Question 1

Which of the following conditions will lead a market away from an efficient allocation of resources?

Accepted Answer

Positive externalities lead to underproduction of a good or service because the full social benefits are not reflected in the market price, causing a market to allocate resources inefficiently.

Question 2

_____ refers to the situation where markets fail to allocate resources efficiently.

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.

Question 3

_____ markets are essential for achieving an efficient allocation of resources.

Accepted Answer

Perfectly competitive markets are essential for achieving an efficient allocation of resources because they ensure that goods and services are produced and distributed in the most efficient manner possible, with prices reflecting the true costs of production.

Question 4

If the marginal social benefit from consuming a good is greater than the marginal private benefit, then the consumption of the good involves:

Accepted Answer

When the marginal social benefit (MSB) from consuming a good is greater than the marginal private benefit (MPB), it indicates the presence of a positive externality. This means that the consumption of the good has additional benefits for society that are not captured by the private market.

Question 5

If beekeepers benefit from their neighbor's flower garden, then the flower garden is a source of:

Accepted Answer

A positive externality occurs when a third party benefits from an economic activity they are not directly involved in. In this case, beekeepers benefit from their neighbor's flower garden without being part of the gardening activity, making it a positive externality.

Question 6

The marginal social benefit is the sum of marginal private benefit and marginal:

Accepted Answer

The marginal social benefit is the sum of the marginal private benefit (the benefit received by consumers) and the marginal external benefit (the benefit received by others not directly involved in the transaction).

Question 7

If the purchase of a good creates a positive externality, then the marginal _____ benefit is greater than the marginal _____ benefit.

Accepted Answer

When a good's purchase results in a positive externality, the marginal social benefit (which includes both private and external benefits) exceeds the marginal private benefit, as the positive effects on third parties are not accounted for in the private benefit.

Question 8

Which of the following statements is NOT true?

Accepted Answer

When a good involves a positive externality, there is typically a deadweight loss because the market quantity is less than the socially optimal level, not because there is no deadweight loss. Choices A, B, and D correctly describe aspects of positive externalities.

Question 9

Which of the following statements is TRUE?

Accepted Answer

When a good involves a positive externality, the market quantity is less than the socially optimal quantity because the full social benefits are not reflected in the market demand.

Question 10

The extra benefit received by everyone in the society by the purchase of one more unit of a good is called the _____ benefit.

Accepted Answer

The extra benefit received by everyone in the society by the purchase of one more unit of a good is called the marginal social benefit. This includes both the private benefit to the consumer and any additional benefits to others in society (external benefits).

Question 11

Suppose that the purchase of a good involves a marginal external benefit of $2 per unit. In this case, the purchase of the good involves a _____ externality, and it will be purchased in an amount that is _____ than socially optimal.

Accepted Answer

The marginal external benefit of $2 per unit indicates a positive externality because it represents an additional benefit to society that is not captured by the direct buyer and seller of the good. When there is a positive externality, the good will be purchased in an amount that is less than socially optimal because the market does not account for the external benefits to others.

Question 12

Suppose that the marginal social benefit curve of a good lies above the marginal private benefit curve. In this case, the purchase of the good involves a _____ externality, and the good will be purchased in an amount that is _____ than the socially optimal.

Accepted Answer

When the marginal social benefit of a good is higher than the marginal private benefit, it indicates the presence of a positive externality. This means that the good has additional benefits to society that are not captured by the private market. As a result, the good will be under-consumed, or purchased in an amount that is less than the socially optimal level, because private individuals do not take into account the external benefits to society.

Question 13

Suppose that beekeepers' bees pollinate a neighbor's flower garden. In this case, the bee keepers have created a _____ externality, and the marginal private benefit to the beekeepers is _____ than the marginal social benefit.

Accepted Answer

The beekeepers have created a positive externality by pollinating the neighbor's flower garden, which benefits the neighbor without them having to pay for it. The marginal private benefit to the beekeepers is less than the marginal social benefit because the social benefit includes both the private benefit to the beekeepers and the external benefit to the neighbor.

Question 14

If the purchase of a good involves a positive externality, then the equilibrium quantity that is purchased in a free market is _____ than socially optimal, and the equilibrium price is _____ than socially optimal.

Accepted Answer

When a good has a positive externality, it means that its consumption or production benefits third parties who are not directly involved in the transaction. In a free market, these external benefits are not taken into account, leading to a lower quantity being produced and consumed than what would be socially optimal. The price is also lower than the socially optimal price because the market does not account for the external benefits in the price mechanism.

Question 15

Which of the following statements is NOT true?

Accepted Answer

Statement B is incorrect because when a good has a positive externality, the equilibrium price in a free market tends to be lower than the socially optimal price, not higher. This is because the external benefits to third parties are not reflected in the market price.

Question 16

Suppose that the marginal private benefit from buying an extra unit of a good is $10 and the marginal social benefit of buying the extra unit is $13. In this case, the purchase of the good involves a _____ externality, and the equilibrium quantity purchased in a free market will be ____ than socially optimal.

Accepted Answer

Since the marginal social benefit ($13) is higher than the marginal private benefit ($10), this indicates a positive externality. In a free market, the quantity purchased will be less than the socially optimal level because the market does not account for the external benefits.

Question 17

Desirable effects that are felt by people who are uninvolved in the decisions that created those effects are known as:

Accepted Answer

Positive externalities occur when the actions of individuals or businesses result in benefits to others that the original parties do not receive compensation for. These are desirable effects felt by those not involved in the decision-making process that led to the effects.

Question 18

The reason that a good is underpurchased in cases with positive externalities is that the marginal _____benefits are greater than the marginal _____ benefits.

Accepted Answer

In cases with positive externalities, the marginal social benefits (which include both private benefits and external benefits) are greater than the marginal private benefits. This discrepancy leads to underpurchase of the good, as individuals do not consider the external benefits their consumption provides to others.

Question 19

It is widely known that the marginal social benefit from having a more educated population is greater than the marginal private benefit received from education. Therefore, education creates _____ externalities, and the free market leads to _____ education compared to the social optimal.

Accepted Answer

Education creates positive externalities because the benefits extend beyond the individual to society at large, such as higher productivity and better civic engagement. However, because the free market does not account for these external benefits, it results in less education being provided than what would be socially optimal.

Question 20

Which of the following actions can help eliminate the deadweight loss that results from positive externalities?

Accepted Answer

Subsidies for the purchase of goods with positive externalities encourage more consumption of those goods, aligning private consumption closer to the socially optimal level, thus reducing or eliminating the deadweight loss associated with underconsumption.

Quiz 12: Market Failure and Government Failure

Which of the following conditions will lead a market away from an efficient allocation of resources?

_____ refers to the situation where markets fail to allocate resources efficiently.

_____ markets are essential for achieving an efficient allocation of resources.

If the marginal social benefit from consuming a good is greater than the marginal private benefit, then the consumption of the good involves:

If beekeepers benefit from their neighbor's flower garden, then the flower garden is a source of:

The marginal social benefit is the sum of marginal private benefit and marginal:

If the purchase of a good creates a positive externality, then the marginal _ benefit is greater than the marginal _ benefit.

Which of the following statements is NOT true?

Which of the following statements is TRUE?

The extra benefit received by everyone in the society by the purchase of one more unit of a good is called the _____ benefit.

Suppose that the purchase of a good involves a marginal external benefit of $2 per unit. In this case, the purchase of the good involves a _ externality, and it will be purchased in an amount that is _ than socially optimal.

Suppose that the marginal social benefit curve of a good lies above the marginal private benefit curve. In this case, the purchase of the good involves a _ externality, and the good will be purchased in an amount that is _ than the socially optimal.

Suppose that beekeepers' bees pollinate a neighbor's flower garden. In this case, the bee keepers have created a _ externality, and the marginal private benefit to the beekeepers is _ than the marginal social benefit.

If the purchase of a good involves a positive externality, then the equilibrium quantity that is purchased in a free market is _ than socially optimal, and the equilibrium price is _ than socially optimal.

Which of the following statements is NOT true?

Desirable effects that are felt by people who are uninvolved in the decisions that created those effects are known as:

The reason that a good is underpurchased in cases with positive externalities is that the marginal _benefits are greater than the marginal _ benefits.

It is widely known that the marginal social benefit from having a more educated population is greater than the marginal private benefit received from education. Therefore, education creates _ externalities, and the free market leads to _ education compared to the social optimal.

Which of the following actions can help eliminate the deadweight loss that results from positive externalities?