✏ Externalities Practice

✏️ When negative externalities are present the private market output level will be

1. too low.
2. too high.
3. socially optimal.
4. at the intersection of demand and MSC.
5. at the point that minimizes the marginal external cost.

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Answer: B The private level of output will be too high, since the parties generating the negative externality do not take into account the extra cost they are imposing on either consumers or producers.  ✅

✏️ The Coase Theorem states that

1. regardless of how property rights are assigned, the outcome will be efficient if transactions costs of bargaining are zero.
2. if property rights are assigned to the party imposing a negative externality on society, an efficient outcome is achievable.
3. efficiency can be achieved when a single owner manages the common property resource.
4. with incomplete information, standards are more efficient than emissions fees.
5. None of the above is correct.

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Answer: A The Coase theorem is stated in the text: “When parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient, regardless of how the property rights are specified.”  ✅

✏ Which of the following are examples of negative externalities?

1. An electronics manufacturer dumps solvents on the ground that end up in the water supply.
2. I plant an attractive flowerbed in the front yard.
3. A policy of peanut quotas in the U.S. causes the domestic price of peanut butter to rise.
4. (A) and (B)
5. (A) and (C)

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Answer: A
Choice (B) is an example of a positive externality, while (C) merely illustrates the effect of an increase in the price of an input.  ✅