Econ 202
Econ 202 Exam 4 Questions and
Answers 2026 Graded A
In the absence of externalities, the "invisible hand" leads a market to maximize -Correct
Answer ✔-total benefit to society from that market
The term market failure refers to -Correct Answer ✔-a market that fails to allocate
resources efficiently
Market failures can be caused by -Correct Answer ✔-Externalities
An externality is the impact of -Correct Answer ✔-one person's actions on the well-being
of a bystander.
A negative externality arises when a person engages in an activity that has -Correct
Answer ✔-a.
an adverse effect on a bystander who is not compensated by the person who causes
the effect.
When externalities are present in a market, the well-being of market participants -
Correct Answer ✔-is directly affected, and market bystanders are indirectly affected.
When an externality is present, the market equilibrium is -Correct Answer ✔-inefficient,
and the equilibrium does not maximize the total benefit to society as a whole.
If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will -
Correct Answer ✔-emit a higher level of smoke than is socially efficient.
Which of the following is an example of an externality? -Correct Answer ✔-a.
cigarette smoke that permeates an entire restaurant
b.
a flu shot that prevents a student from transmitting the virus to her roommate
c.
a beautiful flower garden outside of the local post office
In a certain city, the local government regulates the destruction of historic buildings and
provides tax breaks to owners of historic buildings who restore them. These government
policies -Correct Answer ✔-reflect the fact that restored historic buildings convey a
positive externality.
If an externality is present in a market, economic efficiency may be enhanced by -
Correct Answer ✔-government intervention.
Econ 202
, Econ 202
All remedies for externalities share the goal of -Correct Answer ✔-moving the allocation
of resources toward the socially optimal equilibrium.
The supply curve for a product reflects the -Correct Answer ✔-cost to sellers of
producing the product.
The difference between social cost and private cost is a measure of the -Correct
Answer ✔-cost of an externality.
This graph represents the tobacco industry. The industry creates -Correct Answer ✔-
negative externalities
This graph represents the tobacco industry. Without any government intervention, the
equilibrium price and quantity are -Correct Answer ✔-$1.60 and 42 units, respectively.
This graph represents the tobacco industry. The socially optimal price and quantity are -
Correct Answer ✔-$1.80 and 35 units, respectively.
Which price and quantity combination represents the social optimum? -Correct Answer
✔-P2 and Q1.
Which of the following statements is correct?
a.
The marginal benefit of the positive externality is measured by P3 - P1.
b.
The marginal cost of the negative externality is measured by P3 - P2.
c.
The marginal cost of the negative externality is measured by P3 - P1.
d.
The marginal cost of the negative externality is measured by P3 - P0. -Correct Answer
✔-The marginal cost of the negative externality is measured by P3 - P1.
When a negative externality exists in a market, the cost to producers -Correct Answer
✔-will be less than the cost to society.
When the social cost curve is above a product's supply curve, -Correct Answer ✔-a
negative externality exists in the market
A negative externality will cause a private market to produce -Correct Answer ✔-more
than is socially desirable.
Which of the following would not be considered a negative externality? -Correct Answer
✔-You have an adverse reaction to a medication your doctor prescribed for you.
Which quantity represents the social optimum for this market?
Econ 202
Econ 202 Exam 4 Questions and
Answers 2026 Graded A
In the absence of externalities, the "invisible hand" leads a market to maximize -Correct
Answer ✔-total benefit to society from that market
The term market failure refers to -Correct Answer ✔-a market that fails to allocate
resources efficiently
Market failures can be caused by -Correct Answer ✔-Externalities
An externality is the impact of -Correct Answer ✔-one person's actions on the well-being
of a bystander.
A negative externality arises when a person engages in an activity that has -Correct
Answer ✔-a.
an adverse effect on a bystander who is not compensated by the person who causes
the effect.
When externalities are present in a market, the well-being of market participants -
Correct Answer ✔-is directly affected, and market bystanders are indirectly affected.
When an externality is present, the market equilibrium is -Correct Answer ✔-inefficient,
and the equilibrium does not maximize the total benefit to society as a whole.
If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will -
Correct Answer ✔-emit a higher level of smoke than is socially efficient.
Which of the following is an example of an externality? -Correct Answer ✔-a.
cigarette smoke that permeates an entire restaurant
b.
a flu shot that prevents a student from transmitting the virus to her roommate
c.
a beautiful flower garden outside of the local post office
In a certain city, the local government regulates the destruction of historic buildings and
provides tax breaks to owners of historic buildings who restore them. These government
policies -Correct Answer ✔-reflect the fact that restored historic buildings convey a
positive externality.
If an externality is present in a market, economic efficiency may be enhanced by -
Correct Answer ✔-government intervention.
Econ 202
, Econ 202
All remedies for externalities share the goal of -Correct Answer ✔-moving the allocation
of resources toward the socially optimal equilibrium.
The supply curve for a product reflects the -Correct Answer ✔-cost to sellers of
producing the product.
The difference between social cost and private cost is a measure of the -Correct
Answer ✔-cost of an externality.
This graph represents the tobacco industry. The industry creates -Correct Answer ✔-
negative externalities
This graph represents the tobacco industry. Without any government intervention, the
equilibrium price and quantity are -Correct Answer ✔-$1.60 and 42 units, respectively.
This graph represents the tobacco industry. The socially optimal price and quantity are -
Correct Answer ✔-$1.80 and 35 units, respectively.
Which price and quantity combination represents the social optimum? -Correct Answer
✔-P2 and Q1.
Which of the following statements is correct?
a.
The marginal benefit of the positive externality is measured by P3 - P1.
b.
The marginal cost of the negative externality is measured by P3 - P2.
c.
The marginal cost of the negative externality is measured by P3 - P1.
d.
The marginal cost of the negative externality is measured by P3 - P0. -Correct Answer
✔-The marginal cost of the negative externality is measured by P3 - P1.
When a negative externality exists in a market, the cost to producers -Correct Answer
✔-will be less than the cost to society.
When the social cost curve is above a product's supply curve, -Correct Answer ✔-a
negative externality exists in the market
A negative externality will cause a private market to produce -Correct Answer ✔-more
than is socially desirable.
Which of the following would not be considered a negative externality? -Correct Answer
✔-You have an adverse reaction to a medication your doctor prescribed for you.
Which quantity represents the social optimum for this market?
Econ 202
