Externalities and Market Failure Questions and Answers
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Question 1 of 3externalities
In dam construction, which one is an externality?
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Explanation: An externality is a cost or benefit that falls on third parties not directly involved in the construction. A water skiing facility in the area is an external benefit (positive externality) generated by the dam.
Question 2 of 3public goods and merit goods
Which characteristic distinguishes a public good, such as street lighting or national defence, from a private good?
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Explanation: A pure public good has both properties together: non-rivalry means one person's consumption does not reduce what is available to others, and non-excludability means no one can be stopped from consuming it once it is provided, which is exactly why private firms have no incentive to supply it and why the free-rider problem arises.
Question 3 of 3public goods
A municipal authority budget included construction of non-income generating facilities not taken up by the private sector. Such facilities are referred to as
CorrectNot quite
Explanation: Public goods cannot be provided by the private sector because they are non-excludable and non-rival. The marking scheme confirms answer D.