Practice Questions
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What is the primary reason that negative externalities lead to market failure?
Negative externalities happen when a business does not pay for the harm it causes to others. Other options are incorrect because This answer suggests ...
How does the Coase theorem suggest that government intervention can address negative externalities in a market failure scenario?
The Coase theorem says that if people can talk and negotiate, they can solve problems caused by negative externalities. Other options are incorrect be...
Which of the following scenarios best illustrates the need for government intervention due to negative externalities in a market?
When a factory pollutes a river, it harms the health of people nearby. Other options are incorrect because Opening a restaurant creates jobs, which is...
How do negative externalities affect social costs, and what role does government intervention play in regulating these effects?
Negative externalities raise social costs. Other options are incorrect because This answer suggests that negative externalities don't need government ...
How do regulations aimed at reducing negative externalities affect social costs and overall welfare in an economy?
Regulations help lower social costs by making businesses pay for the harm they cause. Other options are incorrect because This answer suggests that re...
Which of the following is an example of a negative externality?
A factory polluting a river is a negative externality. Other options are incorrect because Some might think that a new park is bad for property values...
What is a primary cause of market failure in an economy?
Negative externalities happen when a business causes harm to others, like pollution. Other options are incorrect because Some might think perfect comp...
Which of the following best describes social costs in the context of negative externalities?
Social costs include all costs to society. Other options are incorrect because This option only talks about what producers pay; This choice focuses on...
Negative externalities in economics are to market inefficiency as a car running out of gas is to what?
When a car runs out of gas, it needs more fuel to work again. Other options are incorrect because Some might think that a car can keep driving without...
How can government intervention effectively address the inefficiencies caused by negative externalities?
Taxes can help make businesses pay for the harm they cause. Other options are incorrect because Increasing subsidies means giving money to businesses;...
Which of the following scenarios best represents a negative externality?
When a factory pollutes the air, it harms the health of people living nearby. Other options are incorrect because Some might think that improvements l...
A factory produces widgets that emit pollution affecting nearby residents' health. The factory's production costs are low, but the health costs to the community are significant and not factored into the price of widgets. What is the most effective way for the government to address this negative externality to achieve a socially optimal level of output?
Imposing a tax on the factory makes them pay for the pollution they cause. Other options are incorrect because Giving money to the factory to make mor...
Negative externalities create a situation where the __________ costs of production exceed the private costs, leading to market inefficiencies.
Social costs include all costs to society, not just the costs to the producer. Other options are incorrect because Total costs might sound right, but ...
How does the presence of negative externalities, like pollution, typically affect market equilibrium?
Negative externalities, like pollution, mean that the costs of production are not fully paid by the producers. Other options are incorrect because Som...
If the production of a good leads to significant pollution, resulting in increased healthcare costs for the community, which of the following best explains the underlying cause of this market failure?
The costs of pollution are not added to the price of the product. Other options are incorrect because This answer suggests that all costs are included...
Which of the following statements accurately describe the implications of negative externalities on market efficiency? Select all that apply.
Negative externalities affect how resources are used in the market. Other options are incorrect because Some might think negative externalities mean t...
Arrange the following steps in the correct order to illustrate the process of addressing negative externalities in a market economy: A) Government imposes a tax on the good or service, B) Identification of the negative externality, C) Reduction in the quantity produced to achieve social optimum, D) Market price reflects true social costs.
First, we need to find out what the negative externality is. Other options are incorrect because This order suggests that the tax comes before identif...
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