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- Externality & Internalityeconomics-mcqs › externality-internality
- Published
- 1 Jun 2019
- Last updated
- 28 May 2026
What is the effect of an unaddressed positive externality on the relationship between equilibrium and optimal quantities?
Multiple choice question for Externality & Internality. Select an option, then review the explanation below.
Explanation
When a positive externality is not internalized, the market equilibrium quantity tends to be lower than the socially optimal quantity. This happens because the benefits to third parties are not reflected in the market price, leading to underproduction relative to the optimal level.
More Externality & Internality MCQs
Practice related questions from the same subject.
- 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?
- 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?
- 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?