

A negative externality generates:

a social cost curve that is below the supply curve (private cost curve) for a good
none of these answers
a social cost curve that is below the supply curve (private cost curve) for a good
a social value curve that is above the demand curve (private value curve) for a good

Question 3 of 20

3. Question

A positive externality generates:

a social cost curve that is above the supply curve (private cost curve) for a good
none of these answers
a social value curve that is above the demand curve (private value curve) for good
a social value curve that is below the demand curve (private value curve) for a good

Question 4 of 20

4. Question

A negative externality (that has not been internalized) causes the

optimal quantity to exceed the equilibrium quantity.
equilibrium quantity to be either above or below the optimal quantity
equilibrium quantity to equal the optimal quantity
equilibrium quantity to exceed the optimal quantity

Question 5 of 20

5. Question

A positive externality (that has not been internalized) caused the

equilibrium quantity to exceed the optimal quantity
equilibrium quantity to equal the optimal quantity
optimal quantity to exceed the equilibrium quantity
equilibrium quantity to be either above or below the optimal quantity

Question 6 of 20

6. Question

To internalize a negative externality an appropriate public policy response would be to

have the government take over the production of the good causing the externality
ban the production of all goods creating negative externalities
tax the good
subsidize the good

Question 7 of 20

7. Question

The government engages in a technology policy

by allocating tradable technology permits to high technology industry.
to internalize the positive externality associated with technology-enhancing industries.
to help stimulate private solution to the technology externality
to internalize the negative externality associated with industrial pollution

Question 8 of 20

8. Question

When an individual buys a car in a congested urban area, it generates

a positive externality
a technology spillover
an efficient market outcome.
a negative externality

Question 9 of 20

9. Question

The most efficient pollution control system would ensure that

the regulators decide how much each polluter should reduce its pollution.
no pollution of the environment is tolerated
each polluter reduce its pollution an equal amount
the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount

Question 10 of 20

10. Question

According to the Coase theorem, private parties can solve the problem of externalities if:

there are no transaction costs.
each affected party has equal power in the negotiations.
the party affected by the externality has the initial property right to be left alone.
There are a large number of affected parties.
the government requires them to negotiate with each other

Question 11 of 20

11. Question

To internalize a positive externality an appropriate public policy response would be to:

ban the good creating the externality
tax the good
subsidize the good
have the government produce the good until the value of an additional unit is zero

Question 12 of 20

12. Question

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?

costs incurred due to lawyers fees
costs incurred to reduce the pollution
costs incurred to enforce the agreement
costs incurred due to a large number of parties affected by the externality
All of these answers are considered transaction costs

Question 13 of 20

13. Question

Roberto and Thomas live in a university hall of residence Roberto values playing loud music at a value of €100. Thomas values pease and quiet at a value of €150. Which of the following statements is true?

It is efficient for Roberto to stop playing loud music regardless of who has the property right to the level of sound
it is efficient for Roberto to continue to play loud music
It is efficient for Roberto to stop playing loud music only if Thomas has the property right to peace and quiet
It is efficient for Roberto to stop playing loud music only if Roberto has the property right to play loud music

Question 14 of 20

14. Question

Roberto and Thomas live in a university hall of residence. Reberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true about an efficient solution to this externality problem if Roberto has the right to play loud music and if there are no transaction costs?

Thomas will pay Roberto between €100 and €150 and Roberto will continue to play loud music
Roberto will pay Thomas €150 and Roberto will continue to play loud music
Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music
Roberto will pay Thomas €100 and Roberto will stop playing loud music

Question 15 of 20

15. Question

Which of the following is true regarding tradable pollution permits and Pigovian taxes?

All of these answers are true
Pigovian taxes and tradable pollution permits create an efficient market for pollution.
Tradable pollution permits efficiently reduce pollution only if they are initially distributed to the firms that can regulator pollution at the lowest cost.
To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights.
Pigovian taxes are more likely to reduce pollution to a targeted amount than tradable pollution permits.

Question 16 of 20

16. Question

The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an example of

a tradeable pollution permit.
an attempt to internalize a positive externality
an application of the Coase theorem
an attempt to internalize a negative externality.

Question 17 of 20

17. Question

A pigovian tax on pollution:

Sets the quantity of pollution
reduces the incentive for technological innovations to further reduce pollution
Sets the price of pollution
determines the demand for pollution rights.

Question 18 of 20

18. Question

Tradable pollution permits

reduce the incentive for technological innovations to further reduce pollution.
set the price of pollution.
determine the demand for pollution rights.
Set the quantity of pollution

Question 19 of 20

19. Question

When wealthy alumni provide charitable contributions to their universities to reduce the tuition payments of current students it is an example of:

an attempt to internalize a positive externality
an attempt to internalize a negative externality
a Pigovian tax
a command-and-control policy

Question 20 of 20

20. Question

Suppose an industry emits a negative externality such a pollution and the possible methods to internalize the externality are command-and-control policies, pigovian taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency ease of implementation and the incentive for the industry to further reduce pollution in the future they would probably rank them in the following order (from most favoured to least favoured):

Pigovian taxes, command-and-control policies, tradable pollution permits.
tradable pollution permits, Pigovian taxes, command-and-control policies
tradable pollution permits command-and-control policies, Pigovian taxes.
command-and-control policies, tradable pollution permits, Pigovian taxes.
They would all rank equally high because the same result can be obtained from any one of the policies

MCQs of Economics – Externality & Internality

Economics - Externality & Internality

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