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Quizzes > Business & Finance > Finance & Economics

Market Failures & Externalities Quiz: Test Your Econ Skills

Ready to spot graphs and master negative externalities? Begin now!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
paper cutout supply demand graphs with factory smoke showing no externality and negative externality on dark blue background

Are you ready to discover which graph represents a market with no externality? Dive into this market failure externalities quiz crafted for Econ enthusiasts eager to test their skills and sharpen their insight. You'll learn to identify when supply and demand align perfectly, explore how a negative externality that has not been internalized causes the divergence between private and social costs, and see how small shifts can appear in an externalities impact quiz. Join us and ignite your curiosity - take the challenge now! Then boost your practice with our microeconomics theory quiz or tackle additional microeconomics questions .

Which condition in a supply and demand graph indicates no externality?
Social cost equals private cost
Demand curve lies above the supply curve
Marginal social benefit exceeds private benefit
Supply curve is vertical
When there is no externality, the social cost equals the private cost, so the supply curve (private cost) and social cost curve coincide. This means the market equilibrium is efficient and there is no divergence between private and social curves. See Investopedia for more details.
In a market with no externality, the equilibrium outcome is:
Socially efficient
Underproduced
Overproduced
Unpredictable without government intervention
With no externality present, private benefits and social benefits coincide and private costs equal social costs, so the market equilibrium is socially efficient. There is no deadweight loss and no need for corrective policies. More at Econlib.
If the marginal private benefit curve coincides with the marginal social benefit curve, the graph shows:
No externality
Positive externality
Negative externality
Monopoly pricing
When MPB equals MSB at every output level, there is no benefit spillover and thus no externality. The private decision maker internalizes all benefits, leading to efficient allocation. See Investopedia.
What is the deadweight loss in a perfectly competitive market graph with no externality?
Zero
Positive
Negative
Undefined
In a market without externalities, the equilibrium maximizes total surplus, so there is no deadweight loss triangle. Both consumer and producer surplus are fully realized. More information at Investopedia.
Which of the following equals the social cost when there is no externality?
Private cost
Marginal external cost
Government tax
Subsidy
If no external costs exist, private cost fully captures the total cost to society. Hence, MSC = MPC in such markets. See Econlib for a description.
In a graph with no externality, what is the relationship between private and social benefit?
They are equal at all output levels
Social benefit is always higher
Private benefit is always higher
They intersect only once
No externality implies all benefits accrue to the decision maker, so MPB = MSB. This alignment yields the efficient outcome. For more, see Investopedia.
Which policy is unnecessary when a market has no externalities?
Pigouvian tax or subsidy
Competition policy
Consumer protection laws
Standard contract enforcement
Pigouvian taxes or subsidies correct for externalities, but if there are none, such interventions would distort an already efficient market. Other policies may still be needed for different market failures. Read more at Investopedia.
When supply and demand curves represent private cost and benefit only, the market has:
No externality
A positive externality
A negative externality
An external subsidy
Supply and demand representing private cost and benefit alone means no costs or benefits fall on third parties. Thus the market is free of externalities and outcome is efficient. Source: Econlib.
In a no-externality market, which curve shift would cause inefficiency?
Any policy-induced shift away from private curves
Endogenous demand shifts
Standard supply adjustments
Technological improvements
Shifting supply or demand away from the private cost/benefit curves in a no-externality market introduces distortions and reduces total surplus. Pure market forces keep it efficient. See Investopedia.
Which of the following areas is zero when no externality exists?
Deadweight loss area
Producer surplus
Consumer surplus
Government revenue
A market with no externalities and perfect competition has zero deadweight loss because total surplus is maximized. Consumer and producer surplus remain positive. More at Investopedia.
Which graph labeling indicates a market free of externalities?
MSC = MPC and MSB = MPB
MSC above MPC
MSB above MPB
Elastic demand only
MSC = MPC and MSB = MPB shows private and social curves align, so no spillovers. This alignment yields efficiency. Reference: Econlib.
In a market without externalities, a subsidy would:
Create inefficiency by overproduction
Improve efficiency
Have no effect
Correct negative spillovers
Subsidies correct underproduction due to positive externalities. In a no-externality market they lead to overproduction and welfare loss. See Investopedia.
Which statement is true in the absence of externalities?
Private choices maximize social welfare
Government intervention is always required
Markets always underprovide
Deadweight loss is unavoidable
Without externalities, private decisions lead to the socially optimal outcome and maximize total welfare. Government action would distort efficiency. More at Investopedia.
If a cost imposed on society equals zero, the graph shows:
No negative externality
High transaction costs
Positive spillovers
Market power
Zero external cost means MPC = MSC, indicating no negative externality. The private supply curve fully captures society’s cost. See Investopedia.
Which graph feature signals both private and social benefits are equal?
Single demand curve represents both MPB and MSB
Two parallel demand curves
Shifted supply curve
Multiple equilibrium points
A single demand curve indicates MPB = MSB, so there is no external benefit. This leads to efficient output. Learn more at Investopedia.
A graph shows supply and demand with no gap between private and social curves. Which outcome is expected?
Market equilibrium is efficient
Government subsidy is needed
Deadweight loss is positive
Overconsumption persists
No gap means MPC=MSC and MPB=MSB, so equilibrium maximizes total surplus. No corrective policy is required. See Investopedia.
On a graph, if the private supply curve shifts upward to social supply, but private demand remains the same, what does it indicate?
A negative externality is internalized
An initial negative externality was corrected
A positive externality emerged
No change in externality status
An upward shift of supply to match MSC suggests a corrective measure for a negative externality; if supply originally equaled MSC, no externality existed. Here it shows that external costs have been internalized. See Econlib.
In which scenario does the market equilibrium quantity equal the social optimum quantity?
When there is no externality
When negative externality exists
When a Pigouvian tax is applied
When a subsidy is granted
In absence of externalities, equilibrium maximizes welfare, so Q_market = Q_social. With externalities, policy tools are needed to realign them. More at Investopedia.
Which metric remains identical between private and social calculations when externalities are zero?
Marginal cost
Transaction cost
Willingness to pay
Property rights value
Zero externalities means MPC = MSC at each output level. This ensures private marginal cost fully reflects social marginal cost. Reference: Investopedia.
A graph shows a single downward-sloping demand and upward-sloping supply curve. Which externality status applies?
No externality
Positive externality
Negative externality
Bilateral monopoly
Single curves imply no divergence between private and social values, so no externalities. That yields an efficient competitive equilibrium. See Investopedia.
Why would a Pigouvian tax be zero in a particular market graph?
Because there is no externality to correct
Because the tax is internalized by producers
Because consumers pay it directly
Because the government subsidizes it
If no external costs exist, optimal tax equals zero to avoid distorting an efficient outcome. That aligns private and social costs. More at Investopedia.
In a graph where MSB overlaps with MPB and MSC overlaps with MPC, consumer and producer surplus are:
Maximized
Minimized
Zero
Indeterminate
Alignment of private and social curves yields the highest total surplus (sum of consumer and producer surplus). No welfare is lost. See Investopedia.
Which feature on a no-externality graph indicates no corrective subsidy is required?
Demand curve equals MSB
Supply curve is perfectly inelastic
Tax revenue is positive
Excess supply occurs
Demand = MSB means private demand equals social benefit, so no subsidy is needed to raise consumption. Private and social benefits align. Reference: Investopedia.
When a market graph shows no divergences between social and private curves, which is true?
Market is Pareto efficient
Market is monopolized
Market has positive deadweight loss
Market requires subsidy
No divergence means the equilibrium achieves Pareto efficiency because all costs and benefits are internalized. No corrective measures are necessary. More at Investopedia.
Which statement describes a zero-externality case on a welfare diagram?
Total surplus is the area between demand and supply at equilibrium
Surplus is negative
Government collects surplus
Surplus is transferred to abroad
With no externalities, consumer and producer surplus combine to total surplus at equilibrium. There are no third?party effects. See Investopedia.
If social marginal cost equals private marginal cost, what can be inferred about production externalities?
They are absent
They are positive
They are negative
They are internalized imperfectly
MSC = MPC means no unaccounted?for external cost. The producer bears the full cost of production. More at Econlib.
Why is a subsidy not needed when MPB equals MSB?
Because private consumption reflects social benefit
Because demand is inelastic
Because the government funds the externality
Because supply is fixed
MPB = MSB implies all benefits accrue privately, so consumption decisions are efficient without subsidy. A subsidy would over?incentivize consumption. Reference: Investopedia.
Which effect is missing in a no-externality demand-supply graph?
Spillover effect
Substitution effect
Income effect
Price effect
Spillover effects are the hallmark of externalities. When none exist, private transactions do not affect third parties. See Investopedia.
On a graph, the area of deadweight loss is zero. Which calculation supports no externality?
Triangle area = 0
Consumer surplus = 0
Producer surplus = 0
Government revenue > 0
Zero deadweight loss triangle implies no divergence between private and social curves, indicating no externality. All welfare gains are realized. See Investopedia.
In a multi?market comparison, which graph shows private cost equals social cost?
The one where supply curves overlap
The one with shifted supply
The one with kinked demand
The one with vertical supply
Overlapping supply curves (MPC and MSC) indicate no production externality. The market outcome matches social optimum. More at Investopedia.
Which outcome arises when marginal external cost equals zero at all quantities?
MPC = MSC, so efficient outcome
Need for corrective tax
Deadweight loss positive
Subsidy requirement
Zero marginal external cost ensures private cost fully reflects social cost (MPC=MSC). Efficiency is achieved at the market equilibrium. See Econlib.
A diagram shows consumer surplus triangle and producer surplus triangle only. What does this imply?
No externality exists
There is a negative externality
There is a positive externality
Government intervention occurred
Only private surpluses appear when there are no externalities; social surplus equals private surplus. No deadweight loss is drawn. Reference: Investopedia.
Which feature confirms that no corrective policy is required in a graph?
MSB and MPB coincide
Supply is horizontal
Demand is vertical
Multiple equilibria appear
MSB=MPB means all benefits are private, so the market outcome is efficient and no policy is needed. See Investopedia.
When drawing welfare analysis, which area is absent if no externality is present?
Tax wedge lost surplus
Consumer surplus
Producer surplus
Market price wedge
No externality means no need for tax or subsidy, so there is no tax wedge or deadweight loss. Only consumer and producer surplus exist. More at Investopedia.
If a market graph shows supply curve equals social cost and demand equals social benefit, what is true?
Market outcome is Pareto optimal
Government subsidy is needed
Production externality exists
Market power distorts outcome
Alignment of supply with social cost and demand with social benefit ensures that market outcome is Pareto optimal without intervention. Reference: Econlib.
Which calculation confirms zero externality when comparing triangles?
Welfare triangle equals zero
Producer surplus is negative
Consumer surplus is zero
Government revenue is maximized
Zero welfare triangle indicates no deadweight loss and thus no externality. Total surplus is fully realized. More at Investopedia.
On a graph with perfect competition and no externalities, price equals:
Marginal cost
Average cost
Total cost
Opportunity cost
In perfect competition without externalities, P = MC ensures allocative efficiency. No divergence occurs. See Investopedia.
Why does a Coase solution not change equilibrium when no externality exists?
Because there is nothing to negotiate over
Because transaction costs are infinite
Because property rights are missing
Because government sets price
Coase theorem applies to externalities; if none exist, there’s no conflict and no reallocation can improve welfare. See Investopedia.
Which mathematical relation holds when private benefit equals social benefit in a graph?
MPB(q)=MSB(q) for all q
MPC(q)>MSC(q) for some q
MSB(q)
Total cost is zero
MPB(q)=MSB(q) at each quantity means no external benefits. That yields efficient market output. Reference: Investopedia.
In a graph exercise, the efficient quantity equals 100 units and market also trades 100 units. What does this imply?
No externality
Positive externality
Negative externality
Monopoly pricing
When Q_market = Q_efficient, it indicates social and private optima align, meaning no externalities. No policy correction is needed. See Investopedia.
In a multi?commodity economy, which condition ensures all zero–externality markets remain efficient when aggregated?
All MPC=MSC and MPB=MSB in each market
Sum of externalities equals zero
Pareto frontier is linear
Budget sets overlap
Each market must internalize costs and benefits individually for the aggregated outcome to be efficient. MPC=MSC and MPB=MSB in all markets is required. Reference: Econlib.
Which advanced model shows no intertemporal externalities?
Samuelson’s island model with private discounting
Overlapping generations with capital externality
Dynamic public goods economy
General equilibrium with network effects
In Samuelson’s island model with private discounting, benefits and costs are internalized, leaving no intertemporal spillovers. This yields efficient allocation over time. See Investopedia.
How does second?best theory apply if no externality exists but another distortion is present?
Correcting other distortion may reduce efficiency
First?best outcome is achieved automatically
Externalities reappear endogenously
Social planner always improves outcome
Second?best theory shows that fixing one distortion in presence of another can worsen welfare. Even with no externality, other distortions may interact. Learn more at Investopedia.
In a game?theoretic model of pollution, if all players internalize damages, the equilibrium outcome is:
Social optimum
Nash equilibrium with spillovers
Mixed?strategy outcome
Tragedy of the commons
Internalization of damages aligns private incentives with social welfare, leading to the socially optimal outcome. No externalities remain. See Investopedia.
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Study Outcomes

  1. Identify which graph represents a market with no externality -

    Use supply and demand curves to recognize an equilibrium where private cost equals social cost, indicating the absence of externalities.

  2. Analyze supply and demand curves -

    Interpret shifts and intersections of curves to assess how different externalities - or lack thereof - affect market equilibrium.

  3. Explain how a negative externality that has not been internalized causes the market outcome to shift -

    Describe the divergence between private and social costs when external costs remain unpriced, leading to overproduction.

  4. Differentiate between private and social costs -

    Define and compare cost curves to understand how externalities influence market efficiency and social welfare.

  5. Apply concepts in the market failure externalities quiz -

    Reinforce your understanding by answering targeted questions on market failures and externalities.

  6. Evaluate outcomes in the externalities impact quiz -

    Assess how well you grasp the real-world effects of externalities on market equilibrium and social welfare.

Cheat Sheet

  1. Spotting a No-Externality Equilibrium -

    Which graph represents a market with no externality? Look for a single supply curve (S) and single demand curve (D) crossing at P* and Q*, where marginal social cost (MSC) equals marginal private cost (MPC). This simple "S=D" intersection is the hallmark of a perfectly competitive market free from external impacts (Mankiw, Principles of Economics).

  2. Defining Negative Externalities -

    In the market failure externalities quiz, a negative externality that has not been internalized causes the marginal social cost to exceed the marginal private cost, such as factory pollution. Remember MSC = MPC + MEC and use the memory phrase "Social Costs Stack Up" to recall the added external component (Pigou, 1920).

  3. Quantifying Deadweight Loss -

    When externalities are ignored, Q_market surpasses Q_optimal, creating a deadweight loss triangle between these quantities. Apply DWL = ½ × (Q_market - Q_optimal) × MEC to calculate the lost welfare (Varian, Intermediate Microeconomics).

  4. Graph Identification Tips -

    In an externalities impact quiz, identify the graph where MSC and MPC overlap completely. No vertical gap between the curves means no externality, so the market outcome here aligns private incentives with social welfare (Harvard Business Review).

  5. Tackling Externalities with Pigouvian Taxes -

    A Pigouvian tax equal to MEC shifts the supply curve from MPC up to MSC, correcting overproduction. For instance, if MEC at Q_social is $5/unit, imposing a $5 tax per unit aligns private costs with social costs (World Bank, Environmental Economics Guide).

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