AP Microeconomics : Externalities Quiz

*Theme/Title: Externalities
* Description/Instructions
People seldom consider the costs that they impose on others during their daily activities. For example, perhaps you've been annoyed by someone smoking or playing their music loud. A negative externality occurs when a good is overproduced and exerts a cost on someone who is neither the buyer of the seller of the good. In the smoking example, the person who was inhaling second hand smoke was not the person smoking the cigarette or the one who sold the cigarettes. The person is what I call the innocent third party. Some textbooks call this an "external cost". Externalities can be positive too. If you have ever admired a neighbor's Christmas lights, you've received all of the benefit but none of the cost. In the case of a positive externality, the good is under produced. In the case of a negative externality, the good is over produced. To regulate externalities, the government will tax a negative externality and subsidize a positive one. Often times, a tax on a negative externality are called a Pigouvian tax after Arthur Pigou. Externalities can result when one party has more information about the transaction than the other party. This "asymmetrical information" can lead to a moral hazard or adverse selection.

Group: AP Microeconomics AP Microeconomics Quizzes
Topic: AP Microeconomics

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