1. How is social cost calculated?
A external cost minus external benefit
B external cost minus private cost
C external cost plus private cost
D social cost minus social benefit

2. Which government policy is not aimed at correcting inefficiency in resource allocation?
A marginal cost pricing in state owned industries
B permits restricting the pollution of rivers by private firms
C requiring firms to pay a minimum wage
D the provision of public goods at zero price

3. The table shows some of the costs and benefits, in $ millions, associated with a road building
project. Both a government department and a profit-maximising private firm are considering
building the road.

Private costs	External costs	External benefits	Social benefits
450	75	50	550

Who would be willing to build the road?
A Both would be willing to build it.
B Neither would be willing to build it.
C Only the government department would be willing to build it.
D Only the private firm would be willing to build it.

4. In the diagram, Q₁ is the quantity produced of a good as the result of market forces.

Which concept is present at output Q₁?
A a government subsidy
B a negative externality
C a positive externality
D a specific tax

5. What would not affect the budget line of an individual consumer?
A the individual’s preference for various goods
B the level of income tax
C the money prices of goods
D the wages earned by the individual

Answers