Deck 8: Market Failure

Question 1

Technology spillovers are examples of negative externalities.

Answer 1

False

Question 2

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

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

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

Question 5

When a price fails to reflect all the costs of a product, too much of it is produced and/or consumed.

Question 6

Pollution taxes always cause deadweight losses, reducing economic efficiency.​

Question 7

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

Question 8

When one more car enters a crowded highway it increases the travel times of all other drivers on the highway creating a negative externality.

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Question 14

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 15

A technology spillover occurs when one firm's research and production increase another firm's access to technological advances.

Question 16

A public good is nonrivalrous and excludable.

Question 17

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.

Question 18

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

Question 19

When your neighbor's dog barks all night long, this is an example of a negative externality.

Question 20

When a price fails to reflect all the benefits of a product, too much of it is produced and/or consumed.

Question 21

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 22

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

Question 23

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

Question 24

Corrective taxes are generally more efficient than regulatory mandates keeping the environment clean.

Question 25

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

Question 26

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Question 27

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

Question 28

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

Question 29

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 30

Economists generally prefer greater effort made to force internalization of externalities through taxes rather than using alternative approaches, such as establishing pollution standards.

Question 31

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

Question 32

Economists believe that the optimal level of pollution is zero.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

The least costly way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Question 39

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

Question 40

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

Question 41

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

Question 42

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 43

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 examples of externalities.

Question 44

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

Question 45

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 46

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 47

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 48

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 49

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 50

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 51

If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are greater than the external costs,

A)​More than the efficient amount is being produced
B)​Less than the efficient amount is being produced
C)​the efficient amount is being produced
D)​We do not know whether the efficient amount, or more or less, is being produced.

Question 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

A positive externality is present whenever:

A)​the social marginal benefit 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 60

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

Question 61

If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are less than the external costs,

A)​More than the efficient amount is being produced
B)​Less than the efficient amount is being produced
C)​the efficient amount is being produced
D)​We do not know whether the efficient amount, or more or less, is being produced.

Question 62

As a result of technology spillovers: Taxes may move us closer to the efficient output level in such industries.

A)​Other members of society bear external costs.
B)​Too much production takes place in the high technology areas.
C)​Taxes may move us closer to the efficient output level in such industries.
D)​None of the above are true.

Question 63

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 64

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 65

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 66

If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are greater than the external costs,

A)​Taxing it could bring us closer to the efficient solution
B)​Subsidizing it could bring us closer to the efficient solution
C)​Neither a tax or a subsidy could bring us closer to the efficient solution
D)​None of the above is true.

Question 67

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 68

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 69

Technology spillovers:

A)​Can be reduced by way of patents.
B)​Can lead to clustering of technology firms near one another.
C)​Are examples of positive externalities.
D)​All of the above are true.

Question 70

The greater the magnitude of the external costs of production,

A)​The larger is the deadweight loss from overproduction.
B)​The greater would be the optimal pollution tax.
C)​The further the private market solution ignoring those costs would deviate from the socially efficient level of output.
D)​All of the above are true.

Question 71

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 72

The greater the magnitude of the external benefits of production,

A)​The larger is the deadweight loss from underproduction.
B)​The greater would be the optimal subsidy.
C)​The further the private market solution ignoring those benefits would deviate from the socially efficient level of output.
D)​All of the above are true

Question 73

If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are less than the external costs,

A)​Taxing it could bring us closer to the efficient solution
B)​Subsidizing it could bring us closer to the efficient solution
C)​Neither a tax or a subsidy could bring us closer to the efficient solution
D)​None of the above is true.

Question 74

A positive externality will cause a market to produce:

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

Question 75

The greater the magnitude of the external benefits of production,

A)​The larger is the deadweight loss from overproduction.
B)​The greater would be the optimal tax.
C)​The less the private market solution would deviate from the socially efficient level of output.
D)​All of the above are true.

Question 76

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 77

If there are both external benefits and external costs associated with the production and consumption of a good, and the external benefits are equal in magnitude to the external costs,

A)​More than the efficient amount is being produced
B)​Less than the efficient amount is being produced
C)​the efficient amount is being produced
D)​We do not know whether the efficient amount, or more or less, is being produced.

Question 78

Which of these statements is not true of both external cost and external benefit situations?

A)​They both can lead to market failure.
B)​They both cause welfare costs.
C)​They both make it possible for government intervention to lead to more efficient results.
D)​All of the above are true.

Question 79

The greater the magnitude of the external costs of production,

A)​The larger is the deadweight loss from overproduction.
B)​The greater would be the optimal pollution tax.
C)​The further the private market solution ignoring those costs would deviate from the socially efficient level of output.
D)​All of the above are true.

Question 80

Technology spillovers:

A)​Are caused by patents.
B)​Can lead to clustering of technology firms near one another.
C)​Are examples of negative externalities.
D)​All of the above are true.