Exercise 1: True or False (4 points) a) An externality is: 1. the benefit that a
ID: 1142880 • Letter: E
Question
Exercise 1: True or False (4 points) a) An externality is: 1. the benefit that accrues to the buyer in a market. 2. the cost that accrues to the seller in a market 3. the unanticipated effect on a business of a decision that it makes. 4. the compensation paid to a firm's external consultants. 5. the uncompensated impact of one person's actions on the well-being of a bystander b) A negative externality generates: 1. a social cost curve that is above the supply curve (private cost curve) for a good. 2. a value to a consumer that is less than the total consumer surplus. 3. a social cost curve that is below the supply curve (private cost curve) for a good. 4. a social value curve that is above the demand curve (private value curve) for a good. c) A positive externality (that has not been internalized) causes the: 1. equilibrium quantity to exceed the optimal quantity. 2. equilibrium quantity to equal the optimal quantity 3. optimal quantity to exceed the equilibrium quantity. 4. equilibrium quantity to be either above or below the optimal quantity. d) Which of the following is not considered a transaction cost incurred by parties in the process of contracting to internalize a pollution externality? 1. costs incurred due to lawyers' fees. 2. costs incurred to reduce the pollution 3. costs incurred to enforce the agreement. 4. costs incurred due to a large number of parties affected by the externality. 5. All of these answers are considered transaction costs.Explanation / Answer
a) 5 is correct
Externality is the effect of one's action on others.
b) 1 is correct
Social cost is the summation of external cost and private marginal cost which makes social cost greater than private cost.
c) 3 is correct
Optimal quantity is greater than equilibrium quantity in presence of positive externality.
d) 2 is correct
Cost incurred to reduce pollution is not a transaction cost.
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