Four random scenarios, one of each type of externality. Answer one step at a time; wrong answers get a hint so you can try again.
Scenario 1 of 8
Correct on the first try: 0 / 0
Scenario
Step 1Whose decision creates the spillover?
Step 2Does it help or harm third parties?
GraphThe market for this scenario
Step 3Which social curve belongs on this graph?
Step 4Compare the market outcome with the social optimum.
Step 5Which policy moves the market to the social optimum?
All scenarios complete
Rule of thumb: the sign decides the policy. Negative externality: tax. Positive externality: subsidy.
The side decides which curve moves: consumption shifts the benefit curve, production shifts the cost curve.