Question

Question 6 (1 point)

An external cost:

Question 6 options:

	a) leads to economic efficiency only when private costs are greater than external costs.
	b) causes markets to allocate resources efficiently.
	c) affects producers but not consumers.
	d) is a cost paid by people other than the producer or consumer trading in the market.

Question 7 (1 point)

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Question 7 options:

	a) the market is sufficiently competitive.
	b) the number of market participants is large.
	c) transaction costs are low and property rights are clearly defined.
	d) the government does not involve itself in the process.

Question 8 (1 point)

Marginal cost is:

Question 8 options:

	a) the change in total cost from producing one more unit of output.
	b) average cost times output.
	c) the change in total output divided by the change in total cost.
	d) total cost divided by the change in total output.

Answer 1

Q6.

A negative externality occurs when there is an incidence of external cost on a third party who is neither a producer or a consumer and is not anyway related to the process of production and consumption.

An external cost is such a cost of an economic activity which is borne by people who are not party to the economic transaction

Ans: d. is a cost paid by people other than the producer or consumer trading in the market

Q7.Coase theorem states that an externality can be internalized through bargaining if there are no transaction costs involved in the process and the property rights are clearly defined.

The essential conditions for the Coase theorem to hold true are that there should no or negligible transactions costs involved and the property rights must be clearly defined.

Ans: c. transaction costs are low and property rights are clearly defined

Q8. Marginal cost is the cost of producing an additional unit of the good/product i.e., it is the change in total cost from producing an additional unit of output.

Mathermatically, it can be represented as follows:

Marginal Cost of Nth unit = Total Cost of N units - Total Cost of (N-1) units

Ans: a. the change in total cost from producing one more unit of output