Deck 4: Economic Efficiency and Markets

Question 1

External benefits can drive a wedge between the market demand curve and the social marginal WTP curve resulting in a market failure.

Answer 1

True

Question 2

The fact that my consumption of a public good does not diminish your consumption is called ________ and the fact that once a public good is made available to one individual it automatically becomes available to all is called ________.

A)non-exclusion;non-rivalness
B)non-rivalness;free-riding
C)free HYPERLINK "" Error! Hyperlink reference not valid.access;non-exclusion
D)non-rivalness;non-exclusion

Answer 2

D

Question 3

In the following figure the net social value is equal to ________.

A)area c
B)areas a + b - c
C)areas a + b + c
D)areas a + b

Answer 3

D

Question 4

In the following figure,social MWTP equals private MWTP plus external benefits from production.In this market,the socially efficient level of output is ________.

A)Q₁
B)Q₂
C)Q₃
D)none of the choices are correct

Question 5

When production results in environmental degradation,private firms do not take the ________ into consideration when making their output decisions resulting in ________.

A)external costs;a market failure
B)market failure;an externality
C)social costs;pollution
D)market failure;pollution

Question 6

In the case of open access resources and public goods,the competitive market output level will be socially efficient.
Market failure in both cases results in the competitive market output level differing from what is socially efficient.

Question 7

Suppose the marginal willingness to pay for a certain good is represented by the equation MWTP = 490 - 0.25Q^D and the marginal cost of production equation for this good is represented by the equation MC = 40 + 2Q^S.Assuming these curves capture all market and non-market values,solve for the socially efficient level of output and the net social benefits at this level of output.

Question 8

When the rate of output is at the socially efficient level,the total willingness to pay is as large as possible.
At the socially efficient level of output net social value which is equal to total WTP minus total costs is as large as possible.

Question 9

________ cause private and social marginal cost curves to diverge while ________ cause private demand and social marginal WTP to diverge.

A)External benefits;external costs
B)External costs;external benefits
C)Market failures;public goods
D)Taxes;subsidies

Question 10

List three causes of market failure and give an example of each.

Question 11

Suppose demand for a public park (assume it is a pure public good)for two groups of consumers (A and B)is given by:
Q_A = 12 - 2P
Q_B = 8 - P
where Q is the number of hectares each group would like to see incorporated into the park.If the marginal cost to provide the park is a constant $9.50/ha,what is the socially efficient number of hectares for the park?

Question 12

If social values are not reflected in the market values determined by the market demand and market supply curves,the competitive market equilibrium output will still be the socially efficient level of output.

Question 13

The following equations represent the MWTP function and the private MC function in the market for some good where an external cost like pollution results in damages of $6 per unit of the good produced:
MWTP = 65 - 0.5Q^D
MPC = 2 + Q^S
Solve for the competitive market equilibrium output and the socially efficient level of output for this market.

Question 14

In the following figure,the socially efficient level of output is equal to ________.

A)Q₁
B)Q₂
C)Q₃
D)none of the choices are correct

Question 15

External costs can drive a wedge between the market demand curve and the social marginal WTP curve resulting in a market failure.
External costs drive a wedge between private marginal costs (i.e. ,the market supply curve)and social marginal costs.

Question 16

Suppose for a given market that the MWTP = 300 - 0.5Q^D and MC = 50 + 2Q^S.Assuming all market and non-market values are incorporated into these equations,the MWTP at the socially efficient level of output is equal to ________.

A)100 units
B)140 units
C)$230
D)$250

Question 17

The following equations represent the MWTP function and the private MC function in the market for some good where a negative externality (i.e. ,pollution)results in damages of $12 per unit of the good produced:
MWTP = 400 - Q^D
MPC = 55 + 0.5Q^S
Solve for the competitive market equilibrium output and the socially efficient level of output for this market.

Question 18

Free parking is an example of a pure public good.
Although free parking is non-excludable,it is still a rival good since when someone has taken the free parking spot no one else can use it.

Question 19

In the case of an open access resource,a(n)________ takes place due to a lack of ________.

A)externality;regulation
B)free rider problem;property rights
C)market failure;property rights
D)external benefit;rivalry in consumption

Question 20

The following equations represent the private MWTP function and the MC function in the market for some good where an external benefit results in benefits of $9 per unit of the good consumed:
Private MWTP = 98 - 0.5Q^D
MC = 20 + 0.25Q^S
Solve for the competitive market equilibrium output and the socially efficient level of output for this market.

Question 21

Suppose demand for a public park (assume it is a pure public good)for two groups of consumers (A and B)is given by:
Q_A = 4 - 0.5P
Q_B = 7 - P
where Q is the number of hectares each group would like to see incorporated into the park.If the marginal cost to provide the park is a constant $3/ha,what is the socially efficient number of hectares for the park?