Question

(1) Negative externalities exist because:
(a) private costs are less than external costs.
(b) private costs are less than social costs.
(c) external costs are greater than social costs.
(d) private costs are greater than social costs.

(2) Consider a market where production of a good generates a positive externality. In the private market equilibrium,
(a) too much of the good is being produced.
(b) firms are not maximizing profit.
(c) there is no deadweight loss.
(d) too little of the good is being produced.

(3)

Answer 1

First answer. (b) private costs are less than social costs.

Second answer. (d) too little of the good is being produced.

Explanation first: Since private costs are less than social costs, for example in case of pollution, that is the reason why too much of the good which gives negative externality is being produced.

Explanation second: An example of a positive externality might be education. Everyone knows that its good for both short and long term, but we have very few good schools and colleges in our society.

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