Question 1

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

Accepted Answer

A public good is referred to as nonrivalrous in consumption because one person's use of it does not diminish its availability to others.

Question 2

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 is said to be inefficient because it underproduces the good associated with the positive externality. Therefore, the answer is false as the market does not overproduce in the presence of a positive externality.

Question 3

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

Accepted Answer

False

Question 4

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

Accepted Answer

A good is nonexcludable if it is difficult or impossible to exclude individuals from using or consuming it, regardless of externalities.

Question 5

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

In a market with network externalities, customers may prefer the good that already has a larger user base as it provides greater benefits from the network externality. This phenomenon is known as the "bandwagon effect." Therefore, being an early leader in the market can give a significant advantage in attracting more customers and solidifying dominance.

Question 6

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

Not all economists agree on the criteria for market failure. While choosing an inferior product over a superior product may indicate market failure, there are other factors such as externalities, public goods, and imperfect competition that can also lead to market failure.

Question 7

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 8

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

Accepted Answer

Moral hazard refers to the increased risk-taking behavior of an insured person that results from being protected against potential losses. By specifying precautions, the insurance company is attempting to reduce this risk-taking behavior and control for moral hazard.

Question 9

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.

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 generally prefer corrective taxes because they give businesses an incentive to reduce pollution at the lowest possible cost instead of mandating specific actions through a command-and-control policy. This approach is usually more efficient and cost-effective in achieving the same pollution reduction goals.

Question 11

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

Accepted Answer

Persuasion can be effective in internalizing negative externalities through education campaigns and social norms. However, it may not be enough on its own and may need to be accompanied by government regulations or taxes.

Question 12

Market failure is a situation in which
A)the market does not provide the ideal or optimal amount of a particular good.
B)there are too many buyers but not enough sellers.
C)prices are too high for "average" people to buy necessities.
D)there is a question over the quality of a product for sale.

Accepted Answer

Market failure occurs when the market fails to generate the ideal or optimal amount of a good, service or resource from society's point of view. This happens due to various reasons, such as externalities, public goods, information asymmetry, and market power. The other options (B, C, and D) do not adequately capture the definition of market failure. Option B refers to a situation where demand exceeds supply, which may create a shortage and push prices up but is not necessarily a market failure. Option C describes the issue of affordability, which could be a problem in a market but does not necessarily mean there is a market failure. Finally, option D refers to the issue of product quality, which can be a market failure if consumers are misled or not fully informed about the quality of the product, but it is not the only cause of market failure.

Question 13

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 public good without contributing to its provision. This leads to underinvestment in the public good and market failure. Nonexcludable public goods are those that cannot be effectively restricted to those who pay for them, making the free rider problem particularly acute in their provision.

Question 14

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

Accepted Answer

Without clear ownership of the land, there was no incentive for proper management and conservation of resources, which led to overgrazing.

Question 15

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 to a transaction takes on more risk because they know that someone else (typically the other party in the transaction) will bear the cost of those risks. The definition provided describes adverse selection, not moral hazard.

Question 16

A public good can be excludable or nonexcludable.

Accepted Answer

A public good can be excludable if it is possible to restrict access to it, or nonexcludable if it is impossible or cost-prohibitive to do so. Examples of excludable public goods include toll roads and patented medications, while examples of nonexcludable public goods include clean air and national defense.

Question 17

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
A)Coase effects.
B)externalities.
C)public goods.
D)internalities.

Accepted Answer

Externalities are the side effects of market transactions that affect individuals who are not directly involved in the exchange. These effects can be positive (such as the creation of jobs in a local community) or negative (such as pollution).

Question 18

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, one party may have more information about the product or service being exchanged, while after a transaction, one party may realize that the product or service was of lower quality than expected. This can lead to issues like moral hazard and adverse selection.

Question 19

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

Meetup, as well as other social media platforms, have made it easier for individuals to find and join groups with similar interests, thereby reducing transaction costs associated with forming social tribes.

Question 20

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

Accepted Answer

The Coase theorem states that if property rights are well defined, transaction costs are low, and parties can negotiate freely, then the market can internalize externalities without the need for government intervention. This means that the parties affected by an externality can negotiate and find a mutually beneficial solution by trading property rights, without any external intervention.

Quiz 17: Market Failure: Externalities, Public Goods, and Asymmetric Information