Deck 8: Market Failure

Question 1

If a negative externality results from the production of chemicals,an external cost is imposed on parties not directly involved in the market for the chemicals.

Answer 1

True

Question 2

An example of a public good is a flood control project that protects all the homes and properties near a river.

Answer 2

True

Question 3

A cost that spills over onto individuals not directly involved in an activity is called a positive externality.

Answer 3

False

Question 4

One way to overcome an adverse selection problem when buying a used car is to hire an independent mechanic to inspect the car before making a purchase.

Question 5

The over hunting of U.S.buffalo that nearly caused their extinction would be an example of the tragedy of the commons.

Question 6

Positive externalities exist any time the social costs of producing a good or service exceed the private costs.

Question 7

When negative externalities are present,it leads to an underallocation of resources in that area relative to that which is socially desirable.

Question 8

Moral hazard occurs when an informed party benefits in an exchange by taking advantage of knowing more than the other party.

Question 9

Inoculation against communicable diseases is an example of an activity that generates positive externalities.

Question 10

Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded.

Question 11

Since it is difficult to establish and enforce ownership rights over air,people have less incentive to preserve air quality than if its ownership was clearly defined.

Question 12

The failure of private incentives to provide adequate maintenance of public resources leads to the tragedy of the commons.

Question 13

If mining companies are able to shift some of their production costs onto outside parties,the actual output of mines is likely to fall short of society's ideal.

Question 14

Information supplied to consumers by the government rarely ever helps in making better decisions.

Question 15

Positive externalities include benefits received the seller but not benefits received by the buyer.

Question 16

A public good is nonrivalrous and excludable.

Question 17

Someone who does not contribute toward covering the cost of a good he desires,and yet he cannot be excluded from receiving the good,is called a free rider.

Question 18

Adverse selection occurs when a fully insured person fails to take as many precautions against risk as she would if uninsured.

Question 19

When positive externalities are present,it leads to an underallocation of resources in that area relative to that which is socially desirable.

Question 20

A public good or service can be consumed by paying and nonpaying customers alike.

Question 21

An example of a positive externality is:

A) freeway congestion.
B) pollution in a resort lake.
C) airport noise.
D) beautiful trees on property along a parkway.

Question 22

Increase in the number of transactors makes it difficult to negotiate private agreements.

Question 23

It is possible to increase our consumption of a clean environment without giving up anything.

Question 24

An externality occurs when:

A) people other than those making the demand and supply decisions share the benefits or the costs of an activity.
B) only the people making the demand and supply decisions share the benefits or the costs of an activity.
C) private costs of production equal the full social costs associated with production of a good.
D) private costs of production are ignored.

Question 25

The main duty of the Environmental Protection Agency is to monitor a government-enforced system of property rights.

Question 26

The Coase theorem implies that an efficient solution is possible only if property rights are well-defined.

Question 27

The least-cost abatement pattern will require all polluters to clean up on an equal basis.

Question 28

Economists prefer greater effort made to force internalization of externalities through taxes rather than using alternative approaches.

Question 29

Golf course developers who buy the land around the golf course they build are attempting to:

A) impose external costs on non-consenting third parties.
B) internalize external benefits.
C) turn a private good into a public good.
D) internalize external costs.

Question 30

Costs that accrue to the total population are called ____ costs.Costs incurred by the producer or consumer who makes the decision are called ____ costs.

A) negative; positive
B) social; private
C) private; social
D) positive; negative

Question 31

Transferable pollution rights would allow firms to move into an area that is already as polluted as allowed by EPA standards.

Question 32

Under the pollution rights approach,polluters have little or no incentive to develop improved pollution abatement technologies.

Question 33

Which of the following is an example of an externality?

A) cigarette smoke that permeates an entire restaurant
B) a flu shot that prevents a student from transmitting the virus
C) a beautiful flower garden outside the county courthouse
D) All of the above are correct.

Question 34

The total social costs of production are:

A) private costs plus private benefits.
B) private benefits minus private costs.
C) private costs plus external costs.
D) private costs minus external costs.

Question 35

Negative externalities are costs incurred by:
i.buyers
ii.sellers
iii.someone other than buyers or sellers

A) (i) only
B) (ii) only
C) (iii) only
D) both (i) and (ii)

Question 36

Private costs are those borne by:

A) the government.
B) the producer of an item.
C) both an item's producer and outside parties affected by a negative externality.
D) outside parties affected by a negative externality.

Question 37

The Coase theorem holds well in situations where information and transaction costs are significant.

Question 38

The presence of negative externalities leads to a misallocation of societal resources because:

A) whenever external costs are imposed on outside parties, the good should not be produced at all.
B) less of the good than is ideal for society is produced.
C) there are some costs associated with production that the producer fails to take into consideration.
D) the government always intervenes in markets when negative externalities are present, and the government is inherently inefficient.

Question 39

Which of the following will most likely generate positive externalities?

A) a hot dog vendor
B) public education
C) an automobile
D) a steel mill

Question 40

Transaction costs are the cost of negotiating and executing an exchange.

Question 41

An example of a negative externality is:

A) the benefit you receive when your neighbor installs a smoke detector.
B) the reduction in profits for your company that occurs when there is a decrease in consumer demand for the product you manufacture.
C) the sleep you lose when your neighbor throws a loud party next door that keeps you awake.
D) the change in the property values of your neighbors' homes when you paint your house and landscape your front yard

Question 42

Which of the following provides an example of an externality?

A) The air pollution generated when you drive your car.
B) The view that passersby and neighbors enjoy when observing your rose garden.
C) The free concerts neighbors hear when an accomplished musician practices at home.
D) All of the above.

Question 43

If positive externalities are present in the production of a good,then society will:

A) produce too much of the good since the marginal private benefit to consumers is less than the marginal social benefit.
B) produce too little of the good since the marginal private benefit to consumers is greater than the marginal social benefit.
C) produce too much of the good since the marginal private benefit to consumers is greater than the marginal social benefit.
D) produce too little of the good since the marginal private benefit to consumers is less than the marginal social benefit.

Question 44

A positive externality will cause a market to produce:

A) more than the efficient equilibrium output level.
B) less than the efficient equilibrium output level.
C) the efficient equilibrium output level.
D) None of the above.

Question 45

Which of the following is (are)true when one firm's research and production can increase another firm's access to technological advances?

A) It is called a technology spillover.
B) Other firms will imitate and improve on the new knowledge.
C) If there is no subsidy, the market equilibrium output level is less than the efficient equilibrium output level.
D) All of the above.

Question 46

Which of the following statements is true?

A) Externalities can never refer to costs borne by the seller.
B) Both external costs and external benefits can never exist for the same good.
C) Externalities can never lead to under-production of a specific good.
D) External benefits can never exceed external costs.

Question 47

Consider two goods-one that generates external benefits and another that generates external costs.A competitive market economy would tend to produce:

A) too much of both goods, relative to the social optimum.
B) too little of both goods, relative to the social optimum.
C) too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs.
D) too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs.

Question 48

In a market where firms are able to reduce their private costs by shifting costs onto others,which of the following will not happen?

A) Inefficiencies will occur.
B) Negative externalities will be observed.
C) The market prices of products produced by firms will be too low relative to the social optimum.
D) Output of the good being produced will be too low.

Question 49

If negative externalities are created in the production of a good,then society will:

A) produce too much of the good since the marginal private cost to firms is less than the marginal social cost.
B) produce too little of the good since the marginal private cost to firms is less than the marginal social cost.
C) produce too much of the good since the marginal private cost to firms is greater than the marginal social cost.
D) produce too little of the good since the marginal private cost to firms is greater than the marginal social cost.

Question 50

Which of the following activities,if any,represents an external cost?

A) The benefits that accrue to society when an individual receives a college education.
B) The increase in property values of vacant lots in an area near where a new amusement park is constructed.
C) The pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard.
D) None of the above

Question 51

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

A) A flu shot is less expensive than the cost of treatment when you get the flu.
B) The income of doctors increases when you get a flu shot.
C) A flu shot reduces the likelihood that others will catch the flu from you.
D) A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income.

Question 52

Which of the following activities,if any,represents an external cost?

A) The reduction in the incidence of chicken pox when children are inoculated against the disease.
B) The damage to a person's health from secondhand smoke.
C) The increase in local property values when the city creates a neighborhood park.
D) The price you pay for the prime rib that you consume at a local restaurant.

Question 53

Suppose that a mayor of a large city believes strongly that education provides great benefits to the community and urges the state government to provide the district with more money.An economist would say that this reflects the Mayor's belief that:

A) since teachers are overpaid, the district needs more money to hire enough teachers for its classrooms.
B) there are positive external benefits associated with education.
C) there are nontrivial external costs associated with education.
D) public schools provide a higher quality education than private schools.

Question 54

If a positive externality results from the consumption of higher education,then the marginal benefit students receive from education:

A) equals the marginal social benefit.
B) is less than the marginal social benefit.
C) includes the marginal external benefit.
D) exceeds the marginal social benefit.

Question 55

If a negative externality results from the refining of oil,the cost of production as seen by the oil refinery:

A) does not include the external cost.
B) includes the external cost.
C) does not include the external benefit.
D) includes the external benefit.

Question 56

Suppose that flu shots create a positive externality equal to $20 per shot.What is the relationship between the market equilibrium output level and the efficient equilibrium output produced?

A) They are equal.
B) The market equilibrium output level is greater than the efficient equilibrium output level.
C) The market equilibrium output level is less than the efficient equilibrium output level.
D) None of the above.

Question 57

Which of the following activities,if any,represents an external benefit?

A) The benefit to a consumer from watching a film on DVD.
B) The reduction in air quality resulting from industrial development in an urban area.
C) The increase in the value of property belonging to your neighbors when you hire a landscaper to beautify your front yard.
D) The reduction in property values when a new airport is built in a neighborhood.

Question 58

Which of the following activities,if any,represents an external benefit?

A) The benefit to a consumer from consuming a Caesar salad.
B) The damage to a person's health from secondhand smoke.
C) The reduction in tourist revenues at a beach resort caused by an oil spill.
D) None of the above

Question 59

If education produces positive externalities and the government does not intervene in the market,we would expect

A) the market equilibrium price to be higher than the efficient equilibrium price.
B) the market equilibrium quantity to be lower than the efficient equilibrium output level.
C) the market equilibrium quantity to be higher than the efficient equilibrium output level.
D) none of the above

Question 60

An negative externality is present whenever:

A) the private marginal cost of an activity exceeds the private marginal benefit.
B) the private marginal benefit of an activity exceeds the private marginal cost.
C) the social marginal cost of an activity exceeds the private marginal cost.
D) none of the above

Question 61

To internalize a negative externality:

A) a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good.
B) a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.
C) a producer could receive a subsidy equal to the external cost resulting from the production of a good.
D) None of the above are correct.

Question 62

Nonrivalry in consumption and the inability to exclude nonpaying consumers from using the goods are characteristics of what kinds of goods?

A) durable
B) nondurable
C) public
D) private

Question 63

Suppose that firms in the chemical industry are allowed,free of charge,to dump harmful products into rivers.If this is the case in a competitive market,how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?

A) Price is too low; output is too large.
B) Price is too high; output is too large.
C) Price is too low; output is too small.
D) Price is too high; output is too small.

Question 64

If there are significant external costs associated with the production of a product,it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation.

A) overstates; increase
B) understates; increase
C) overstates; decrease
D) understates; decrease

Question 65

If there are significant external benefits associated with the consumption of a product,it can be said that the private benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the efficient situation.

A) overstates; increase
B) understates; increase
C) overstates; decrease
D) understates; decrease

Question 66

As an additional consumer obtains the benefits of a public good such as national defense,the benefits to existing consumers:

A) decline.
B) increase.
C) increase in the short run, but decrease in the long run.
D) do not change.

Question 67

Which of the following is an example of a public good?

A) telephone service
B) national defense
C) a city-owned bus
D) electricity generated by a city-owned public utility

Question 68

Currently Q₀ of electrical power is being produced.The demand curve is represented by D,and the current market supply is represented by S₀.It is discovered that the Rocky Mountain Electrical Co-op and Power Company is discharging waste into the area water supply.As a result,S₁ represents ____ and a price of ____ would represent the true internalized cost of production at that level of output.

A) the supply curve with external costs included; P₂
B) the supply curve with external costs included; P₁
C) the supply curve with external costs included; P₀
D) There is insufficient information available to provide an accurate answer.

Question 69

A corrective tax equal to the external cost imposed on third parties levied on polluters will:

A) eliminate all pollution.
B) increase the level of pollution.
C) force polluters to internalize the external cost resulting from their actions.
D) usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government.

Question 70

Exhibit 8-1 Refer to Exhibit 8-1.Suppose that education provides spillover benefits to the community as illustrated in the diagram.Based on this information,we can say that:

A) the market would fall short of the desirable level of education, Q₀.
B) education is overproduced by Q₁ minus Q₀ units.
C) the socially optimal quantity of education is Q₁ units.
D) the socially optimal quantity of education is Q₀ units.

Question 71

If firms were required to pay the full social costs of the production of goods,including both private and external costs,other things being equal,there would probably be:

A) an increase in production.
B) a decrease in production.
C) a greater misallocation of resources.
D) a decrease in the market price of the product.

Question 72

If the production of a particular good involves significant external costs,to force the externality to be internalized the government might:

A) impose a tax on production of the good in order to increase production.
B) impose a tax on production of the good in order to decrease production.
C) offer a subsidy for production of the good in order to increase production.
D) offer a subsidy for production of the good in order to decrease production.

Question 73

Exhibit 8-1 Refer to Exhibit 8-1.The area bounded by what letters represents the associated efficiency loss resulting when there are external benefits associated with education?

A) Q₀, c, b, Q₁
B) O, P₁, b, Q₁
C) O, P₀, a, Q₀
D) a, b, c

Question 74

To internalize a positive externality:

A) the consumers of a good could receive a subsidy equal to the external benefit resulting from the production or consumption of the good.
B) a producer's costs could be increased by an amount equal to the external benefit resulting from the production of the good.
C) consumers of the good could pay a tax equal to the external benefit resulting from the production or consumption of the good.
D) None of the above are correct.

Question 75

If the production of a particular good involves significant external benefits,to force the externality to be internalized the government might:

A) impose a tax on production of the good in order to increase production.
B) impose a tax on production of the good in order to decrease production.
C) offer a subsidy for production of the good in order to increase production.
D) offer a subsidy for production of the good in order to decrease production.

Question 76

Which of the following would be an example of a nongovernmental solution to a problem associated with externalities?

A) society's preference to drive large cars and SUVs
B) new stricter anti-litter laws
C) a general moral commitment against using sprinklers during a drought
D) tax credits for the purchase of hybrid autos

Question 77

Which of the following is a valid reason for the government rather than the market to finance the provision of certain economic goods and services?

A) When the government provides economic goods, they are free; costs are incurred when such goods are provided by private firms.
B) Voters tend to be better informed than market consumers are.
C) Decision makers in the market sector are motivated by self-interest, whereas political decision makers are primarily motivated by altruism (the desire to help others).
D) Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers; the government can use taxes to overcome this problem of nonpayment.

Question 78

A tax equal to the external cost on firms that emit pollutants would:

A) provide firms with the incentive to increase the level of activity creating the pollution.
B) provide firms with the incentive to decrease the level of activity creating the pollution.
C) provide firms with little incentive to search for less environmentally damaging production methods.
D) not reduce pollution levels at all.

Question 79

If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities,other things being equal,there would probably be:

A) an increase in consumption.
B) a decrease in consumption.
C) a greater misallocation of resources.
D) a decrease in the market price of the product.

Question 80

Because of the problem of second-hand smoke,if unregulated,the market for cigarettes would produce a quantity that is too ____ at a price that is too ____ when compared to the socially optimal results.

A) low; low
B) high; low
C) low; high
D) high; high