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Externalities

Q61 In a free-market economy, externalities refer to which one of the following?

The conditions (environmental or economic) that are beyond the control of firms and consumers

Q62 A negative externality from consumption occurs when the consumption of a given good or service imposes a cost on others. Which of the following would potentially cause a negative externality from consumption?

1. Smoking

2. Fitting double-glazing 3. Binge drinking 4. Eating unhealthy food

5. Buying a vaccine 6. Cycling to work 7. Attending a premier league football match

  1. 1, 3, 4 and 7

Q63 Which of the following might represent a negative externality from production?

1. Using a higher proportion of part time employees.

2. Discharging untreated effluents from production directly in to the environment. 3. Outsourcing production to overseas suppliers who use cheap labour. 4. Operating plant & heavy machinery around the clock near residential areas. 5. The selling of untested products. 6. Selling contaminated food products.

2 And 4 only

Q64 Which of the following are incorrect?

  1. Private benefits are received directly by the parties involved in a market transaction.

  2. Private costs are incurred directly by the parties involved in a market transaction.

  3. Those parties not involved in a market transaction receive social benefits directly & indirectly.

  4. Social costs are things like taxation and local council rates.

  5. Externalities occur through a failure of the pricing mechanism to reflect the true cost or benefits of a market exchange.

Q65 With respect to marginal social costs (MSC) and marginal social benefits (MSB), which of the following statements are incorrect?

1. MSC equals the additional cost to society of doing more or less of a given economic activity; it includes the private costs plus the social costs.

2. MSC equals the negative costs to society of a given activity; to find the total cost to society (of any given activity) we have to add the private costs to MSC. 3. To appreciate the extent of a negative externality, at a given output we can deduct the private costs from MSC.

4. MSB equals the additional benefit to society of any given economic activity, if positive externalities are depicted using a diagram, MSB would have a value which was higher than the private benefits. 5. MSB includes the private benefits plus the social benefits of any given economic activity.

6. In stating an activity generates a social dis-benefit we are in fact saying the activity is incurring a social cost, which would then be included in any value for MSC.

  1. 3 and 4 are incorrect

  2. 1 and 5 are incorrect

  3. 2 and 6 are incorrect

  4. Only 2 is incorrect

  5. Only 4 is incorrect

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