28 Questions
Which of the following best defines a normative economic principle?
A principle that says how people should behave
What does welfare economics study?
How the allocation of resources affects economic wellbeing
How is consumer surplus measured using the demand curve?
The area below the demand curve and above the price
Which of the following is an advantage of standards over market-based instruments?
Standards are easy to understand
What is a disadvantage of standards compared to market-based instruments?
Firms have no incentives to reduce pollution beyond the standard
What do tradable pollution permits combine?
Command-and-control approach with market-based instruments
According to the text, what does the area below the price and above the supply curve measure in a market?
Producer surplus
What kind of allocation would a fictional benevolent social planner choose to maximize society's well-being?
The quantity supplied and demanded must maximize total surplus received by all members of society.
What does the equilibrium allocation in a perfectly competitive market achieve?
Maximizes total surplus
What conditions must be satisfied for the equilibrium outcome to be an efficient allocation?
All of the above
Which of the following is true about the social optimum in the presence of a negative externality?
The social optimum is determined by the intersection of the social cost and demand curves.
What is the effect of a positive externality in consumption?
The demand curve does not change from the situation without external benefit.
What is true about the market equilibrium in the presence of a positive externality?
The market participants trade too high a quantity.
What is one way to deal with positive externalities in consumption?
Internalising the externalities by subsidising the sellers.
According to welfare economics, what does consumer surplus measure in a market?
The net benefit that buyers receive from a good
What does producer surplus measure in a market?
The net benefit that sellers receive from a good
What does the area below the demand curve and above the price measure in a market?
Consumer surplus
Which of the following is a disadvantage of standards compared to market-based instruments?
Firms have incentives to reduce pollution beyond the standard
What do tradable pollution permits combine?
Command-and-control with market-based instruments
What is the effect of a positive externality in consumption?
Consumers consume more than the socially optimal level
According to the text, what does the area below the price and above the supply curve measure in a market?
Producer surplus
What kind of an allocation would a fictional benevolent social planner choose to maximize society's well-being?
Allocation that maximizes total surplus
What allocation is chosen in a competitive market?
Allocation based on demand of goods
What is the effect of a negative externality in production?
Increase in social cost
Which of the following is true about the social optimum in the presence of a positive externality?
The socially optimal level is larger than the equilibrium quantity.
What is one way to deal with negative externalities in production?
Imposing a tax on the producer to reduce the equilibrium quantity.
What is one way to deal with positive externalities in consumption?
Subsidizing the buyers to increase the equilibrium quantity.
What is the command-and-control approach in environmental policy?
Setting a standard and monitoring and enforcing it.
Test your knowledge on negative externalities and social optimization in this quiz. Learn how the social cost and demand intersect to determine the socially optimal level, and understand why it is often lower than the equilibrium level.
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