Deck 4: Market Failures: Public Goods and Externalities

Question 1

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.

Answer 1

equals the marginal cost of producing that particular unit.

Question 2

Which of the following is an example of market failure?

A) Negative externalities.
B) Positive externalities.
C) Public goods.
D) All of these.

Answer 2

All of these.

Question 3

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.

Answer 3

The total revenue received by producers equals the total cost of production.

Question 4

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 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

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.

Question 7

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 8

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 9

Supply-side market failures occur when:

A) the demand and supply curves don't reflect consumers' full willingness to pay for a good or service.
B) the demand and 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 10

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 11

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 12

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.

Question 13

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 14

Consumer surplus:

A) is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
B) the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.
C) 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 15

Producer surplus:

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

Question 16

Demand-side market failures occur when:

A) the demand and supply curves don't reflect consumers' full willingness to pay for a good or service.
B) the demand and supply 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 demands it.

Question 17

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 18

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.

Question 19

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 20

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 21

Nonrivalry and nonexcludability are the main characteristics of:

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

Question 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

Public goods are those for which there:

A) is no free-rider problem.
B) are no externalities.
C) are nonrivalry and nonexcludability.
D) are rivalry and excludability.

Question 31

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. $\begin{array}{c}\begin{array}{c}\underline{\text {Q }}\\1 \\2 \\3 \\4 \\5\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{a}} }\\\$ \\2\\1\\0\\0\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{b}} }\\\$ 5 \\4 \\3 \\2 \\1\end{array}\end{array}$
Refer to the data.Suppose government has already produced 4 units of this public good.The amount individual B is willing voluntarily to pay for the 4^th unit is:

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

Question 32

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 33

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. $\begin{array}{c}\begin{array}{c}\underline{\text {Q }}\\1 \\2 \\3 \\4 \\5\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{a}} }\\\$ \\2\\1\\0\\0\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{b}} }\\\$ 5 \\4 \\3 \\2 \\1\end{array}\end{array}$
Refer to the data.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 34

An efficiency loss (or deadweight loss):

A) is measured as the combined loss of consumer surplus and producer surplus.
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 35

Nonexcludability 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 36

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 37

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. $\begin{array}{c}\begin{array}{c}\underline{\text {Q }}\\1 \\2 \\3 \\4 \\5\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{a}} }\\\$ \\2\\1\\0\\0\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{b}} }\\\$ 5 \\4 \\3 \\2 \\1\end{array}\end{array}$
Refer to the data.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 38

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 39

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 40

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. $\begin{array}{c}\begin{array}{c}\underline{\text {Q }}\\1 \\2 \\3 \\4 \\5\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{a}} }\\\$ \\2\\1\\0\\0\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{b}} }\\\$ 5 \\4 \\3 \\2 \\1\end{array}\end{array}$
Refer to the data.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 41

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 42

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 43

(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 44

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 the good exceeds the marginal cost of producing it.
D) the total cost of producing a good exceeds the costs borne by the producer.

Question 45

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 46

The following data are for a series of increasingly extensive flood control projects: $\begin{array}{c}\begin{array}{lll}\\\\\text {Plan A= Levees}\\\text {Plan B = Small Reservoir}\\\text {Plan C = Medium Reservoir}\\\text {Plan D= Large Reservoir}\\\end{array}\begin{array}{c}\text {Total Cost}\\\underline{\text {Per Year}}\\\$ 10,000 \\24,000 \\44,000 \\72,000\end{array}\begin{array}{c}\text {Total Benefit}\\\underline{\text {Per Year}}\\ \$ 16,000 \\36,000\\52,000\\64,000\\\end{array}\end{array}$
Refer to the data.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 47

Answer the question on the basis of the following information for four highway programs of increasing scope.All figures are in millions of dollars. $\begin{array}{c}\begin{array}{c}\underline{\text {Program}}\\\text {A}\\\text {B}\\\text {C}\\\text {D}\end{array}\begin{array}{c}\underline{\text {Total Cost}}\\\$ 2 \\6\\12\\20 \end{array}\begin{array}{c}\underline{\text {Total Benefit}}\\\$ 9 \\16 \\21 \\23\end{array}\end{array}$
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 48

Answer the question on the basis of the following information for four highway programs of increasing scope.All figures are in millions of dollars. $\begin{array}{c}\begin{array}{c}\underline{\text {Program}}\\\text {A}\\\text {B}\\\text {C}\\\text {D}\end{array}\begin{array}{c}\underline{\text {Total Cost}}\\\$ 2 \\6\\12\\20 \end{array}\begin{array}{c}\underline{\text {Total Benefit}}\\\$ 9 \\16 \\21 \\23\end{array}\end{array}$
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) the marginal cost and marginal benefit of Program A cannot be determined.

Question 49

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 50

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 51

Alex,Kara,and Susie are the only three people in a community and 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) $300.

Question 52

If a good that generates positive externalities were 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 53

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 54

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 55

(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 56

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 57

(Consider This)Brinley is the hottest new pop singer,but his agent discovers that Internet sales of Brinley's music have been poor due to Internet piracy,but concerts are regularly sold out and merchandise (such as T-shirts)sells well.If Brinley wants to enhance profits,economists would most likely recommend that he:

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 58

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 59

(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 60

(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 61

(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.

Question 62

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 63

Society's marginal cost of pollution abatement curve slopes upward because of the law of diminishing marginal utility.

Question 64

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 65

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

Question 66

Society's optimal amount of pollution abatement is where society's marginal benefit of abatement is zero.

Question 67

An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement.

Question 68

Sellers will opt out of markets in which:

A) there are significant negative externalities.
B) standardized products exist.
C) there are only foreign buyers.
D) information about buyers is inadequate,and some buyers can impose high costs on the sellers.

Question 69

Buyers will opt out of markets in which:

A) there are significant negative externalities.
B) standardized products are being produced.
C) there is inadequate information about sellers and their products.
D) there are only foreign sellers.

Question 70

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

Question 71

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

Question 72

Where there is asymmetric information between buyers and sellers:

A) product shortages will occur at the equilibrium price.
B) product surpluses will occur at the equilibrium price.
C) markets can produce inefficient outcomes.
D) markets will fail due to the "free-rider problem."

Question 73

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

Question 74

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

Question 75

(Consider This)The principle that private negotiation can resolve potential externalities without resort to government intervention is known as the Coase theorem.

Question 76

(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 77

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

Question 78

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

Question 79

(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 80

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