Externality & Internality

Free 20+ Externality & Internality MCQs for PPSC, FPSC, NTS, and Pakistan government job tests. Practise below with answers and explanations.

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1.What is the primary function of tradable pollution permits?

They decrease motivation for technological advancements aimed at lowering pollution.They establish the cost associated with pollution emissions.They influence the market demand for pollution allowances.They limit the total amount of pollution that can be emitted.

2.The gas-guzzler tax imposed on new vehicles with poor fuel efficiency serves as an example of which economic concept?

tradable emissions allowancesa strategy to address a positive external benefitimplementation of the Coase theorema measure to internalize a negative externality

3.Roberto and Thomas share a university dorm room. Roberto enjoys playing loud music, valuing it at €100, while Thomas prefers silence, valuing peace at €150. Assuming Roberto has the legal right to play loud music and there are no costs involved in negotiation, which of the following best describes an efficient outcome to this externality issue?

Thomas compensates Roberto with an amount between €100 and €150, and Roberto keeps playing loud music.Roberto pays Thomas €150 and continues to play loud music.Thomas offers Roberto a payment ranging from €100 to €150, leading Roberto to stop playing loud music.Roberto pays Thomas €100 and ceases playing loud music.None of the above accurately describes the efficient resolution.

4.Which of the following is not classified as a transaction cost borne by parties when negotiating to address a pollution externality?

Expenses related to legal counsel feesExpenditures for actually decreasing the pollutionCosts associated with ensuring the contract is upheldCosts arising from the involvement of many affected partiesAll of the above are examples of transaction costs

5.According to the Coase theorem, under what condition can private individuals effectively resolve externality issues?

When transaction costs are absent.When all parties involved possess equal bargaining power.When the affected party initially holds the property rights to be free from interference.When numerous parties are impacted by the externality.When the government mandates negotiation among the parties.

6.What type of external effect is created when a person purchases a vehicle in a heavily trafficked city?

A beneficial side effectAn innovation spilloverAn optimal market resultAn adverse external impact

7.Which public policy is most effective in addressing a negative externality by internalizing its social costs?

Let the government assume control over the production of the product causing the externalityProhibit the manufacture of all products that generate negative externalitiesImpose a tax on the productProvide financial support to the product

8.What is the effect of an unaddressed negative externality on the market quantity produced?

The efficient quantity surpasses the market equilibrium quantity.The market quantity may be greater or less than the efficient quantity.The market quantity matches the efficient quantity exactly.The market quantity is higher than the efficient quantity.None of the above.

9.What results from the presence of a negative externality in a market?

The social cost curve lies beneath the supply curve (private cost curve) for the productNone of the provided options are correctThe social cost curve is positioned below the supply curve (private cost curve) for the productThe social value curve is higher than the demand curve (private value curve) for the product

10.Consider an industry that generates a negative externality, such as pollution. To address this issue, common approaches include regulatory mandates, Pigovian taxes, and tradable pollution permits. From the perspective of economists, how would these methods be ranked in terms of efficiency, ease of enforcement, and incentives for the industry to reduce pollution over time (from most preferred to least preferred)?

Pigovian taxes first, followed by regulatory mandates, then tradable pollution permits.Tradable pollution permits ranked highest, then Pigovian taxes, and lastly regulatory mandates.Tradable pollution permits first, regulatory mandates second, and Pigovian taxes last.Regulatory mandates at the top, followed by tradable pollution permits, then Pigovian taxes.All methods would be equally preferred because each achieves the same outcome.

11.When affluent graduates donate funds to their alma mater to help lower tuition fees for current students, this action exemplifies which of the following?

an effort to internalize a positive externalityan effort to internalize a negative externalitythe implementation of a Pigouvian taxa regulatory command-and-control measurea market-based subsidy program

12.What is the primary effect of a Pigovian tax on pollution?

Establishes a fixed limit on pollution levelsDecreases motivation for developing cleaner technologiesAssigns a cost to pollution emissionsRegulates the market demand for pollution permits

13.Which statement accurately describes the relationship between tradable pollution permits and Pigouvian taxes?

Every statement listed here is accurate.Both Pigouvian taxes and tradable pollution permits establish an efficient market mechanism for controlling pollution.Tradable pollution permits only reduce pollution effectively if initially allocated to firms with the lowest abatement costs.Regulators must fully understand the demand for pollution rights to determine the pollution level using tradable permits.Pigouvian taxes are generally more effective than tradable permits at achieving a precise pollution reduction target.

14.Roberto and Thomas share a university dormitory. Roberto values playing loud music at €100, while Thomas values peace and quiet at €150. Which statement accurately reflects the efficient outcome?

Roberto should cease playing loud music to maximize efficiency, no matter who holds the right to control noise levels.Roberto continuing to play loud music is the efficient choice.Roberto should stop playing loud music only if Thomas owns the right to maintain peace and quiet.Roberto should stop playing loud music solely if he possesses the right to play loud music.None of the above statements are correct.

15.Which public policy is best suited to promote a positive externality?

Prohibit the product responsible for the externalityImpose a tax on the productProvide financial support or subsidies for the productHave the government manufacture the product until the marginal benefit equals zero

16.Which approach leads to the most cost-effective pollution control system?

Authorities mandate specific pollution reduction levels for each polluter.Zero environmental pollution is allowed under any circumstance.All polluters cut their emissions by the same fixed quantity.Polluters who can reduce emissions at the lowest expense cut back the most.

17.Why does the government implement technology policies?

By distributing tradable technology permits exclusively to advanced tech sectors.To address and incorporate the positive externalities generated by technology-driven industries.To encourage private sector initiatives in resolving technology-related externalities.To manage the negative externalities caused by pollution from industrial activities.To regulate the import and export of technological products.

18.What is the effect of an unaddressed positive externality on the relationship between equilibrium and optimal quantities?

The quantity at equilibrium surpasses the socially optimal quantity.The equilibrium quantity matches the socially optimal quantity.The socially optimal quantity is greater than the equilibrium quantity.The equilibrium quantity can be either higher or lower than the optimal quantity.

19.What effect does a positive externality have on the social value curve compared to the private demand curve for a good?

It causes the social cost curve to lie above the private cost (supply) curve.None of the provided options are correct.It results in the social value curve being positioned above the private demand curve for the good.It leads to the social value curve falling below the private demand curve for the good.

20.What is the definition of an externality?

The advantage gained by the purchaser in a transactionThe expense incurred by the seller in a market exchangeNone of the above choicesThe payment made to a company's outside advisorsThe unaddressed effect of an individual's actions on the welfare of others

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Externality &amp; Internality

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Practice questions

1.What is the primary function of tradable pollution permits?

2.The gas-guzzler tax imposed on new vehicles with poor fuel efficiency serves as an example of which economic concept?

4.Which of the following is not classified as a transaction cost borne by parties when negotiating to address a pollution externality?

5.According to the Coase theorem, under what condition can private individuals effectively resolve externality issues?

6.What type of external effect is created when a person purchases a vehicle in a heavily trafficked city?

7.Which public policy is most effective in addressing a negative externality by internalizing its social costs?

8.What is the effect of an unaddressed negative externality on the market quantity produced?

9.What results from the presence of a negative externality in a market?

11.When affluent graduates donate funds to their alma mater to help lower tuition fees for current students, this action exemplifies which of the following?

12.What is the primary effect of a Pigovian tax on pollution?

13.Which statement accurately describes the relationship between tradable pollution permits and Pigouvian taxes?

14.Roberto and Thomas share a university dormitory. Roberto values playing loud music at €100, while Thomas values peace and quiet at €150. Which statement accurately reflects the efficient outcome?

15.Which public policy is best suited to promote a positive externality?

16.Which approach leads to the most cost-effective pollution control system?

17.Why does the government implement technology policies?

18.What is the effect of an unaddressed positive externality on the relationship between equilibrium and optimal quantities?

19.What effect does a positive externality have on the social value curve compared to the private demand curve for a good?

20.What is the definition of an externality?

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