Question 1

Adverse selection exists when

Accepted Answer

A)  the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market. 
B)  the parties on one side of a market charge more for something than the parties on the other side of the market want to pay. 
C)  one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
D)  the parties on one 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. 
E)  none of the above 
A)  the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market. 
B)  the parties on one side of a market charge more for something than the parties on the other side of the market want to pay. 
C)  one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
D)  the parties on one 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. 
E)  none of the above

Question 2

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 the government imposes an emission tax of $300 per ton of pollution. As a result of this tax,Firm A would _________________,firm B would ____________________ and firm C would __________________.

Accepted Answer

A)  not reduce any of its pollution; not reduce any of its pollution; reduce all 4 tons of its pollution 
B)  reduce all 4 tons of its pollution; only reduce 1 ton of its pollution; not reduce any of its pollution 
C)  reduce all 4 tons of its pollution; reduce all 4 tons of its pollution; not reduce any of its pollution 
D)  not reduce any of its pollution; reduce 3 tons of its pollution; reduce all 4 tons of its pollution 
A)  not reduce any of its pollution; not reduce any of its pollution; reduce all 4 tons of its pollution 
B)  reduce all 4 tons of its pollution; only reduce 1 ton of its pollution; not reduce any of its pollution 
C)  reduce all 4 tons of its pollution; reduce all 4 tons of its pollution; not reduce any of its pollution 
D)  not reduce any of its pollution; reduce 3 tons of its pollution; reduce all 4 tons of its pollution

Question 3

When a negative externality exists,

Accepted Answer

A)  external costs are necessarily greater than private costs. 
B)  social costs equal private costs. 
C)  social costs are less than private costs. 
D)  social costs are greater than private costs. 
E)  none of the above 
A)  external costs are necessarily greater than private costs. 
B)  social costs equal private costs. 
C)  social costs are less than private costs. 
D)  social costs are greater than private costs. 
E)  none of the above

Question 4

Externalities can be internalized through voluntary agreements as long as

Accepted Answer

A)  transaction costs are low relative to expected benefits. 
B)  transaction costs are high relative to expected benefits. 
C)  the agreement is a short-run agreement. 
D)  the agreement is a long-run agreement. 
A)  transaction costs are low relative to expected benefits. 
B)  transaction costs are high relative to expected benefits. 
C)  the agreement is a short-run agreement. 
D)  the agreement is a long-run agreement.

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Suppose the production of a good results in negative externalities.If society produces the output consistent with the intersection of the demand curve and the marginal private cost 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 more output produced, and producers will be willing to satisfy this desire at a price that society deems acceptable. 
D)  all of the above 
E)  There is not enough information to answer this question. 
A)  the socially optimal level of output will be produced. 
B)  society will incur a net social cost. 
C)  society will want more output produced, and producers will be willing to satisfy this desire at a price that society deems acceptable. 
D)  all of the above 
E)  There is not enough information to answer this question.

Question 8

Suppose that there are two goods,X and Y,that are competing for dominance in a market with network externalities. Furthermore,suppose that the market has chosen good X even though it is inferior to good Y and that the net benefits of switching from X to Y are $20 while the costs of switching are $30. If the market stays with good X,then __________________ has occurred. If the costs of switching were to fall to $15 and the market still stays with good X then

Accepted Answer

A)  no market failure; market failure has occurred. 
B)  market failure; no market failure has occurred. 
C)  no market failure; there will still be no market failure. 
D)  market failure; there will still be market failure. 
A)  no market failure; market failure has occurred. 
B)  market failure; no market failure has occurred. 
C)  no market failure; there will still be no market failure. 
D)  market failure; there will still be market failure.

Question 9

The excludability versus nonexcludability 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 10

A side effect of an action that affects the well-being of third parties is

Accepted Answer

A)  a marginal cost. 
B)  a marginal private benefit. 
C)  an externality. 
D)  a and b 
E)  all of the above 
A)  a marginal cost. 
B)  a marginal private benefit. 
C)  an externality. 
D)  a and b 
E)  all of the above

Question 11

Exhibit 31-5
  
-Refer to Exhibit 31-5. If a positive externality exists,then the external benefits associated with the positive externality equal the distance between points ____________ and the socially optimal output is

Accepted Answer

A)  C and A; Q1. 
B)  D and B; Q1. 
C)  D and B; Q2. 
D)  A and B; Q2. 
A)  C and A; Q1. 
B)  D and B; Q1. 
C)  D and B; Q2. 
D)  A and B; Q2.

Question 12

Most economists believe that the market __________ produce nonexcludable public goods because of __________.

Accepted Answer

A)  will; the monetary incentive they have to produce them 
B)  will not; the externality problem 
C)  will not; the free rider problem 
D)  will; the market shortage that often accompanies the production of public goods. 
E)  none of the above 
A)  will; the monetary incentive they have to produce them 
B)  will not; the externality problem 
C)  will not; the free rider problem 
D)  will; the market shortage that often accompanies the production of public goods. 
E)  none of the above

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Some pollution may be preferable to zero pollution because

Accepted Answer

A)  attempting to decrease the level of pollution to zero may cause significant losses in society's welfare. 
B)  we really do not have that much pollution. 
C)  the nation's citizens are against government's involvement in solving the pollution problem. 
D)  no form of regulation that has been shown to be effective at solving the pollution problem. 
A)  attempting to decrease the level of pollution to zero may cause significant losses in society's welfare. 
B)  we really do not have that much pollution. 
C)  the nation's citizens are against government's involvement in solving the pollution problem. 
D)  no form of regulation that has been shown to be effective at solving the pollution problem.

Question 15

Identify two activities that generate positive externalities and two activities that generate negative externalities. Be sure to explain why each activity you identified generates the type of externality you stated.

Accepted Answer

A positive externality occurs when benef

Question 16

Exhibit 31-2
  
-Refer to Exhibit 31-2.If the exhibit represents a positive externality situation,the private cost 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 17

Which of the following statements is true?

Accepted Answer

A)  A tax applied to an activity that generates a negative externality always brings about the socially optimal level of output. 
B)  A subsidy applied to an activity that generates a positive externality always brings about the socially optimal level of output. 
C)  a and b 
D)  none of the above 
A)  A tax applied to an activity that generates a negative externality always brings about the socially optimal level of output. 
B)  A subsidy applied to an activity that generates a positive externality always brings about the socially optimal level of output. 
C)  a and b 
D)  none of the above

Question 18

Which of the following statements is false?

Accepted Answer

A)  Externalities can sometimes be internalized through individual voluntary agreements. 
B)  It would be a relatively easy matter to establish property rights in the air. 
C)  Persuasion can be used in some cases to internalize externalities. 
D)  Taxes and subsidies are sometimes used as corrective devices for market failures. 
A)  Externalities can sometimes be internalized through individual voluntary agreements. 
B)  It would be a relatively easy matter to establish property rights in the air. 
C)  Persuasion can be used in some cases to internalize externalities. 
D)  Taxes and subsidies are sometimes used as corrective devices for market failures.

Question 19

Exhibit 31-5
  
-Refer to Exhibit 31-5. If a positive 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 20

Exhibit 31-3
  
-Refer to Exhibit 31-3.The government issues two pollution permits to each firm.Firm C will pay up to __________ to buy a permit from Firm A or B.

Accepted Answer

A)  $2,200 
B)  $1,000 
C)  $600 
D)  $500 
A)  $2,200 
B)  $1,000 
C)  $600 
D)  $500

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

Adverse selection exists when

When a negative externality exists,

Externalities can be internalized through voluntary agreements as long as

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

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

Suppose the production of a good results in negative externalities.If society produces the output consistent with the intersection of the demand curve and the marginal private cost curve,then

The excludability versus nonexcludability issue is

A side effect of an action that affects the well-being of third parties is

Exhibit 31-5 -Refer to Exhibit 31-5. If a positive externality exists,then the external benefits associated with the positive externality equal the distance between points ____________ and the socially optimal output is

Most economists believe that the market __________ produce nonexcludable public goods because of __________.

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

Some pollution may be preferable to zero pollution because

Identify two activities that generate positive externalities and two activities that generate negative externalities. Be sure to explain why each activity you identified generates the type of externality you stated.

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

Which of the following statements is true?

Which of the following statements is false?

Exhibit 31-5 -Refer to Exhibit 31-5. If a positive externality exists then the socially optimal output is

Exhibit 31-3 -Refer to Exhibit 31-3.The government issues two pollution permits to each firm.Firm C will pay up to __________ to buy a permit from Firm A or B.

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 net social benefit of expanding output from Q₁ to Q₂is the area of

Most economists believe that the market produce nonexcludable public goods because of .

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