Questions (see bottom of page for answers)
1. An externality is:
a) The same as opportunity cost
b) The unintended side effect of a decision or transaction
2. Pollution produced by a steel factory is an example of a:
a) Positive externality
b) Negative externality
3. Increased income (through employment) for workers at a new firm
which has maximizing profit as its main aim is an example of a:
a) Positive externality
b) Negative externality
4. Markets always come up with the best solutions to combat externalities:
a) True
b) False
5. The best way for a government to tackle negative externalities is through:
a) Taxation
b) Regulation
c) A combination of both taxation and regulation
Answers: 1.b 2.b 3.a 4.b 5.c