Take this Quiz: A-Level Economics: Externalities and Market Failure | Zestly

Question 1

In the context of externalities, which of the following best defines the relationship between Marginal Social Cost (MSC) and Marginal Private Cost (MPC) when a negative production externality exists?

Accepted Answer

MSC is equal to MPC plus the Marginal External Cost (MEC).

Question 2

Which of the following scenarios represent a positive externality in consumption?

Accepted Answer

An individual receiving a vaccination, reducing the risk of disease transmission to others.

Question 3

Why does a free market result in the over-production of goods with negative production externalities?

Accepted Answer

Producers only consider their private costs, ignoring the external costs imposed on society.

Question 4

Which of the following statements accurately describe the characteristics of merit goods?

Answer

They are often under-consumed in a free market due to imperfect information.

Answer

They provide positive externalities when consumed.

Answer

They are non-excludable and non-rivalrous in nature.

Answer

They are goods that the government believes should be consumed more than the market provides.

Answer

They are always provided exclusively by the public sector.

Question 5

What is the primary reason for the welfare loss associated with a negative externality in production?

Answer

The price of the good is too low for the firm to make a profit.

Answer

The output level is higher than the socially optimal level, where MSC exceeds MSB.

Answer

The government fails to tax the firm sufficiently to cover its costs.

Answer

Consumers are unable to purchase the good due to high prices.