Market Failure: Externalities and Public Goods · seed 1 · A4, ink-friendly. The answer key prints on its own page for grown-ups.
En anglais

When prices miss shared costs and benefits

Civics & Economics · Economics · ages 15-16
Name ______________________   Date ____________

  1. In a competitive market with no other market failures, firms ignore uncompensated pollution harm. Why is output above the socially efficient level?

    • Buyers love dirty rivers
    • Outside harm is unpriced
    • Taxes always raise pollution

  2. A factory pays its production costs but leaves damage from its river pollution uncompensated. How do private and social costs compare?

    • Social cost includes outside harm
    • Private cost is higher, adding the harmed neighbours
    • Both costs are always equal

  3. Why might a town use taxes to fund street lighting that passers-by can use without paying?

    • Because bulbs are too heavy to sell
    • Shared light is hard to charge for
    • Because councils enjoy darkness

  4. A family benefits from patrols paid for by its neighbours but chooses not to contribute. What is the family doing?

    • Free riding
    • Funding a public good
    • A binding price floor

  5. A town enforces a cap on dumping equally harmful units of one pollutant. Firms have different cleanup costs and can freely trade permits. What does this tool do?

    • It bans every factory at once
    • It pays polluters to pollute more
    • Caps harm; directs cuts to lower costs

  6. Unpaid pollination benefits a neighbouring orchard. No private payment agreement is possible, and beekeeping is below the socially efficient level. Which policy could encourage more beekeeping?

    • A subsidy for beekeeping
    • A tax on the orchard's apples
    • A ban on all bees

  7. A town chooses pollution charges to make all factories account for their harm. It fines one factory once but leaves the others' dumping uncharged. What is missing from this plan?

    • The fine ends all pollution forever
    • Charges covering all sources
    • Rivers clean themselves instantly

  8. In a competitive model with no other market failures, excess pollution caused by unpriced harm occurs because every polluter already bears the full social cost.

    Circle one:   True   False

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Answer key

For grown-ups. Fold this page away before handing over the rest.

When prices miss shared costs and benefits W1-mt_TvBDQJqv1R-s1

  1. Outside harm is unpriced · Private decisions omit damage that belongs in the social cost of extra output.
  2. Social cost includes outside harm · Social cost includes the factory's own costs plus the uncompensated damage to others.
  3. Shared light is hard to charge for · Nonrival, nonexcludable light invites free riding, so collective funding can address a shortfall.
  4. Free riding · The family receives the shared service while leaving its cost to others.
  5. Caps harm; directs cuts to lower costs · The enforced limit caps these equally harmful units. Permit trade rewards cheaper cleanup.
  6. A subsidy for beekeeping · A subsidy can reward the outside pollination benefit missing from the beekeeper's return.
  7. Charges covering all sources · Uncovered polluters still have no charge for their outside harm, so the stated pricing plan is incomplete.
  8. False · Unpriced outside harm means a cost is omitted, not fully borne by each polluter.
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