Question 1

If a negative externality exists,__________ for the socially optimal output to be reached.

Accepted Answer

A)  supply needs to increase 
B)  supply needs to decrease 
C)  demand needs to increase 
D)  b and c 
E)  none of the above 
A)  supply needs to increase 
B)  supply needs to decrease 
C)  demand needs to increase 
D)  b and c 
E)  none of the above

Question 2

A good is a nonexcludable if

Accepted Answer

A)  its consumption by one person does not reduce its consumption by others. 
B)  it is impossible to prevent people from obtaining the benefits of the good once it has been produced. 
C)  no negative externalities are associated with its production and consumption. 
D)  it is free in the first place; that is, it is so abundant that people can get all they want at zero price. 
A)  its consumption by one person does not reduce its consumption by others. 
B)  it is impossible to prevent people from obtaining the benefits of the good once it has been produced. 
C)  no negative externalities are associated with its production and consumption. 
D)  it is free in the first place; that is, it is so abundant that people can get all they want at zero price.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 31-2
  
-Refer to Exhibit 31-2.If the exhibit represents a positive externality situation,the social benefit of expanding output from Q1 to Q2 is the area of

Accepted Answer

A)  Q1ABQ2. 
B)  Q1AEQ2. 
C)  Q1CBQ2. 
D)  ABE. 
A)  Q1ABQ2. 
B)  Q1AEQ2. 
C)  Q1CBQ2. 
D)  ABE.

Question 5

Some racing horse breeders keep a few of their foals and sell the others.Generally,they put the poorest quality foals up for sale early in the season.Buyers have limited information about the foals up for sale,but they know that the first foals from some breeders will not be good racers.Other breeders sell all their foals.Since buyers cannot know which breeders are keeping back their good foals,they are suspicious of all foals offered for sale early in the season,lowering the sale prices.Breeders who sell all their foals are therefore forced to hold back their better foals until later in the season,to get true market prices for them.The market for foals is therefore subject to the

Accepted Answer

A)  adverse selection problem. 
B)  moral hazard problem. 
C)  free-rider effect. 
D)  none of the above 
A)  adverse selection problem. 
B)  moral hazard problem. 
C)  free-rider effect. 
D)  none of the above

Question 6

The side effect of an action that increases the well-being of others is called

Accepted Answer

A)  an augmentation. 
B)  an elasticity. 
C)  a passive benefit. 
D)  a positive externality. 
A)  an augmentation. 
B)  an elasticity. 
C)  a passive benefit. 
D)  a positive externality.

Question 7

A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

Accepted Answer

A)  increase; decrease 
B)  increase; increase 
C)  decrease; decrease 
D)  decrease; increase 
A)  increase; decrease 
B)  increase; increase 
C)  decrease; decrease 
D)  decrease; increase

Question 8

The rivalry versus nonrivalry issue is

Accepted Answer

A)  relevant to the issue of market failure. 
B)  not relevant to the issue of market failure. 
C)  relevant to the free-rider problem. 
D)  a and c 
E)  b and c 
A)  relevant to the issue of market failure. 
B)  not relevant to the issue of market failure. 
C)  relevant to the free-rider problem. 
D)  a and c 
E)  b and c

Question 9

Which of the following goods is least likely to be rivalrous in consumption?

Accepted Answer

A)  a car 
B)  a pair of shoes 
C)  a book 
D)  a computer 
E)  a sunset 
A)  a car 
B)  a pair of shoes 
C)  a book 
D)  a computer 
E)  a sunset

Question 10

Which of the following statements is false?

Accepted Answer

A)  A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive. 
B)  Internalizing externalities is not the same as adjusting for externalities. 
C)  An externality has been completely internalized if the socially optimal output emerges. 
D)  Assigning property rights is one way to internalize externalities. 
A)  A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive. 
B)  Internalizing externalities is not the same as adjusting for externalities. 
C)  An externality has been completely internalized if the socially optimal output emerges. 
D)  Assigning property rights is one way to internalize externalities.

Question 11

A good is rivalrous in consumption if

Accepted Answer

A)  its consumption by one person reduces its consumption by others. 
B)  it can be used to satisfy many needs (as compared to just one need). 
C)  it can be used to satisfy many wants (as compared to just one want). 
D)  its consumption by one person increases its consumption by others. 
E)  a and c 
A)  its consumption by one person reduces its consumption by others. 
B)  it can be used to satisfy many needs (as compared to just one need). 
C)  it can be used to satisfy many wants (as compared to just one want). 
D)  its consumption by one person increases its consumption by others. 
E)  a and c

Question 12

A tax may be used as a corrective device in the case of a negative externality because it will __________ marginal private costs and __________ supply.

Accepted Answer

A)  increase; decrease 
B)  increase; increase 
C)  decrease; decrease 
D)  decrease; increase 
A)  increase; decrease 
B)  increase; increase 
C)  decrease; decrease 
D)  decrease; increase

Question 13

Exhibit 31-3
  
-Refer to Exhibit 31-3.What is the cost to Firm C of eliminating 2 tons of pollution?

Accepted Answer

A)  $1,300 
B)  $300 
C)  $1,500 
D)  $2,200 
E)  $3,500 
A)  $1,300 
B)  $300 
C)  $1,500 
D)  $2,200 
E)  $3,500

Question 14

Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision.This is an example of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  the free-rider effect. 
D)  asymmetric information before exchange. 
E)  none of the above 
A)  adverse selection. 
B)  moral hazard. 
C)  the free-rider effect. 
D)  asymmetric information before exchange. 
E)  none of the above

Question 15

Exhibit 31-5
  
-Refer to Exhibit 31-5. If a positive externality exists,then the external benefits associated with the positive externality equal

Accepted Answer

A)  P4 - P2. 
B)  P3 - P1. 
C)  P2 - P1. 
D)  P3 - P2. 
E)  a and b 
A)  P4 - P2. 
B)  P3 - P1. 
C)  P2 - P1. 
D)  P3 - P2. 
E)  a and b

Question 16

Suppose the production of a good results in negative externalities.If all costs are taken into account,then

Accepted Answer

A)  output will be at a lower level than if all costs are not taken into account. 
B)  output will be at a lower level than the socially optimal level. 
C)  the marginal private cost curve will lie above and to the left of the marginal social cost curve. 
D)  a and b 
E)  a, b, and c 
A)  output will be at a lower level than if all costs are not taken into account. 
B)  output will be at a lower level than the socially optimal level. 
C)  the marginal private cost curve will lie above and to the left of the marginal social cost curve. 
D)  a and b 
E)  a, b, and c

Question 17

Exhibit 31-3
  
-Refer to Exhibit 31-3.Suppose that Firms A,B,and C are the only polluters in the state and that each emits 4 tons of pollution into the atmosphere.To cut the level of pollution in half the government issues two transferable pollution permits to each firm (a cap and trade policy). What is the total cost savings to society of decreasing pollution to half its present level if firm C buys one pollution permit from firm A and one pollution permit from firm B compared to if there were a government mandate for each firm to cut pollution by one-half?

Accepted Answer

A)  $515 
B)  $1,300 
C)  $1,380 
D)  $965 
E)  $1,025 
A)  $515 
B)  $1,300 
C)  $1,380 
D)  $965 
E)  $1,025

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

In which of the following situations would a positive externality most likely be involved?

Accepted Answer

A)  Shawn is sitting at home one day when she gets a telephone call, informing her that she has won $10,000 in a contest she entered three months ago. 
B)  There are eight houses in the neighborhood where Rodney lives. Rodney likes nice-looking yards, and last week his neighbors began to beautify their yards. 
C)  Willy needs eight hours of sleep each night to feel good. Last night he got eight hours of sleep. 
D)  Patrick received an A on a biology exam. He is feeling better about his chances of getting admitted to medical school. 
A)  Shawn is sitting at home one day when she gets a telephone call, informing her that she has won $10,000 in a contest she entered three months ago. 
B)  There are eight houses in the neighborhood where Rodney lives. Rodney likes nice-looking yards, and last week his neighbors began to beautify their yards. 
C)  Willy needs eight hours of sleep each night to feel good. Last night he got eight hours of sleep. 
D)  Patrick received an A on a biology exam. He is feeling better about his chances of getting admitted to medical school.

Question 20

Market failure is a situation in which

Accepted Answer

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. 
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.

Exam 31: Market Failure: Externalities, Public Goods, and Asymmetric Information

If a negative externality exists,__________ for the socially optimal output to be reached.

A good is a nonexcludable if

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

Exhibit 31-2 -Refer to Exhibit 31-2.If the exhibit represents a positive externality situation,the social benefit of expanding output from Q1 to Q2 is the area of

The side effect of an action that increases the well-being of others is called

A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

The rivalry versus nonrivalry issue is

Which of the following goods is least likely to be rivalrous in consumption?

Which of the following statements is false?

A good is rivalrous in consumption if

A tax may be used as a corrective device in the case of a negative externality because it will __________ marginal private costs and __________ supply.

Exhibit 31-3 -Refer to Exhibit 31-3.What is the cost to Firm C of eliminating 2 tons of pollution?

Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision.This is an example of

Exhibit 31-5 -Refer to Exhibit 31-5. If a positive externality exists,then the external benefits associated with the positive externality equal

Suppose the production of a good results in negative externalities.If all costs are taken into account,then

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

In which of the following situations would a positive externality most likely be involved?

Market failure is a situation in which

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, Controlled, and Relative

Supply, Demand, and Price: Applications

Macroeconomic Measurements: Prices and Unemployment

Macroeconomic Measurements: GDP and Real GDP

Aggregate Demand and Aggregate Supply

Classical Macroeconomics and the Self Regulating Economy

Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy

Fiscal Policy and the Federal Budget

Money, Banking,and the Financial System

The Federal Reserve System

Money and the Economy

Monetary Policy

Expectations Theory and the Economy

Economic Growth: Resources, Technology, Ideas, and Institutions

The Financial Crisis of 2007-2009

Debates in Macroeconomics Over the Role and Effects of Government

Elasticity

Consumer Choice: Maximizing Utility and Behavioral Economics

Production and Costs

Perfect Competition

Monopoly

Monopolistic Competition, Oligopoly, and Game Theory

Government and Product Markets: Antitrust and Regulation

Factor Markets: With Emphasis on the Labor Market

Wages,Unions,and Labor

The Distribution of Income and Poverty

Interest, Rent, and Profit

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

Globalization and International Impacts on the Economy

The Economic Case For and Against Government: Five Topics Considered

Stocks, Bonds, Futures, and Options

Agriculture: Problems, Policies, and Unintended Effects

Filters

Exhibit 31-2 -Refer to Exhibit 31-2.If the exhibit represents a positive externality situation,the social benefit of expanding output from Q₁ to Q₂ is the area of

A subsidy may be used as a corrective device in the case of a positive externality because it will marginal private benefits and demand.

A tax may be used as a corrective device in the case of a negative externality because it will marginal private costs and supply.