Questions

1. Which one of the following four statements is correct? (2 mark, no explanation required)

a. In general, an externality can be either negative or positive.

b. In general, an externality is never positive.

c. On average, an externality is negative.

d. On average, an externality can be both negative and positive.

2. Give one externality that arises when poor farmers engage in slashandburn agriculture. Who are affected by this externality and how are they affected by it? (3 mark, answer in less than 5 sentences)

3. Illustrate and explain, in your own diagram and words (i.e. not copy and paste from textbooks and online documents), a product market in which private producers do not take into account the social cost of their production and the level of supply is suboptimal from the social viewpoint. Hint: Study carefully Subsection 10.4.2 of Todaro & Smith (2020), the required reading. (5 mark for a correct diagram, 5 mark for correct explanation in words).