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

When the market gets the quantity wrong

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

  1. Why is the market quantity of a polluting good too high?

    • Buyers love dirty rivers
    • The firm ignores the outside harm, so its price invites excess buying
    • Taxes always raise pollution

  2. A factory fouls a river. How do its private and social costs compare?

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

  3. Why is street lighting funded from taxes?

    • Because bulbs are too heavy to sell
    • Because it is nonrival and nonexcludable, so sellers cannot charge all users
    • Because councils enjoy darkness

  4. One family skips paying for shared patrols that pass anyway. What is this?

    • Free riding: benefit without payment
    • A positive externality
    • A binding price floor

  5. A town caps total dumping and lets firms trade permits. What does this tool do?

    • It bans every factory at once
    • It pays polluters to pollute more
    • It caps total harm while letting cuts happen where cheapest

  6. A beekeeper's hives pollinate the next-door orchard for free. What should follow?

    • A subsidy or public support, since the market alone supplies too little
    • A tax on the orchard's apples
    • A ban on all bees

  7. A mayor fines one dumper and declares the river fixed. What is missing?

    • The fine ends all pollution forever
    • Every source still needs its harm priced, or the excess continues
    • Rivers clean themselves instantly

  8. A river keeps getting polluted because each polluter pays the full social cost already.

    Circle one:   True   False

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Answer key

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

When the market gets the quantity wrong W1-mt_TvBDQJqv1R-s1

  1. The firm ignores the outside harm, so its price invites excess buying · Unpriced harm keeps the price cheap and the quantity fat.
  2. Social cost is higher, adding the harmed neighbours · Private covers labour and machines only; social adds the downstream harm.
  3. Because it is nonrival and nonexcludable, so sellers cannot charge all users · Light spills to all, so the market stays dark unless the public purse pays.
  4. Free riding: benefit without payment · They enjoy the shared benefit while skipping the bill.
  5. It caps total harm while letting cuts happen where cheapest · Permits cap the total and price the remainder through trade.
  6. A subsidy or public support, since the market alone supplies too little · Spilling benefits deserve support, or riders starve them.
  7. Every source still needs its harm priced, or the excess continues · One fine never covers the whole gap between private and social cost.
  8. False · Nobody prices the neighbours harm, so excess pollution continues.
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