Microeconomics, externalities, final exam practice problems
(The attached PDF file has better formatting.)
*Question 1.1: Positive Externalities
Which of the following is true regarding positive externalities?
The Coase theorem posits that externalities can be priced by the private market.
Firms which create positive externalities generally pay lower wages.
Social marginal cost is less than private marginal cost if a firm creates positive externalities.
If a firm creates positive externalities, it produces too little in a perfectly competitive market.
Efficiency is maximized if the government pays firm to produce positive externalities.
Answer 1.1: C
Competitive behavior results in underproduction, since it does not consider the gains created by the externalities.
*Question 1.2: Positive Externalities
Which of the following is an example of positive externalities?
Job training for immigrants reduces the likelihood of criminal behavior by their children.
Free abortions reduces the cost of raising children.
Dental insurance reduces the likelihood of rotting teeth.
Attainment of an FSA eliminates the need for continual study.
Incentive stock options increase the likelihood of good performance.
Answer 1.2: A
Job training for immigrants provides income for them and increases social welfare by their work and contributions to society (like taxes). A side effect is that children of employed parents are less likely to engage in criminal behavior.