16 Questions
What is the main topic of the lecture 6 in the economic policy course?
Externalities and market failure
In the context of externalities, what are private remedies primarily concerned with?
Addressing external effects to prevent market failure
Which policy instrument involves imposing charges on activities that cause negative externalities?
Pigouvian taxes
According to the compulsory reading, which book and chapter discusses externalities in public economics?
Intermediate Public Economics, Chapter 8
What is the definition of an externality in economics?
An externality is present when an economic agent’s welfare is directly affected by the action of another agent in the economy.
What are the two categories of externalities in economics?
Production and consumption
In which type of externality does the externality affect profit?
Production externality
Which of the following is an example of a negative consumption externality?
Consumers polluting a river, harming a fishery
What may result if economic agents do not consider all the effects of their actions when making decisions?
Underproduction of goods generating negative externalities
What does the utility function 𝑈1 = 𝑥1 + 𝑢1 (𝑧1) + 𝑣1 (𝑧2) represent?
Consumer 1’s utility function with positive external effect
In competitive equilibrium conditions, what does 𝑢ℎ′ 𝑧 ℎ = 1 represent?
Private marginal cost equals private marginal benefit
What is the key presumption on which the efficiency of the competitive market is based?
Each consumer’s welfare depends only on his/her own consumption decision.
What kind of market failure may occur if economic agents do not consider all the effects of their actions when making decisions?
Underproduction due to positive externalities
In an efficient allocation, what does 1 + 𝑈2 represent?
Consumer 2’s utility function without any external effect
What happens to equilibrium prices if external effects are considered in the determination?
Equilibrium prices do not change.
What does the equation 𝑥1 + 𝑧1 + 𝑥2 + 𝑧2 = 𝜔1 + 𝜔2 represent?
The sum of private marginal costs and benefits.
This quiz covers the topic of externalities in economic policy, including market failure, private remedies, the Coase theorem, mergers, social conventions, and corrective policy instruments such as Pigouvian taxes and subsidies.
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