Deck 3: Modeling Market Failure

Question 1

If MSC = 40.0 + 0.25Q, and MPC = 40.0 + 0.14Q, then production is associated with an externality specified as MEC = 40.0 + 0.36Q.

Answer 1

False

Question 2

A public good is characterized as possessing either nonrivalry in consumption or nonexcludable benefits.

Answer 2

False

Question 3

Environmental pollution can be characterized as a market failure that distorts the classical market outcome.

Answer 3

True

Question 4

The underlying assumptions of the Coase Theorem are that transactions are costless and that damages are accessible and can be measured.

Question 5

If the market for a public good is comprised of two consumers, 1 and 2, who have individual demands of p1 = 100 - 0.2Q_D and p2 = 250 - 0.5Q_D, then the market demand function would be P = 350 - 0.7Q_D.

Question 6

At an efficient equilibrium, MSB = MSC, which implies that Mπ = MEC.

Question 7

Nonexcludability refers to the possibility that the benefits of consumption can be shared.

Question 8

According to the Coase Theorem, assignment of property rights will permit bargaining that leads to an efficient solution only in the absence of externalities.

Question 9

At a competitive equilibrium, Mπ = 0, but at an efficient equilibrium MEC = 0.

Question 10

Property rights are the set of valid claims to a good or resource that allow its use and the transfer of ownership through a sale.

Question 11

If the third-party effects of a good generate benefits to a third party, it is a positive externality.

Question 12

Nonrivalness means that one person's consumption does not preclude that of another.

Question 13

The market demand for a public good such as environmental quality is found as the horizontal sum of all the individual demands for that good.

Question 14

The study conducted by Greenpeace China of the Pearl River Delta (PRD) region indicates that progress is being made to improve water quality.

Question 15

If property rights are held by the producer of an externality-generating good, then bargaining will continue as long as MEC > ρ > Mπ, where ρ represents the payment offered to the producer not to pollute.

Question 16

If recreational users of a natural resource hold the property rights to that resource, their bargaining stance with the producer of an externality-generating good who wants to use that resource is that they will accept a payment ρ as long as ρ < (MSC - MSB).

Question 17

If property rights for resources are shared, those resources are called common property resources.

Question 18

According to the textbook application, CD packaging is a negative production externality.

Question 19

If we define the relevant market as "environmental quality," then the market failure is due to the presence of a negative externality.

Question 20

If market is defined as a good or service whose production or consumption generates environmental damage, then the market failure is due to a negative externality.

Question 21

If a good has the characteristic of nonrivalness, it means that

A) the good is publicly provided
B) it is impossible to prevent others from sharing the benefits of consumption
C) the benefits linked to consumption are indivisible
D) none of the above

Question 22

At Q_C, the maximum payment recreational users of the river would be willing to pay the producer for a unit change in output is

A) DG
B) DEH
C) EH
D) none of the above

Question 23

The Coase Theorem assumes

A) transactions are costless
B) damages are accessible and measureable
C) both (a) and (b)
D) none of the above

Question 24

If it is not possible to prevent others from sharing in the benefits of a good's consumption, we say that the good

A) is an economic bad
B) is nonrival in consumption
C) has the characteristic of nonexcludability
D) is a private good

Question 25

In the presence of a negative externality

A) there is an overallocation of resources to production
B) the competitive equilibrium will not achieve an allocatively efficient solution
C) MSC exceeds MSB at the competitive output level
D) all of the above
E) (a) and (b) only

Question 26

The reduction in damages to the environment from changing output from Q_C to Q_E is

A) EH
B) DG
C) DEHG
D) DGH

Question 27

An external effect that generates costs to a third party is called

A) free-ridership
B) a positive externality
C) a negative externality
D) a marginal private cost

Question 28

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.

-Based on the model, the firm's M $\pi$ function must be

A) M $\pi$ = 20 - 0.8Q
B) P_E = $22.50
C) M $\pi$ = 0.3Q
D) M $\pi$ = 20 - 0.1Q

Question 29

The net gain to society from changing output from Q_C to Q_E is

A) DG
B) DEH
C) DGH
D) DEHG

Question 30

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.

-Based on the model, the MPC function is:

A) MPC = 20 - 0.8Q
B) MPC = 30 - 0.6Q
C) MPC = 10 + 0.8Q
D) MPC = 10 + 0.2Q

Question 31

The original 'long box' packaging of CD's is an example of

A) a positive production externality
B) a negative production externality
C) an envirotech industry
D) a negative consumption externality

Question 32

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.

-According to these relationships, the efficient output level arises where

A) Q_E = 25
B) Q_E = 40
C) Q_E = 20
D) none of the above

Question 33

Theoretically, the market demand for a public good is found by

A) vertically adding the MEC and MPC functions
B) overcoming free-ridership and vertically summing the price responses for each quantity
C) adding horizontally the marginal benefits received by each consumer at every price level
D) summing the quantities each person is willing and able to buy at each and every price

Question 34

According to the Coase Theorem

A) efficiency can result only if producers hold the property rights
B) an efficient outcome is possible as long as property rights are assigned
C) efficiency is not possible in the presence of an environmental externality
D) none of the above

Question 35

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.

-According to these relationships, the competitive output level arises where

A) Q_C = 25
B) Q_C = 20
C) Q_C = 40
D) none of the above

Question 36

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.

-Based on the model, the price at the efficient equilibrium is

A) P_E = $18
B) P_E = $22.50
C) P_E = $20
D) P_E = $40

Question 37

The loss of profit to the chemical solvent manufacturer from changing its output from Q_C to Q_E is

A) DGH
B) DEH
C) DEHG
D) EH

Question 38

A public good

A) possesses the characteristic of nonrivalry in consumption
B) is one whose benefits cannot be shared
C) is provided by the public sector
D) has nonexcludable benefits
E) both (a) and (d)

Question 39

The firm's marginal profit (M?) at the efficient equilibrium is

A) EH
B) HL
C) GK
D) DG

Question 40

Consider the following model for the production of refined oil: MSC = 10 + 0.5Q; MEC = 0.3Q;
MSB = 30 - 0.3Q; MEB = 0. Use these relationships to answer any or all of Questions.

-Based on the model, the competitive price level is

A) P_C = $18
B) P_C = $20
C) P_C = $25
D) P_C = $40

Question 41

Use the following graph of the refined petroleum market to answer the questions below.


-Describe the bargaining process between the refineries and the recreational water users, assuming the refineries have the right to pollute.

Question 42

Use the following graph of the refined petroleum market to answer the questions below.

Which area represents the net gain to society? Should the reduction in output from Q_C to Q_E take place? Why or why not?

Question 43

Use the following graph of the refined petroleum market to answer the questions below.

2 Which area represents the loss to the petroleum refineries as a result of the restoration of efficiency?

Question 44

Use the following graph of the refined petroleum market to answer the questions below.

Give the economic interpretation of each of the labeled areas: A, B, C, and D.