Externalities in Market Transactions Quiz

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What does the supply curve (Sprivate) show?

Quantity demanded at each price

Quantity supplied taking social costs into account

Quantity supplied by firms considering private costs only (correct)

Quantity demanded considering external benefits

Where does the market equilibrium occur in this scenario?

$625 and a quantity of 47,000

$650 and a quantity of 45,000 (correct)

$550 and a quantity of 50,000

$700 and a quantity of 40,000

What does the firm's supply curve become when external costs are taken into account?

Ssocial (correct)

Smarket

Sprivate

Sexternal

What happens to the equilibrium price and quantity when only private costs are taken into account?

Equilibrium price decreases, equilibrium quantity increases Signup and view all the answers

What does the negative externality in this situation refer to?

Increase in noise pollution near the firm's location Signup and view all the answers

Why is it important to identify the equilibrium price and quantity when taking social costs into account?

To understand how external factors impact the market Signup and view all the answers

What happens when externalities exist?

Private costs are the same as social costs Signup and view all the answers

In the presence of pollution as an externality, what happens to the supply curve?

It no longer represents all social costs Signup and view all the answers

What is the consequence of market failure due to externalities?

Firms underproduce goods Signup and view all the answers

Why do economists refer to externalities as a market failure?

Because externalities represent a case where markets don't consider all social costs Signup and view all the answers

What would happen if firms were required to pay the social costs of pollution?

They would produce less product and charge a higher price Signup and view all the answers

How does the presence of pollution impact the quantity of products produced in a market?

Leads to overproduction and lower prices Signup and view all the answers

What is an externality in economics?

An indirect cost or benefit to an uninvolved third party arising from another party's activity. Signup and view all the answers

Which of the following best describes a negative externality?

A cost imposed on a third party due to an economic activity. Signup and view all the answers

What is an example of a negative externality mentioned in the text?

Air pollution from motor vehicles. Signup and view all the answers

How are externalities sometimes referred to in market transactions?

Spillovers Signup and view all the answers

What do economists illustrate with a demand and supply diagram when it comes to externalities?

Social costs of production including external pollution costs Signup and view all the answers

Which of the following best describes a positive externality?

A benefit experienced by a third party from an economic activity. Signup and view all the answers