Mr. Maurer
AP Economics
Name: ________________________________
Externalities – Problem Set #1
1. What type of externality is represented by the
graph at left? Explain.
Positive externality. Marginal social benefit is
greater than marginal private benefit.
2. Will the market underproduce or
overproduce the good depicted at left?
Underproduce.
3. On the graph, label the marginal external benefit (MEB) and shade in the area of
deadweight loss. MEB is the bold arrow. Deadweight loss is the shaded triangle.
4. What type of externality is represented
by the graph at left? Explain.
Negative. MSC > MPC
5. Will the market underproduce or
overproduce the good depicted at left?
Overproduce.
6 On the graph, label the marginal
external cost (MEC) and shade in the area of deadweight loss.
MEB is the bold arrow. Deadweight loss is the shaded triangle.
7. The graph at left shows a perfectly
competitive market in equilibrium. Assume
now that a negative externality exists in the
market. Add the necessary elements and
labeling to the graph to demonstrate the
externality. Label the area of deadweight loss.
8. The graph at left shows a perfectly
competitive market in equilibrium. Assume
now that a positive externality exists in the
market. Add the necessary elements and
labeling to the graph to demonstrate the
externality. Label the area of deadweight
loss.
9. What type of externality is represented by
the graph at left? What does the arrow
labeled (A) represent?
A positive externality. (A) is the Marginal
External Benefit.
10. What type of externality is represented by the graph at
left? What does the arrow labeled (A) represent?
A negative externality (A) is the marginal external cost.
11. What type of externality is represented by the
diagram at left? A negative externality.
12. Identify the following:
a. S1 = Marginal private cost.
b. S2 = Marginal social cost.
c. Line segment AB Marginal external cost.
d. Q1 Socially efficient quantity.
e. Q2 Market quantity.
f. The area of deadweight loss.
12. What type of externality is represented at left?
A positive externality.
13. Identify the following:
a. D1 Marginal private benefit.
b. D2 Marginal social benefit.
c. Line segment CE marginal external benefit.
d. Q1 Market quantity
e. Q2 Socially efficient quantity.
f. The area of deadweight loss.
ABC
14. In the space below, draw a correctly labeled graph of a market that includes a positive externality.
On your graph, be sure to label:
marginal private benefit (MPB)
marginal social benefit (MSB = MPB + MEB)
the marginal external benefit (MEB)
the marginal social cost (MSC)
the quantity the market will produce (QMKT) the socially efficient quantity (QEFF)
the area of deadweight loss
15. What action could the government take, and in what amount, to correct for the externality in
represented in your graph (refer back to your textbook for this)
A per-unit subsidy to either the consumer or the producer in an amount = MEB.
16. In the space below, draw a correctly labeled graph of a market that includes a negative
externality. On your graph, be sure to label:
marginal private cost (MPC)
marginal social cost (MSC = MPC + MEC)
the marginal external cost (MEC)
the marginal social benefit (MSB)
the quantity the market will produce (QMKT) the socially efficient quantity (QEFF)
the area of deadweight loss
17. What action could the government take, and in what amount, to correct for the externality in
represented in your graph (refer back to your textbook for this) A per-unit tax in the amount of MEC.