Microeconomics Midterm Exam #3 Review With Questions And
Answers Latest Update 2026
Chapter 10 - (answer)
What do choices have? - (answer)Side effects
What is an externality? - (answer)A side effect of an activity that affects bystanders whose interests are
NOT taken into account.
What happens to bystanders' interests in the case of an externality? - (answer)Their interests are
ignored or underweighed in the decision-making process.
What can externalities lead to? - (answer)Market failure.
Negative Externality - (answer)A side effect that harms bystanders
- choices that impose costs on others
Positive externality - (answer)A side effect that benefits bystanders
- choices that generate benefits for others
Are price changes the same as externalities? - (answer)NO
Private interest - (answer)Costs and benefits that you personally incur
Society's interest - (answer)Includes ALL costs and benefits (whether they accrue to you or to others)
,Microeconomics Midterm Exam #3 Review With Questions And
Answers Latest Update 2026
During Negative Externalities - (answer)
Marginal Private Cost - (answer)The extra costs paid by the sellers from producing one extra unit
- supply curve!
Marginal External Cost - (answer)The extra costs imposed on bystanders from producing one extra unit
- The seller is NOT on the hook
Marginal Social Cost - (answer)All marginal costs, no matter who pays them
Marginal Social Cost equation - (answer)Marginal social costs = Marginal private costs + Marginal
external costs
MSC = MPC + MEC
During positive externalities - (answer)
Marginal private benefit - (answer)The extra enjoyment by the buyer from purchasing one extra unit
- buyer's demand curve!
Marginal external benefit - (answer)The extra benefit accruing to bystanders from one extra unit
Marginal social benefit - (answer)All marginal benefits, not matter who gets them
, Microeconomics Midterm Exam #3 Review With Questions And
Answers Latest Update 2026
Major theme in economics: - (answer)Markets are efficient
- yield good outcomes for buyers and sellers
What is the socially optimal quantity? - (answer)The quantity that is most efficient for society as a
whole.
What does the socially optimal quantity account for? - (answer)All the costs and all the benefits,
regardless of who they fall on.
Marginal principle from society's perspective - (answer)Will society be better off if it produces one more
gallon of gas?
Cost-benefit principle from society's perspective - (answer)Compare the marginal social benefit and the
marginal social cost
Rational Rule for Society - (answer)Marginal social benefit = Marginal social cost
Four-step recipe for analyzing externalities - (answer)1. Predict the equilibrium quantity to forecast what
you think will happen
2. Assess what externalities are involved (+ or -)
3. Find the socially optimal quantity that is in society's best interest
(Marginal benefit = marginal costs)
4. Compare your forecast of the equilibrium quantity with the socially optimal quantity (overproduction
or underproduction?)
Answers Latest Update 2026
Chapter 10 - (answer)
What do choices have? - (answer)Side effects
What is an externality? - (answer)A side effect of an activity that affects bystanders whose interests are
NOT taken into account.
What happens to bystanders' interests in the case of an externality? - (answer)Their interests are
ignored or underweighed in the decision-making process.
What can externalities lead to? - (answer)Market failure.
Negative Externality - (answer)A side effect that harms bystanders
- choices that impose costs on others
Positive externality - (answer)A side effect that benefits bystanders
- choices that generate benefits for others
Are price changes the same as externalities? - (answer)NO
Private interest - (answer)Costs and benefits that you personally incur
Society's interest - (answer)Includes ALL costs and benefits (whether they accrue to you or to others)
,Microeconomics Midterm Exam #3 Review With Questions And
Answers Latest Update 2026
During Negative Externalities - (answer)
Marginal Private Cost - (answer)The extra costs paid by the sellers from producing one extra unit
- supply curve!
Marginal External Cost - (answer)The extra costs imposed on bystanders from producing one extra unit
- The seller is NOT on the hook
Marginal Social Cost - (answer)All marginal costs, no matter who pays them
Marginal Social Cost equation - (answer)Marginal social costs = Marginal private costs + Marginal
external costs
MSC = MPC + MEC
During positive externalities - (answer)
Marginal private benefit - (answer)The extra enjoyment by the buyer from purchasing one extra unit
- buyer's demand curve!
Marginal external benefit - (answer)The extra benefit accruing to bystanders from one extra unit
Marginal social benefit - (answer)All marginal benefits, not matter who gets them
, Microeconomics Midterm Exam #3 Review With Questions And
Answers Latest Update 2026
Major theme in economics: - (answer)Markets are efficient
- yield good outcomes for buyers and sellers
What is the socially optimal quantity? - (answer)The quantity that is most efficient for society as a
whole.
What does the socially optimal quantity account for? - (answer)All the costs and all the benefits,
regardless of who they fall on.
Marginal principle from society's perspective - (answer)Will society be better off if it produces one more
gallon of gas?
Cost-benefit principle from society's perspective - (answer)Compare the marginal social benefit and the
marginal social cost
Rational Rule for Society - (answer)Marginal social benefit = Marginal social cost
Four-step recipe for analyzing externalities - (answer)1. Predict the equilibrium quantity to forecast what
you think will happen
2. Assess what externalities are involved (+ or -)
3. Find the socially optimal quantity that is in society's best interest
(Marginal benefit = marginal costs)
4. Compare your forecast of the equilibrium quantity with the socially optimal quantity (overproduction
or underproduction?)
