Question 1

Consider a childhood vaccination program that is fully effective if all children are vaccinated. Now suppose that all children except one are vaccinated and as a result that one child will not contract the disease. In economics, we can compare this situation to

Accepted Answer

The situation described is an example of the free-rider problem. The one unvaccinated child is able to benefit from the vaccinations of others without contributing to the cost or effort of getting vaccinated themselves. This can lead to a breakdown in the effectiveness of the vaccination program if too many people choose to free-ride.

Question 2

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. What is the optimal quantity of this public good to provide?

Accepted Answer

The answer of The diagram below shows the marginal benefit...

Question 3

Moral hazard is said to exist when one party to a transaction

Accepted Answer

Moral hazard occurs when one party has an incentive to take risks because they are not bearing the full costs of their actions. This can happen when a party purchases insurance, for example, because they know they can engage in risky behavior without bearing the full financial consequences. Therefore, the party has the incentive to shift costs to another party in the transaction.

Question 4

Suppose an advertising firm purchases additional insurance against theft, and as a result, the partners are not very careful about locking their office doors when they leave. This is an example of

Accepted Answer

This is an example of moral hazard, where the purchase of insurance leads to increased risk-taking behavior. In this case, the partners are not taking necessary precautions because they believe the insurance will cover any losses resulting from theft.

Question 5

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If consumers were then required to pay a price of zero for the good,

Accepted Answer

The answer of The diagram below shows the marginal benefit...

Question 6

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. The curve MBABC is derived by

Accepted Answer

The curve MBABC is derived by a vertical summation of the marginal benefits of all individuals at each level of output, which is how the aggregate demand for public goods is typically represented.

Question 7

The fact that it is difficult to prevent people from using public goods once they are produced, even if they have not paid, is known as

Accepted Answer

The free-rider problem refers to the difficulty of excluding individuals from consuming public goods once they are produced, even if they have not contributed to their production. This leads to a situation where some individuals can benefit from the goods without paying for them, making it difficult to fund their production and maintenance.

Question 8

The efficient price to charge consumers for their use of a public good is

Accepted Answer

The answer of The efficient price to charge consumers for...

Question 9

It is inefficient for the government to charge a price for consuming public health information because

Accepted Answer

Public health information is a non-excludable and non-rival good, meaning that it cannot be excluded from anyone's use and the consumption of it by one person does not reduce its availability for others. Therefore, the cost of providing this information to an additional person is essentially zero, and it would not make sense for the government to charge a price for this type of good.

Question 10

Which of the following is the best description of a ʺfree riderʺ? Someone who

Accepted Answer

A free rider is someone who benefits from a good or service without paying for it. This is often seen in public goods, where individuals can enjoy the benefits of the good or service without contributing to its production or cost.

Question 11

Because of the free-rider problem,

Accepted Answer

The free-rider problem occurs when individuals can benefit from a public good without contributing to its production. This makes it difficult for private markets to produce public goods because individuals have no incentive to pay for them. Therefore, the best answer is D, as it correctly identifies the difficulty that private markets face in producing public goods due to the free-rider problem.

Question 12

Moral hazard often arises in the case of insurance because

Accepted Answer

The answer of Moral hazard often arises in the case...

Question 13

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the government was able to require consumers to pay a price of P4, then

Accepted Answer

The answer of The diagram below shows the marginal benefit...

Question 14

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. Once some quantity of this public good is provided, the efficient price to charge for its use is

Accepted Answer

Public goods are characterized by non-excludability and non-rivalry, meaning that once they are provided, additional users can use the good without additional costs. Therefore, the efficient price to charge for its use is approximately zero, as charging more would prevent some users from benefiting from the good without saving any costs.

Question 15

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. Suppose the optimal amount of this good is provided, but that Individual B was only consuming Q2 units of the good. What would be the marginal cost of Individual B consuming an extra unit of this good?

Accepted Answer

The answer of The diagram below shows the marginal benefit...

Question 16

Adverse selection is said to exist when an individual

Accepted Answer

Adverse selection is a situation where individuals who are at high risk for a certain event (such as car accidents, health problems, etc.) are more likely to purchase insurance, causing the insurance company to incur higher costs. This is because these high-risk individuals have more information about their own health or driving habits than the insurance company does, and can use this information to their advantage by purchasing a lot of insurance. This leads to a situation where the insurance company has to raise premiums for everyone in order to cover the costs of the high-risk individuals, resulting in a market failure.

Question 17

Why would it be inefficient for the government to charge a price for consuming a public good such as national defence?

Accepted Answer

The answer of Why would it be inefficient for the...

Question 18

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.
  FIGURE 16-4
-Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the government was able to require consumers to pay a price of P1, then

Accepted Answer

The answer of The diagram below shows the marginal benefit...

Question 19

An example of adverse selection is

Accepted Answer

Adverse selection refers to the situation where one party has more information than the other party in a transaction, leading to an imbalance of risk. In this case, the person purchasing more dental insurance knows that their teeth are in worse condition than the insurance company does, which puts the insurer at risk for having to cover more expensive dental procedures. The other choices do not necessarily involve adverse selection.

Question 20

The concept of moral hazard was publicly discussed in the context of the 2007 -2008 financial crisis because

Accepted Answer

The concept of moral hazard was discussed in the context of the 2007-2008 financial crisis because there was a fear that government bailouts of financial institutions would encourage them to continue engaging in risky behavior, knowing that they would be bailed out again in the future. This is known as moral hazard, and it was seen as a potential problem during the crisis.

Quiz 16: Market Failures and Government Intervention

Consider a childhood vaccination program that is fully effective if all children are vaccinated. Now suppose that all children except one are vaccinated and as a result that one child will not contract the disease. In economics, we can compare this situation to

Moral hazard is said to exist when one party to a transaction

Suppose an advertising firm purchases additional insurance against theft, and as a result, the partners are not very careful about locking their office doors when they leave. This is an example of

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits. FIGURE 16-4 -Refer to Figure 16-4. The curve MBABC is derived by

The fact that it is difficult to prevent people from using public goods once they are produced, even if they have not paid, is known as

The efficient price to charge consumers for their use of a public good is

It is inefficient for the government to charge a price for consuming public health information because

Which of the following is the best description of a ʺfree riderʺ? Someone who

Because of the free-rider problem,

Moral hazard often arises in the case of insurance because

Adverse selection is said to exist when an individual

Why would it be inefficient for the government to charge a price for consuming a public good such as national defence?

An example of adverse selection is

The concept of moral hazard was publicly discussed in the context of the 2007 -2008 financial crisis because