Deck 4: Market Failures: Public Goods and Externalities

Question 1

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.

Answer 1

demand-side market failure.

Question 2

Market failure is said to occur whenever

A) private markets do not allocate resources in the most economically desirable way.
B) prices rise.
C) some consumers who want a good do not obtain it because the price is higher than they are willing to pay.
D) government intervenes in the functioning of private markets.

Answer 2

private markets do not allocate resources in the most economically desirable way.

Question 3

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.

Answer 3

costs more to produce than it provides in benefits.

Question 4

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 5

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 6

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 7

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 8

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 9

Demand-side market failures occur when

A) demand curves don't reflect consumers' full willingness to pay for a good or service.
B) demand curves don't reflect the full cost of producing a good or service.
C) government imposes a tax on a good or service.
D) a good or service is not produced because no one wants it.

Question 10

Consumer surplus

A) is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
B) is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.
C) is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
D) rises as equilibrium price rises.

Question 11

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences

A) a consumer surplus of $10, and Tony experiences a producer surplus of $190.
B) a producer surplus of $200, and Tony experiences a consumer surplus of $10.
C) a consumer surplus of $670, and Tony experiences a producer surplus of $200.
D) a producer surplus of $10, and Tony experiences a consumer surplus of $190.

Question 12

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 13

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 14

Other things equal, a fall in the market price caused by a change in supply will

A) increase consumer surplus.
B) decrease consumer surplus.
C) increase producer surplus while leaving consumer surplus unchanged.
D) decrease producer surplus while leaving consumer surplus unchanged.

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

If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then which of the following is true?

A) The benefit surpluses shared between consumers and producers will be maximized.
B) The benefit surpluses received by consumers and producers will be equal.
C) There will be no consumer or producer surplus.
D) Consumer surplus will be maximized, and producer surplus will be minimized.

Question 17

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.

Question 18

Which of the following is an example of market failure?

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

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

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 21

Answer the question on the basis of the following information for a public good. P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. The collective willingness of this society to pay for the second unit of this public good is

A) $2.
B) $4.
C) $6.
D) $8.

Question 22

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 23

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 24

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 25

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 26

Answer the question on the basis of the following information for a public good. P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be

A) 1 unit.
B) 2 units.
C) 3 units.
D) 4 units.

Question 27

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

A) a weather warning system
B) a television set
C) a sofa
D) a bottle of soda

Question 28

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 29

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 30

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 31

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 32

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 33

An efficiency loss (or deadweight loss)

A) is measured as the combined loss of consumer surplus and producer surplus from over- or underproducing.
B) results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price.
C) can result from underproduction, but not from overproduction.
D) can result from overproduction, but not from underproduction.

Question 34

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 35

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.

Question 36

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 37

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 38

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 39

Nonrivalry and nonexcludability are the main characteristics of

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

Question 40

If one person's consumption of a good does not preclude another's consumption, the good is said to be

A) nonrival in consumption.
B) rival in consumption.
C) nonexcludable.
D) excludable.

Question 41

Economists consider governments to be "wasteful"

A) whenever they over- or underallocate resources to a project.
B) only when they overallocate resources to a project.
C) only when they underallocate resources to a project.
D) whenever they attempt to correct a market failure.

Question 42

Answer the question on the basis of the following information for four highway programs of increasing scope. All figures are in millions of dollars. The data indicate that

A) there is no highway program that is economically justifiable on the basis of cost-benefit analysis.
B) the marginal cost and marginal benefit of Program A are $2 and $9, respectively.
C) the marginal cost and marginal benefit of Program C are $12 and $21, respectively.
D) program D is optimal because it maximizes the total benefit.

Question 43

Answer the question on the basis of the following information for four highway programs of increasing scope. All figures are in millions of dollars. On the basis of the data, we can say that

A) Program D is the most efficient on economic grounds.
B) Program C is the most efficient on economic grounds.
C) Program B is the most efficient on economic grounds.
D) Program A is the most efficient on economic grounds.

Question 44

Alex, Kara, and Susie are the only three people in a community. Alex is willing to pay $20 for the fifth unit of a public good; Kara, $15; and Susie, $25. Government should produce the fifth unit of the public good if the marginal cost is less than or equal to

A) $25.
B) $15.
C) $60.
D) $20.

Question 45

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?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 46

A demand curve for a public good is determined by

A) summing vertically the individual demand curves for the public good.
B) summing horizontally the individual demand curves for the public good.
C) combining the amounts of the public good that the individual members of society demand at each price.
D) multiplying the per-unit cost of the public good by the quantity made available.

Question 47

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 48

Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. If this good were a private good instead of a public one, the total quantity demanded at a $3 market price would be

A) 2 units.
B) 3 units.
C) 6 units.
D) 4 units.

Question 49

The following data are for a series of increasingly extensive flood-control projects. For Plan D marginal costs and marginal benefits are

A) $72,000 and $64,000, respectively.
B) $28,000 and $12,000, respectively.
C) $24,000 and $18,000, respectively.
D) $16,000 and $28,000, respectively.

Question 50

The following data are for a series of increasingly extensive flood-control projects. Plan C entails

A) marginal benefits in excess of marginal costs.
B)
B) fewer spillovers than either Plan A or Plan
C) an overallocation of resources to flood control.
D) an underallocation of resources to flood control.

Question 51

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 52

Pigovian taxes

A) are used to correct negative externalities.
B) are used to correct positive externalities.
C) are primarily designed to fund public goods.
D) are a form of income tax.

Question 53

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 54

Cost-benefit analysis attempts to

A) compare the real worth, rather than the market values, of various goods and services.
B) compare the relative desirability of alternative distributions of income.
C) determine whether it is better to cut government expenditures or reduce taxes.
D) compare the benefits and costs associated with any economic project or activity.

Question 55

If a good that generates positive externalities was produced and priced to take into account these spillover benefits, then its

A) price and output would increase.
B) output would increase, but price would remain constant.
C) price would increase and output would decrease.
D) price would increase, but output would remain constant.

Question 56

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 57

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 58

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 59

Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. Suppose government has already produced 4 units of this public good. The amount individual B is willing voluntarily to pay for the fourth unit is

A) $14.
B) $5.
C) $2.
D) $0.

Question 60

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 61

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 62

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

Question 63

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 64

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

Question 65

(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 66

(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 67

(Last Word) Because there are so many sources of carbon dioxide, making monitoring difficult and costly, many economists

A) prefer a carbon tax to cap-and-trade for reducing carbon dioxide emissions.
B) prefer cap-and-trade to a carbon tax for reducing carbon dioxide emissions.
C) believe that cap-and-trade and a carbon tax are both costly but should be implemented to reduce carbon dioxide emissions.
D) believe that neither cap-and-trade nor carbon taxes can effectively reduce carbon dioxide emissions.

Question 68

(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 69

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 70

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

Question 71

(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 72

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

Question 73

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

Question 74

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

Question 75

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

Question 76

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

Question 77

(Consider This) Darcy and Rachel live down the hall from each other in the same dorm. Darcy likes to play her music loudly down the hall, and Rachel finds the music annoying. A Coase theorem solution for this problem would be for

A) Darcy and Rachel to negotiate a mutually agreeable level of volume and/or selection of music.
B) the director of housing to impose a fine on Darcy whenever she plays her music too loud.
C) the dorm government to set a payment schedule by which Rachel would compensate Darcy for making her play her music at a lower volume.
D) the college to ban the playing of music in dorms.

Question 78

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 79

(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes

A) the Coase theorem.
B) the optimal allocation of a public good.
C) nonrivalry and nonexcludability.
D) a market for externality rights.

Question 80

(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.