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catinabox
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Last visit: 18 Nov 2025
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05 Sep 2024, 07:00
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Question 1
E
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
15%
(low)
Question Stats:
88% (02:10) correct
13%
(02:08) wrong
based on 56
sessions
History
Date
Time
Result
Not Attempted Yet
Question 2
A
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
25%
(medium)
Question Stats:
75% (00:51) correct 25%
(01:17) wrong
based on 56
sessions
History
Date
Time
Result
Not Attempted Yet
Question 3
B
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
25%
(medium)
Question Stats:
66% (00:43) correct 34%
(00:55) wrong
based on 53
sessions
History
Date
Time
Result
Not Attempted Yet
Q1. Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Q1. Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
Q2. Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs.
B. Consumers are able to influence the price of goods based on supply and demand.
C. The production opportunities for firms are optimized without affecting others.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
A. Externalities result in significant differences between private and social costs.
B. Consumers are able to influence the price of goods based on supply and demand.
C. The production opportunities for firms are optimized without affecting others.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
Q3. The primary purpose of the passage is to:
A. Criticize the role of businesses in creating externalities and suggest ways to mitigate them.
B. Explain the concept of externalities and how they justify government intervention in economic activities.
C. Propose a framework for understanding the impact of government policies on private businesses.
D. Analyze the trade-offs between private profit maximization and societal welfare in market transactions.
E. Compare different types of externalities and their respective impact on economic production and consumption.
A. Criticize the role of businesses in creating externalities and suggest ways to mitigate them.
B. Explain the concept of externalities and how they justify government intervention in economic activities.
C. Propose a framework for understanding the impact of government policies on private businesses.
D. Analyze the trade-offs between private profit maximization and societal welfare in market transactions.
E. Compare different types of externalities and their respective impact on economic production and consumption.
05 Sep 2024, 10:07
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Q1. Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers. NO
B. A homeowner installs solar panels on their roof, reducing their electricity costs. NO
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs. (Allows businesses to reduce cost, doesn’t have any irreversible impact on people or environment.) NO
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers. NO
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources. (Pesticide increases crop yield, but also harms the soil in long term, and cost of the harm caused to soil is an externality.) ~CORRECT
Q2. Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs. ~CORRECT (Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account)
B. Consumers are able to influence the price of goods based on supply and demand. NO
C. The production opportunities for firms are optimized without affecting others. NOT RELEVANT
D. The benefits of production are fully absorbed by those directly involved in the transactions. NOT RELEVANT
E. Firms efficiently incorporate the costs of negative externalities into their pricing. NOTHING LIKE THIS CAN BE INFERRED FROM THE PASSAGE.
Q3. The primary purpose of the passage is to:
A. Criticize the role of businesses in creating externalities and suggest ways to mitigate them. NOTHING IS CRITICIZED IN THE PASSAGE.
B. Explain the concept of externalities and how they justify government intervention in economic activities. ~CORRECT (Firstly, the concept of externalities is explained, then govt intervention and then explained a category of externality and its example.)
C. Propose a framework for understanding the impact of government policies on private businesses. NOT EVEN CLOSE
D. Analyze the trade-offs between private profit maximization and societal welfare in market transactions. NOTHING IS ANALYSED
E. Compare different types of externalities and their respective impact on economic production and consumption. NOTHING IS COMPARED
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A. A company launches a new product that significantly reduces the cost of energy for consumers. NO
B. A homeowner installs solar panels on their roof, reducing their electricity costs. NO
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs. (Allows businesses to reduce cost, doesn’t have any irreversible impact on people or environment.) NO
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers. NO
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources. (Pesticide increases crop yield, but also harms the soil in long term, and cost of the harm caused to soil is an externality.) ~CORRECT
Q2. Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs. ~CORRECT (Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account)
B. Consumers are able to influence the price of goods based on supply and demand. NO
C. The production opportunities for firms are optimized without affecting others. NOT RELEVANT
D. The benefits of production are fully absorbed by those directly involved in the transactions. NOT RELEVANT
E. Firms efficiently incorporate the costs of negative externalities into their pricing. NOTHING LIKE THIS CAN BE INFERRED FROM THE PASSAGE.
Q3. The primary purpose of the passage is to:
A. Criticize the role of businesses in creating externalities and suggest ways to mitigate them. NOTHING IS CRITICIZED IN THE PASSAGE.
B. Explain the concept of externalities and how they justify government intervention in economic activities. ~CORRECT (Firstly, the concept of externalities is explained, then govt intervention and then explained a category of externality and its example.)
C. Propose a framework for understanding the impact of government policies on private businesses. NOT EVEN CLOSE
D. Analyze the trade-offs between private profit maximization and societal welfare in market transactions. NOTHING IS ANALYSED
E. Compare different types of externalities and their respective impact on economic production and consumption. NOTHING IS COMPARED
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catinabox
Alum
Joined: 27 Nov 2019
Last visit: 18 Nov 2025
Posts: 567
Own Kudos:
Given Kudos: 223
Location: United States (IL)
Schools: Kellogg '24 (M)
GMAT 1: 770 Q50 V44
GPA: 4
Products:
09 Sep 2024, 07:49
Kudos
Bookmarks
Here are the official solutions:
Q1. Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
Correct Answer:
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
This is a classic negative externality: the company benefits from increased yields, but the water contamination harms others.
Incorrect Answers:
A. A company launches a new product that significantly reduces the cost of energy for consumers.
This is a direct benefit with no harm to third parties.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
This results in a direct benefit with no harm to others.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
Increased productivity benefits businesses directly, with no negative effects on third parties.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
This action does not have unintended harmful consequences affecting others.
Q2. Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
Correct Answer:
A. Externalities result in significant differences between private and social costs.
The passage states that externalities are among the main reasons for government intervention, especially when private and social costs diverge.
Incorrect Answers:
B. Consumers are able to influence the price of goods based on supply and demand.
This is unrelated to the concept of externalities discussed in the passage.
C. The production opportunities for firms are optimized without affecting others.
If there are no negative effects on others, government intervention is less likely.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
This suggests no externalities are present, reducing the need for intervention.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
If firms incorporate these costs, there's no need for government intervention.
Q3. The primary purpose of the passage is to:
Correct Answer:
B. Explain the concept of externalities and how they justify government intervention in economic activities.
The passage primarily focuses on explaining externalities, particularly how they lead to government intervention when private and social costs diverge.
Incorrect Answers:
A. Criticize the role of businesses in creating externalities and suggest ways to mitigate them.
The passage does not criticize businesses or provide solutions, but rather explains the concept of externalities.
C. Propose a framework for understanding the impact of government policies on private businesses.
The passage discusses externalities and government intervention but does not propose a specific framework.
D. Analyze the trade-offs between private profit maximization and societal welfare in market transactions.
While there’s mention of private and social costs, the passage's goal is not to deeply analyze these trade-offs.
E. Compare different types of externalities and their respective impact on economic production and consumption.
The passage primarily explains negative externalities like pollution rather than comparing various types of externalities.
Q1. Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
Correct Answer:
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
This is a classic negative externality: the company benefits from increased yields, but the water contamination harms others.
Incorrect Answers:
A. A company launches a new product that significantly reduces the cost of energy for consumers.
This is a direct benefit with no harm to third parties.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
This results in a direct benefit with no harm to others.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
Increased productivity benefits businesses directly, with no negative effects on third parties.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
This action does not have unintended harmful consequences affecting others.
Q2. Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
Correct Answer:
A. Externalities result in significant differences between private and social costs.
The passage states that externalities are among the main reasons for government intervention, especially when private and social costs diverge.
Incorrect Answers:
B. Consumers are able to influence the price of goods based on supply and demand.
This is unrelated to the concept of externalities discussed in the passage.
C. The production opportunities for firms are optimized without affecting others.
If there are no negative effects on others, government intervention is less likely.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
This suggests no externalities are present, reducing the need for intervention.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
If firms incorporate these costs, there's no need for government intervention.
Q3. The primary purpose of the passage is to:
Correct Answer:
B. Explain the concept of externalities and how they justify government intervention in economic activities.
The passage primarily focuses on explaining externalities, particularly how they lead to government intervention when private and social costs diverge.
Incorrect Answers:
A. Criticize the role of businesses in creating externalities and suggest ways to mitigate them.
The passage does not criticize businesses or provide solutions, but rather explains the concept of externalities.
C. Propose a framework for understanding the impact of government policies on private businesses.
The passage discusses externalities and government intervention but does not propose a specific framework.
D. Analyze the trade-offs between private profit maximization and societal welfare in market transactions.
While there’s mention of private and social costs, the passage's goal is not to deeply analyze these trade-offs.
E. Compare different types of externalities and their respective impact on economic production and consumption.
The passage primarily explains negative externalities like pollution rather than comparing various types of externalities.
