Microeconomics — Chapter 6: Public Goods and Externalities
Microeconomics — Chapter 6: Public Goods and Externalities. Practice questions to deepen understanding of public goods and externalities. Online economics practice with full solutions and step-by-step explanations.
Public goods and externalities practice — public good, free-rider problem, externalities, market failures.
🏛️ A pure public good is characterized by:
💡 Solution:
Pure public good: consumption by one does not reduce it for others + cannot prevent consumption.
🛡️ Example of a public good:
💡 Solution:
The army defends everyone - non-rival and non-excludable.
🚗 The free rider problem is:
💡 Solution:
Because exclusion is not possible, people prefer to enjoy for free.
📊 The free market provides public goods:
💡 Solution:
The free rider problem causes a market failure.
🏛️ Who provides public goods?
💡 Solution:
The government can compel payment through taxes.
📊 The summation of demand for a public good is:
💡 Solution:
Everyone consumes the same quantity, the willingness to pay is summed (vertically).
🌍 An externality is:
💡 Solution:
An externality = a benefit or harm to a party that does not participate in the transaction.
🏭 Example of a negative externality:
💡 Solution:
Pollution harms residents who are not connected to the production.
💉 Example of a positive externality:
💡 Solution:
Whoever gets vaccinated also protects others from infection.
📊 In a negative externality:
💡 Solution:
Social cost = private cost + external cost.
📊 In a positive externality:
💡 Solution:
Social benefit = private benefit + external benefit.
🏭 The market produces a good with a negative externality:
💡 Solution:
The producer does not take the external cost into account = produces too much.
💉 The market produces a good with a positive externality:
💡 Solution:
The producer is not compensated for the external benefit = produces too little.
💰 A Pigouvian tax is used to correct:
💡 Solution:
Pigouvian tax = a tax in the size of the marginal external cost.
🎁 A subsidy is used to correct:
💡 Solution:
A subsidy encourages additional production of a good with an external benefit.
📐 The size of a Pigouvian tax should be:
💡 Solution:
Tax = MEC in order to internalize the external cost.
📜 The Coase theorem claims that:
💡 Solution:
Coase: if property rights are defined and there are no transaction costs, bargaining will solve it.
🐟 Fish in the sea are an example of:
💡 Solution:
A fish that is caught is unavailable to others (rival), but it is hard to prevent fishing (non-excludable).
📺 Cable television is an example of:
💡 Solution:
One person's viewing does not interfere with others, but it is possible to prevent viewing by those who do not pay.
🍞 Bread is an example of:
💡 Solution:
Bread that is eaten is unavailable to others + it is possible to prevent it from those who do not pay.
🔺 A negative externality creates:
💡 Solution:
Overproduction creates a deadweight loss.
📐 The socially efficient quantity is determined when:
💡 Solution:
Social efficiency: marginal social benefit = marginal social cost.
🌍 A market failure is:
💡 Solution:
Market failure = the market fails to reach an efficient outcome.
📊 The financing of public goods is done through:
💡 Solution:
The government collects taxes in order to finance public goods.
🎯 "Internalizing an externality" means:
💡 Solution:
Internalization = causing the producer to take into account the effect on others.