1. How do externalities affect markets?

If a negative externality in production is present in a market, then

a. The private cost of production will be different than the social cost of production

b. the private benefit from consumption will be different than the social benefit from consumption

c. consumer and producer surplus will be maximized

d. the social cost of production will be equal to the social benifit from consumption.

e. the private cost of production will be equal to the private benefit from consumption

2. Suppose a common resource –wood in a public forest- is being overused because residents consider the benefit of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being overused?

To prevent overuse of the common resource,

a. the government could subsidize chopping down trees

b. the government could impose restrictions on access to wood in the forest.

c. the community could create transactions cost to private bargaining.

d. the community could establish social customs prohibiting the use of permits required to chop down trees

e. the government could make a binding commitment to keep the forest lands public.

3. What must be true for the Coase Theorem to hold?

For the Coase Theorem to hold,

a.The government must monitor the negotiations to obtain an agreement

b. The parties to an agreement cannot know the full cost of the externality

c. Transaction cost to obtain an agreement must be high

d. All parties to an agreement must be willing to accept a reasonable agreement

e. The externality must be generated by the consumption of a good or service