Question 1

Exhibit 31-4
  
-Refer to Exhibit 31-4. If a negative externality exists,then the socially optimal output is

Accepted Answer

A)  Q1. 
B)  Q2. 
C)  Q1 - Q2. 
D)  Q2 - Q1. 
A)  Q1. 
B)  Q2. 
C)  Q1 - Q2. 
D)  Q2 - Q1.

Question 2

If private property rights were established in the oceans,there would probably be

Accepted Answer

A)  more ocean pollution. 
B)  less ocean pollution. 
C)  the same amount of ocean pollution that exists without private property rights in the ocean. 
D)  more ocean voyages on cruise ships. 
A)  more ocean pollution. 
B)  less ocean pollution. 
C)  the same amount of ocean pollution that exists without private property rights in the ocean. 
D)  more ocean voyages on cruise ships.

Question 3

Exhibit 31-5
  
-Refer to Exhibit 31-5. If a positive externality exists,then the market ____________ output by the amount ________________.

Accepted Answer

A)  underproduces; Q1 
B)  overproduces; Q2 
C)  overproduces; Q2 - Q1 
D)  underproduces; Q2 - Q1 
A)  underproduces; Q1 
B)  overproduces; Q2 
C)  overproduces; Q2 - Q1 
D)  underproduces; Q2 - Q1

Question 4

Which of the following statements is true?

Accepted Answer

A)  The lower transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange. 
B)  The higher transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange. 
C)  Coase agrees with Pigou that taxing those activities associated with negative externalities is a good idea. 
D)  a and c 
E)  none of the above 
A)  The lower transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange. 
B)  The higher transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange. 
C)  Coase agrees with Pigou that taxing those activities associated with negative externalities is a good idea. 
D)  a and c 
E)  none of the above

Question 5

Exhibit 31-2
  
-Refer to Exhibit 31-2.This graph represents a positive externality situation.Given this,which of the two curves,X or Y,represents marginal social benefits and why?

Accepted Answer

A)  Curve X, because if there is a positive externality, negative external benefits are associated with it: social costs external benefits - private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
B)  Curve X, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
C)  Curve Y, because if there is a positive externality, external costs are associated with it: social benefits = external costs + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit cost curve. 
D)  Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve. 
A)  Curve X, because if there is a positive externality, negative external benefits are associated with it: social costs external benefits - private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
B)  Curve X, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
C)  Curve Y, because if there is a positive externality, external costs are associated with it: social benefits = external costs + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit cost curve. 
D)  Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve.

Question 6

Suppose the production of a good results in positive externalities.If output occurs at the intersection of the supply curve and the marginal social benefits curve,then

Accepted Answer

A)  the socially optimal level of output will be produced. 
B)  society will incur a net social cost. 
C)  society will want less produced, and producers will be willing to satisfy that desire. 
D)  there is market failure. 
A)  the socially optimal level of output will be produced. 
B)  society will incur a net social cost. 
C)  society will want less produced, and producers will be willing to satisfy that desire. 
D)  there is market failure.

Question 7

Firm X pays firm Y $345 for a pollution permit.This expenditure on the part of firm X is considered a __________.Firm Y ends up spending $200 to eliminate some pollution.This expenditure on the part of firm Y is considered a __________.

Accepted Answer

A)  resource cost; transfer 
B)  fixed cost; sunk cost 
C)  market environmental cost; standards cost 
D)  transfer; resource cost 
E)  none of the above 
A)  resource cost; transfer 
B)  fixed cost; sunk cost 
C)  market environmental cost; standards cost 
D)  transfer; resource cost 
E)  none of the above

Question 8

When positive externalities are involved,the market is said to

Accepted Answer

A)  fail, because it underproduces the good connected with the positive externality. 
B)  fail, because it overproduces the good connected with the positive externality. 
C)  succeed, because it produces the socially optimal quantity of the good connected with the positive externality. 
D)  be "in optimum," because the equilibrium fully adjusts for the positive externality. 
A)  fail, because it underproduces the good connected with the positive externality. 
B)  fail, because it overproduces the good connected with the positive externality. 
C)  succeed, because it produces the socially optimal quantity of the good connected with the positive externality. 
D)  be "in optimum," because the equilibrium fully adjusts for the positive externality.

Question 9

There is no market failure if

Accepted Answer

A)  the marginal private cost curve is upward sloping. 
B)  the demand curve (for a good or service) is downward sloping. 
C)  the demand curve lies about the marginal private cost curve. 
D)  marginal private costs are greater than the external costs associated with a negative externality. 
E)  none of the above 
A)  the marginal private cost curve is upward sloping. 
B)  the demand curve (for a good or service) is downward sloping. 
C)  the demand curve lies about the marginal private cost curve. 
D)  marginal private costs are greater than the external costs associated with a negative externality. 
E)  none of the above

Question 10

Explain why the socially optimal output is not always the same as the market output.

Accepted Answer

It is only when there are no externaliti

Question 11

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

A) True 
 B)False

Question 12

Which of the following statements is false?

Accepted Answer

A)  Asymmetric information can exist both before and after a transaction. 
B)  Moral hazard occurs when one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
C)  Adverse selection has the potential to eliminate some markets. 
D)  b and c 
E)  none of the above 
A)  Asymmetric information can exist both before and after a transaction. 
B)  Moral hazard occurs when one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
C)  Adverse selection has the potential to eliminate some markets. 
D)  b and c 
E)  none of the above

Question 13

Lemon laws __________ the __________ problem in the used car market.

Accepted Answer

A)  are meant to reduce; adverse selection 
B)  are meant to reduce; moral hazard 
C)  unintentionally worsen; adverse selection 
D)  unintentionally worsen; moral hazard 
A)  are meant to reduce; adverse selection 
B)  are meant to reduce; moral hazard 
C)  unintentionally worsen; adverse selection 
D)  unintentionally worsen; moral hazard

Question 14

Negative externalities arising from the production of a good

Accepted Answer

A)  cause an increase in the demand for the good. 
B)  cause a decrease in the demand for the good. 
C)  impose costs on third parties. 
D)  bring private costs into equality with social costs. 
A)  cause an increase in the demand for the good. 
B)  cause a decrease in the demand for the good. 
C)  impose costs on third parties. 
D)  bring private costs into equality with social costs.

Question 15

Given a positive externality,the marginal private benefit curve lies to the __________ of the demand curve,with the market output __________ the socially optimal output.

Accepted Answer

A)  right; above 
B)  right; below 
C)  left; above 
D)  left; below 
A)  right; above 
B)  right; below 
C)  left; above 
D)  left; below

Question 16

If the government does not provide it,the quantity of a nonexcludable good that private firms will choose to produce is

Accepted Answer

A)  zero. 
B)  more than the optimal amount. 
C)  the optimal amount. 
D)  optimal only if property rights are assigned. 
E)  optimal only if the industry is competitive. 
A)  zero. 
B)  more than the optimal amount. 
C)  the optimal amount. 
D)  optimal only if property rights are assigned. 
E)  optimal only if the industry is competitive.

Question 17

A side effect of an action that adversely affects the well-being of others is called a

Accepted Answer

A)  complement. 
B)  supplement. 
C)  negative externality. 
D)  marginal cost. 
A)  complement. 
B)  supplement. 
C)  negative externality. 
D)  marginal cost.

Question 18

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

A) True 
 B)False

Question 19

A negative externality can be internalized by

Accepted Answer

A)  persuasion. 
B)  the imposition of a tax. 
C)  the assignment of property rights. 
D)  a voluntary agreement. 
E)  all of the above 
A)  persuasion. 
B)  the imposition of a tax. 
C)  the assignment of property rights. 
D)  a voluntary agreement. 
E)  all of the above

Question 20

Which of the following statements is true?

Accepted Answer

A)  When production of a good yields positive externalities but output is currently at the market level, then a change in output to the socially optimal level will certainly be for the worse. 
B)  When production of a good yields negative externalities but output is currently at the market level, then a change in output to the socially optimal level will cause benefits to increase by an amount greater than costs will increase. 
C)  When production of a good yields positive externalities but output is currently at the market level, then a change in output to the socially optimal level will cause benefits to increase by an amount less than costs will increase. 
D)  a, b, and c 
E)  none of the above 
A)  When production of a good yields positive externalities but output is currently at the market level, then a change in output to the socially optimal level will certainly be for the worse. 
B)  When production of a good yields negative externalities but output is currently at the market level, then a change in output to the socially optimal level will cause benefits to increase by an amount greater than costs will increase. 
C)  When production of a good yields positive externalities but output is currently at the market level, then a change in output to the socially optimal level will cause benefits to increase by an amount less than costs will increase. 
D)  a, b, and c 
E)  none of the above

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

Exhibit 31-4 -Refer to Exhibit 31-4. If a negative externality exists,then the socially optimal output is

If private property rights were established in the oceans,there would probably be

Exhibit 31-5 -Refer to Exhibit 31-5. If a positive externality exists,then the market ____________ output by the amount ________________.

Which of the following statements is true?

Exhibit 31-2 -Refer to Exhibit 31-2.This graph represents a positive externality situation.Given this,which of the two curves,X or Y,represents marginal social benefits and why?

Suppose the production of a good results in positive externalities.If output occurs at the intersection of the supply curve and the marginal social benefits curve,then

Firm X pays firm Y $345 for a pollution permit.This expenditure on the part of firm X is considered a __________.Firm Y ends up spending $200 to eliminate some pollution.This expenditure on the part of firm Y is considered a __________.

When positive externalities are involved,the market is said to

There is no market failure if

Explain why the socially optimal output is not always the same as the market output.

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.

Which of the following statements is false?

Lemon laws __________ the __________ problem in the used car market.

Negative externalities arising from the production of a good

Given a positive externality,the marginal private benefit curve lies to the __________ of the demand curve,with the market output __________ the socially optimal output.

If the government does not provide it,the quantity of a nonexcludable good that private firms will choose to produce is

A side effect of an action that adversely affects the well-being of others is called a

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.

A negative externality can be internalized by

Which of the following statements is true?

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 31-5 -Refer to Exhibit 31-5. If a positive externality exists,then the market output by the amount ____.

Firm X pays firm Y $345 for a pollution permit.This expenditure on the part of firm X is considered a .Firm Y ends up spending $200 to eliminate some pollution.This expenditure on the part of firm Y is considered a .

Lemon laws the problem in the used car market.

Given a positive externality,the marginal private benefit curve lies to the of the demand curve,with the market output the socially optimal output.