Question 1

For a good where network externalities are present, having an early lead in the race for customers may be the only lead necessary to ultimately win the race for dominance in the good's market.

Accepted Answer

Network externalities imply that the value of a product to a user increases as more people use it. Therefore, an early lead in customer base can create a self-reinforcing advantage, making it difficult for competitors to catch up, as users gravitate towards the product that others are using.

Question 2

Social media, such as the online social networking portal Meetup, have increased the likelihood of people forming social tribes by reducing the transaction costs associated with forming such groups.

Accepted Answer

Social media platforms like Meetup lower the barriers (transaction costs) for organizing and joining groups by providing easy-to-use tools for communication, event planning, and member management, thus facilitating the formation of social tribes around shared interests or goals.

Question 3

The primary characteristic of a public good is that it is nonrivalrous in consumption.

Accepted Answer

A public good is characterized by being nonrivalrous, meaning one person's consumption of the good does not reduce its availability for someone else.

Question 4

The free rider problem is the main source of market failure in the provision of nonexcludable public goods.

Accepted Answer

The free rider problem occurs when individuals can benefit from a good or service without paying for it, which is common with nonexcludable public goods, leading to underproduction or no production at all, hence a market failure.

Question 5

When a negative externality exists, the market is said to underproduce the good connected with the negative externality.

Accepted Answer

When a negative externality exists, the market tends to overproduce the good connected with the negative externality, because the cost to society is higher than the cost to the producers.

Question 6

When a positive externality exists, the market is said to fail because it overproduces the good associated with the positive externality.

Accepted Answer

When a positive externality exists, the market tends to underproduce the good associated with the positive externality, not overproduce it, because the social benefits exceed the private benefits received by the producer.

Question 7

The open lands in the early West were overgrazed largely because no one owned the land being used for grazing.

Accepted Answer

The tragedy of the commons explains this phenomenon, where shared resources are overused and depleted because individuals act in their own self-interest rather than considering the common good, leading to overgrazing on unowned or commonly held lands.

Question 8

Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called

Accepted Answer

Externalities refer to the side effects or consequences of commercial activities that affect other parties without this being reflected in market prices. These can be either positive or negative and occur when the production or consumption of goods and services imposes costs or benefits on third parties not involved in the transaction.

Question 9

According to the Coase theorem, under certain conditions the market can internalize externalities.

Accepted Answer

The Coase theorem posits that if trade in an externality is possible and there are no transaction costs, parties can negotiate solutions to externalities on their own, leading to an efficient allocation of resources regardless of the initial distribution of property rights.

Question 10

To reduce pollution, economists generally prefer a corrective tax to a command-and-control policy because the same goals can be achieved but in an efficient manner with a corrective tax.

Accepted Answer

Economists prefer a corrective tax because it provides incentives for pollution reduction in a cost-effective way, allowing firms to choose how to minimize their pollution based on their own costs, rather than imposing specific regulations that might not be efficient for all firms.

Question 11

When an insurance company specifies certain precautions that an insured person must take it is trying to control for moral hazard.

Accepted Answer

By specifying certain precautions, the insurance company aims to reduce the likelihood that the insured will engage in riskier behavior knowing they are covered, which is a direct strategy to control for moral hazard.

Question 12

All economists agree that to justify that market failure has occurred, it is sufficient to have the market choose an inferior product over a superior product.

Accepted Answer

Economists do not universally agree that the market choosing an inferior product over a superior one is sufficient to justify market failure. Market failure is typically identified through specific criteria such as externalities, public goods, market power, and information asymmetries, rather than subjective assessments of product superiority.

Question 13

From an economist's point of view, zero pollution is always preferable to some pollution.

Accepted Answer

Economists often argue that some level of pollution may be acceptable if the benefits of economic activities outweigh the costs of pollution, aiming for an optimal balance rather than zero pollution.

Question 14

Asymmetric information can exist before, but not after, a transaction.

Accepted Answer

Asymmetric information can exist both before and after a transaction. Before a transaction, it is often related to one party having more information about the product or service being exchanged (adverse selection). After a transaction, it can relate to one party having more information about the outcome or usage of the product or service (moral hazard).

Question 15

Market failure is a situation in which

Accepted Answer

Market failure occurs when the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss. This typically happens when the market does not provide the ideal or optimal amount of a particular good, such as in cases of public goods, externalities, or monopolies.

Question 16

A public good can be excludable or nonexcludable.

Accepted Answer

A public good is typically nonexcludable, meaning it is difficult to prevent people from using it, but in some contexts, it can be made excludable through mechanisms like tolls or subscriptions.

Question 17

Moral hazard occurs when the parties on once side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market.

Accepted Answer

Moral hazard occurs when one party in a transaction takes risks because they know the other party bears the consequences of those risks, not because of asymmetric information leading to adverse selection.

Question 18

A good is nonexcludable if no externalities, either negative or positive, are associated with its production or consumption.

Accepted Answer

Nonexcludability refers to the inability to prevent non-paying consumers from accessing a good, and is not directly related to the presence or absence of externalities.

Question 19

Positive externalities can be internalized using persuasion, but persuasion is not effective with negative externalities.

Accepted Answer

Both positive and negative externalities can potentially be internalized using persuasion. Persuasion can encourage behaviors that lead to positive externalities and discourage those that result in negative externalities.

Question 20

Ronald Coase stressed the necessity of using taxes to internalize negative externalities.

Accepted Answer

Ronald Coase argued that under certain conditions, private negotiations between parties could solve the problem of externalities without the need for government intervention, such as taxes. This is known as the Coase Theorem.

Quiz 30: Market Failure Externalities Public Goods and Asymmetric Information