Deck 4: Market Failures: Public Goods and Externalities

Question 1

The two main characteristics of a public good are

A)production at constant marginal cost and rising demand.
B)nonexcludability and production at rising marginal cost.
C)nonrivalry and nonexcludability.
D)nonrivalry and large negative externalities.

Answer 1

nonrivalry and nonexcludability.

Question 2

Which of the following is the best example of a supply-side market failure?

A)No one provides street lights in a town because, once the lights are in operation, people don’t have to pay to use them.
B)A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.
C)Government imposes taxes on the production of a socially desirable good.
D)Street performers don’t get full payment for the value of their output because people watch and enjoy the shows without paying the artist.

Answer 2

A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.

Question 3

Nonrivalry and nonexcludability are the main characteristics of

A)consumption goods.
B)capital goods.
C)private goods.
D)public goods.

Answer 3

public goods.

Question 4

At the output level defining allocative efficiency,

A)the areas of consumer and producer surplus necessarily are equal.
B)marginal benefit exceeds marginal cost by the greatest amount.
C)consumer surplus exceeds producer surplus by the greatest amount.
D)the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

Question 5

Supply-side market failures occur when

A)supply curves don't reflect consumers' full willingness to pay for a good or service.
B)supply curves don't reflect the full cost of producing a good or service.
C)government regulates production of a good or service.
D)a good or service is not supplied because no one wants it.

Question 6

At the output where the combined amounts of consumer and producer surplus are largest,

A)the areas of consumer and producer surplus necessarily are equal.
B)the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
C)consumer surplus exceeds producer surplus by the greatest amount.
D)marginal benefit exceeds marginal cost by the greatest amount.

Question 7

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42.The minimum acceptable price to the seller, Nathan, was $30.Jennifer experiences

A)a consumer surplus of $12, and Nathan experiences a producer surplus of $3.
B)a producer surplus of $9, and Nathan experiences a consumer surplus of $3.
C)a consumer surplus of $9, and Nathan experiences a producer surplus of $3.
D)a producer surplus of $9, and Nathan experiences a producer surplus of $12.

Question 8

Which of the following is an example of market failure?

A)negative externalities
B)positive externalities
C)public goods
D)all of these

Question 9

What two conditions must hold for a competitive market to produce efficient outcomes?

A)Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay.
B)Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.
C)Firms must minimize production costs, and consumers must minimize total expenditures.
D)Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay.

Question 10

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle

A)under the demand curve and below the actual price.
B)under the demand curve and above the actual price.
C)above the supply curve and above the actual price.
D)above the supply curve and below the actual price.

Question 11

Which of the following conditions does not need to occur for a market to achieve allocative efficiency?

A)Consumers' maximum willingness to pay equals producers' minimum acceptable price for the last unit of output.
B)The sum of producer and consumer surplus is maximized.
C)The total revenue received by producers equals the total cost of production.
D)The marginal benefit of the last unit produced equals the marginal cost of producing that unit.

Question 12

Producer surplus is the difference between

A)the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
B)the quantity supplied and quantity demanded at an above equilibrium price.
C)the minimum prices producers are willing to accept for a product and the higher equilibrium price.
D)the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

Question 13

Allocative efficiency occurs only at that output where

A)marginal benefit exceeds marginal cost by the greatest amount.
B)consumer surplus exceeds producer surplus by the greatest amount.
C)the combined amounts of consumer surplus and producer surplus are maximized.
D)the areas of consumer and producer surplus are equal.

Question 14

From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically

A)generates more of a benefit than it costs to produce.
B)produces a benefit exactly equal to the cost of producing the last unit.
C)maximizes the net benefit to society.
D)costs more to produce than it provides in benefits.

Question 15

Graphically, producer surplus is measured as the area

A)under the demand curve and below the actual price.
B)under the demand curve and above the actual price.
C)above the supply curve and above the actual price.
D)above the supply curve and below the actual price.

Question 16

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others.If Transcontinental does not pay for the damage it causes, what has occurred?

A)positive externality
B)demand-side market failure
C)supply-side market failure
D)all of these

Question 17

A producer's minimum acceptable price for a particular unit of a good

A)is the same for all units of the good.
B)will, for most units produced, equal the maximum that consumers are willing to pay for the good.
C)equals the marginal cost of producing that particular unit.
D)must cover the wages, rent, and interest payments necessary to produce the good but need not include profit.

Question 18

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay.Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like.This is an example of a

A)negative externality.
B)supply-side market failure.
C)demand-side market failure.
D)government failure.

Question 19

Market failures

A)are only a concern when they result in prices that are too high.
B)apply exclusively to situations where private markets do not produce any of an economically desirable good.
C)result in overproduction or underproduction of a good.
D)result from government interference in private markets.

Question 20

An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which

A)marginal cost exceeds marginal benefit.
B)maximum willingness to pay exceeds minimum acceptable price.
C)consumer surplus exceeds producer surplus.
D)producer surplus exceeds consumer surplus.

Question 21

The socially optimal amount of pollution abatement occurs where society's marginal

A)benefit of abatement exceeds its marginal cost of abatement by the greatest amount.
B)benefit of abatement equals its marginal cost of abatement.
C)benefit of abatement is zero.
D)cost of abatement is at its maximum.

Question 22

According to the marginal-cost-marginal-benefit rule,

A)only government projects (as opposed to private projects) should be assessed by comparing marginal costs and marginal benefits.
B)the optimal project size is the one for which MB = MC.
C)the optimal project size is the one for which MB exceeds MC by the greatest amount.
D)project managers should attempt to minimize both MB and MC.

Question 23

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of

A)increasing costs.
B)diminishing returns.
C)diminishing marginal utility.
D)conservation of matter and energy.

Question 24

Which of the following statements is not true?

A)Some public goods are paid for by private philanthropy.
B)Private provision of public goods is usually unprofitable.
C)The free-rider problem results from the characteristics of nonrivalry and nonexcludability.
D)Public goods are only provided by government.

Question 25

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display.Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that

A)the display creates negative externalities.
B)government should tax the producers of holiday lighting.
C)resources are currently overallocated to the provision of holiday lighting in Anytown.
D)resources are currently underallocated to the provision of holiday lighting in Anytown.

Question 26

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve?

A)frozen yogurt
B)bubble gum
C)microwave popcorn
D)courts of law

Question 27

Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the third unit of a public good.Also, assume that the marginal cost of the third unit is $17.We can conclude that

A)the third unit should not be produced.
B)the third unit should be produced.
C)zero units should be produced.
D)4 units should be produced.

Question 28

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of

A)diminishing marginal utility.
B)conservation of matter and energy.
C)demand.
D)diminishing returns.

Question 29

Because of the free-rider problem,

A)the market demand for a public good is overstated.
B)the market demand for a public good is nonexistent or understated.
C)government has increasingly yielded to the private sector in producing public goods.
D)public goods often create serious negative externalities.

Question 30

A positive externality or spillover benefit occurs when

A)product differentiation increases the variety of products available to consumers.
B)the benefits associated with a product exceed those accruing to people who consume it.
C)a firm does not bear all of the costs of producing a good or service.
D)firms earn positive economic profits.

Question 31

The market system does not produce public goods because

A)there is no need or demand for such goods.
B)private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
C)public enterprises can produce such goods at lower cost than can private enterprises.
D)their production seriously distorts the distribution of income.

Question 32

(Consider This) Suppose that a new band, "Balin and the Wolf Riders," tries to sell its music on the Internet.Economists would expect

A)all of those enjoying the music to pay for downloads and compensate the band for its costs.
B)some of those enjoying the music to "free ride" through illegal file sharing and digital piracy.
C)government to tax those attempting to download the band's music.
D)there to be no consumer surplus for those who download the band's music.

Question 33

Non excludability describes a condition where

A)one person's consumption of a good does not prevent consumption of the good by others.
B)there is no effective way to keep people from using a good once it comes into being.
C)sellers can withhold the benefits of a good from those unwilling to pay for it.
D)there is no potential for free-riding behavior.

Question 34

Public goods are those for which there

A)is no free-rider problem.
B)are no externalities.
C)are nonrivalry and non excludability.
D)are rivalry and excludability.

Question 35

Toll-free roads sometimes get congested, such as during rush-hour traffic.During those times, we would say that these roads are

A)excludable and rival.
B)excludable and nonrival.
C)nonexcludable and nonrival.
D)nonexcludable and rival.

Question 36

At the optimal quantity of a public good,

A)marginal benefit exceeds marginal cost by the greatest amount.
B)total benefit equals total cost.
C)marginal benefit equals marginal cost.
D)marginal benefit is zero.

Question 37

Unlike a private good, a public good

A)has no opportunity costs.
B)has benefits available to all, including nonpayers.
C)produces no positive or negative externalities.
D)is characterized by rivalry and excludability.

Question 38

A negative externality or spillover cost occurs when

A)firms fail to achieve allocative efficiency.
B)firms fail to achieve productive efficiency.
C)the price of a good exceeds the marginal cost of producing it.
D)the total cost of producing a good exceeds the costs borne by the producer.

Question 39

A public good

A)can be profitably produced by private firms.
B)is characterized by rivalry and excludability.
C)produces no positive or negative externalities.
D)is available to all and cannot be denied to anyone.

Question 40

Alex, Kara, and Susie are the only three people in a community.Alex is willing to pay $40 for the third unit of a public good; Kara is willing to pay $25.If the marginal cost of producing the third unit is $100, what is the minimum amount that Susie must be willing to pay for it to be efficient for government to produce the third unit?

A)$35
B)$100
C)$65
D)The amount cannot be determined with the information provided.

Question 41

Allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum.

Question 42

(Consider This) The principle that private negotiation can resolve potential externalities without resorting to government intervention is known as the Coase theorem.

Question 43

Where there is asymmetric information between buyers and sellers,

A)product shortages will occur at the equilibrium price.
B)product surpluses will occur at the equilibrium price.
C)markets can produce inefficient outcomes.
D)markets will fail due to the "free-rider problem."

Question 44

Along a supply curve, product price and producer surplus are inversely related.

Question 45

(Consider This) According to the Coase theorem,

A)government should levy excise taxes on firms that generate spillover or external costs.
B)taxes should be levied such that they change private behavior as little as possible.
C)private individuals can often negotiate their own resolution of externality problems, without the need for government intervention.
D)private firms should not provide public goods.

Question 46

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement.

Question 47

Along a demand curve, product price and consumer surplus are inversely related.

Question 48

When a supply-side market failure occurs, the costs are greater than the benefits for the last unit(s) of output produced.

Question 49

(Consider This) Augi is the hottest new pop singer, but her agent discovers that Internet sales of Augi's music have been poor due to Internet piracy.However, concerts are regularly sold out and merchandise (such as T-shirts) sells well.If Augi wants to enhance profits, economists would most likely recommend that she

A)charge more for downloads, concerts, and merchandise.
B)cut prices for downloads, concerts, and merchandise.
C)only give concerts.
D)keep prices of downloads low and raise prices for concerts and merchandise.

Question 50

Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the greatest amount.

Question 51

That government that has the smallest budget is the most efficient in the economic sense.

Question 52

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

Question 53

(Last Word) A cap-and-trade program

A)assigns a property right to the atmosphere.
B)mandates that every firm individually cut its emissions to below a certain level.
C)assigns a property right to polluting the atmosphere.
D)is easy to establish and enforce.

Question 54

Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or service.

Question 55

Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product.

Question 56

(Last Word) In a cap-and-trade program,

A)government fixes the price of pollution rights and firms choose how many permits to purchase.
B)government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other.
C)each firm is provided a fixed number of permits for a particular pollutant and no individual firm is allowed to acquire additional permits.
D)firms can emit whatever type of pollutant they want, so long as the total tonnage does not exceed a government-established quantity.

Question 57

Society's optimal amount of pollution abatement is where society's marginal benefit of abatement is zero.

Question 58

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

Question 59

Buyers will opt out of markets in which

A)there are significant negative externalities.
B)standardized products are being produced.
C)there is inadequate information about sellers and their products.
D)there are only foreign sellers.

Question 60

A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good.

Question 61

The moral hazard problem is the tendency of some parties to a contract to alter their behavior as a result of the contract in ways that are costly to the other party.

Question 62

Which of the following is an example of a market failure?

A)There are not enough tickets available to concerts of extremely popular performers and artists.
B)The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and procedures.
C)Successful public schools provide benefits to the students who attend them, as well as to the community as a whole, including those who don't go to those public schools.
D)Sharply declining prices of electronic equipment result in large numbers of bankruptcies in the computer industry.

Question 63

In response to the financial crisis that began in 2007, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future.This illustrates

A)the adverse selection problem.
B)the moral hazard problem.
C)the principal-agent problem.
D)logrolling.

Question 64

Upon buying a car with airbags, Indy begins to drive recklessly.This is an example of the

A)principal-agent problem.
B)adverse selection problem.
C)moral hazard problem.
D)free-rider problem.

Question 65

In a television advertisement for AFLAC supplemental health insurance, an ice skater says to his skating partner, "Do you want to try a triple jump?" She responds, "Why not, I have AFLAC." This response illustrates the

A)principal-agent problem.
B)adverse selection problem.
C)moral hazard problem.
D)free-rider problem.

Question 66

Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars.This is an example of

A)the moral hazard problem.
B)a spillover cost.
C)a positive externality.
D)asymmetric information.

Question 67

Insurance co-pays and deductibles are methods used by insurance companies to reduce moral hazard.

Question 68

Some sellers of used cars provide warranties to buyers, with the aim of reassuring buyers that the car is of good quality.These warranties help reduce the chance of what occurring?

A)negative externalities
B)adverse selection
C)spillover benefits
D)moral hazard

Question 69

As it applies to insurance, the moral hazard problem is the tendency for

A)those most likely to collect on insurance to buy it.
B)those who buy insurance to take less precaution in avoiding the insured risk.
C)sellers to price discriminate.
D)sellers to restrict output and charge high prices.

Question 70

If many people in a community get flu shots, the whole community benefits, including those that did not get flu shots.Therefore, not enough people may decide to get the shots.This is one illustration of

A)the market allocating resources efficiently.
B)monopoly power due to lack of competition.
C)supply-side market failure.
D)demand-side market failure.

Question 71

Which of the following situations is not an example of market failure?

A)Ben's Department Store cannot charge passers-by for using the sidewalk outside the store.
B)Ben cannot afford to buy a high-end Mercedes Benz luxury car.
C)Ben's Place is the only restaurant in town, and thus he has significant power to set menu prices.
D)Ben's Industries is dumping its wastewater into the unregulated river behind the factory.

Question 72

Professional buyers of antiques often have more information about the value of antique objects than do the sellers.This illustrates

A)the principal-agent problem.
B)the moral hazard problem.
C)the free-rider problem.
D)asymmetric information.

Question 73

Suppose an insurance company decided to offer divorce insurance.Based on the concept of moral hazard, economists would expect

A)all married couples to purchase divorce insurance.
B)no married couples to purchase divorce insurance.
C)mostly the couples with marital problems to purchase divorce insurance.
D)the divorce rate to decrease.

Question 74

Professor Gullible agreed to cancel the final examination if students promised to study for it anyway.The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Question 75

Sellers will opt out of markets in which

A)there are significant negative externalities.
B)standardized products exist.
C)there are only foreign buyers.
D)information about buyers is inadequate, and some buyers can impose high costs on the sellers.

Question 76

Which of the following statements about market failure is not true?

A)Market failure causes an inefficient allocation of resources, even in a competitive market.
B)Market failure can come from causes on the demand side or the supply side of a market.
C)Market failure always results from some government action or policy in a market.
D)Market failure can result from the number of sellers in a market being too few to ensure competition.

Question 77

The adverse selection problem is the tendency for insured drivers to drive recklessly.

Question 78

Asymmetric information always results in adverse selection.

Question 79

Suppose a firm offers its workers a cafeteria plan in which it allows workers to allocate a set amount of fringe benefit money toward specific insurance.Mary, who has five kids needing braces, selects the family dental coverage.This is an example of the

A)free-rider problem.
B)principal-agent problem.
C)adverse selection problem.
D)moral hazard problem.

Question 80

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized.This illustrates

A)the adverse selection problem.
B)the moral hazard problem.
C)the special interest effect.
D)logrolling.