What this practice covers
These questions are drawn from past CIE 9708 papers and filtered to externalities and social costs and benefits. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
Start practising Paper 3 MCQs →
What examiners see students get wrong here
These are the errors that cost marks on externalities and social costs and benefits, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Using MPC = MPB as the social optimum. This is the market equilibrium. The social optimum is MSC = MSB.
- Calling all harmful effects external costs. A cost borne by the buyer or seller is private, not external.
- Confusing a third-party effect with imperfect information. They are distinct market failures.
- Treating merit goods as identical to positive externalities. Merit-good underconsumption can arise from information failure.
- Shading the gap between MSC and MPC as welfare loss. That gap is MEC; welfare loss covers inefficient units.
- Using the wrong curve for the source of the externality. Production externalities usually create a cost-side divergence; consumption externalities usually create a benefit-side divergence.
- Assuming positive production externalities mean MSB must exceed MPB. A consistent cost-side representation may instead show MSC below MPC.
- Calling adverse selection moral hazard. Adverse selection concerns hidden characteristics before contracting; moral hazard concerns hidden action after contracting.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Externalities and Social Costs and Benefits revision notes.