Question 1

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 2

When a good is nonexcludable, then individuals

Accepted Answer

A) will purchase the good for less than it cost to produce. 
B) can obtain the benefits of the good without paying for it. 
C) have an incentive to become free riders. 
D) will purchase more than the optimum amount. 
E) b and c 
A) will purchase the good for less than it cost to produce. 
B) can obtain the benefits of the good without paying for it. 
C) have an incentive to become free riders. 
D) will purchase more than the optimum amount. 
E) b and c

Question 3

A negative externality is internalized when __________ until the socially optimum level of production is obtained.

Accepted Answer

A) supply shifts to the left 
B) supply shifts to the right 
C) demand shifts to the right 
D) b and c 
E) none of the above 
A) supply shifts to the left 
B) supply shifts to the right 
C) demand shifts to the right 
D) b and c 
E) none of the above

Question 4

If a negative externality exists, __________ in order 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 5

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 6

Exhibit 30-3
  
-Refer to Exhibit 30-3. 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. What is the total cost 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?

Accepted Answer

A) $515 
B) $1,300 
C) $1,380 
D) $965 
E) $10,350 
A) $515 
B) $1,300 
C) $1,380 
D) $965 
E) $10,350

Question 7

Marginal social costs are equal to

Accepted Answer

A) marginal private costs + marginal external costs. 
B) marginal private costs - marginal external costs. 
C) marginal private costs + marginal internal costs. 
D) marginal private costs - marginal internal costs. 
A) marginal private costs + marginal external costs. 
B) marginal private costs - marginal external costs. 
C) marginal private costs + marginal internal costs. 
D) marginal private costs - marginal internal costs.

Question 8

When a professor announces to the class that she will grade on a curve and that no one in the class will receive a grade lower than a "C"

Accepted Answer

A) a moral hazard problem for her students will likely arise. 
B) an adverse selection problem for her students will likely arise. 
C) the marginal social benefit will exceed the marginal social cost. 
D) the marginal social cost will exceed the marginal social benefit. 
A) a moral hazard problem for her students will likely arise. 
B) an adverse selection problem for her students will likely arise. 
C) the marginal social benefit will exceed the marginal social cost. 
D) the marginal social cost will exceed the marginal social benefit.

Question 9

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 10

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 11

A __________ good is one that once produced and provided to one person, provides benefits to other persons.

Accepted Answer

A) consumption 
B) investment 
C) private 
D) public 
A) consumption 
B) investment 
C) private 
D) public

Question 12

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 13

Exhibit 30-5
​
  
-Refer to Exhibit 30-5. 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 14

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

Accepted Answer

A) right; greater than 
B) right; less than 
C) left; greater than 
D) left; less than 
A) right; greater than 
B) right; less than 
C) left; greater than 
D) left; less than

Question 15

Marginal social benefits are equal to

Accepted Answer

A) marginal private benefits + marginal internal benefits. 
B) marginal private benefits - marginal internal benefits. 
C) marginal private benefits + marginal external benefits. 
D) marginal private benefits - marginal external benefits. 
A) marginal private benefits + marginal internal benefits. 
B) marginal private benefits - marginal internal benefits. 
C) marginal private benefits + marginal external benefits. 
D) marginal private benefits - marginal external benefits.

Question 16

The primary difference between private goods and public goods is that

Accepted Answer

A) private goods are consumed by private individuals whereas public goods are not consumed by private individuals. 
B) private goods often yield externalities but public goods do not. 
C) property rights can be assigned to public goods but not to private goods. 
D) public goods are nonrivalrous in consumption whereas private goods are rivalrous in consumption. 
A) private goods are consumed by private individuals whereas public goods are not consumed by private individuals. 
B) private goods often yield externalities but public goods do not. 
C) property rights can be assigned to public goods but not to private goods. 
D) public goods are nonrivalrous in consumption whereas private goods are rivalrous in consumption.

Question 17

When negative externalities are connected with the production of a good,

Accepted Answer

A) market output will be greater than the socially optimal output. 
B) private costs and social costs are equal. 
C) the government should subsidize the production of the good. 
D) there will be a shortage of the good. 
A) market output will be greater than the socially optimal output. 
B) private costs and social costs are equal. 
C) the government should subsidize the production of the good. 
D) there will be a shortage of the good.

Question 18

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) 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) none of the above

Question 19

The government's provision of nonexcludable public goods such as national defense is accepted because

Accepted Answer

A) government is more efficient than private firms at producing goods. 
B) the market fails to produce nonexcludable public goods as a result of the free-rider problem. 
C) people do not value public goods such as national defense very highly. 
D) a and c 
E) all of the above 
A) government is more efficient than private firms at producing goods. 
B) the market fails to produce nonexcludable public goods as a result of the free-rider problem. 
C) people do not value public goods such as national defense very highly. 
D) a and c 
E) all of the above

Question 20

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

Accepted Answer

A) output will be at the socially optimal level. 
B) the price of the product will be the same as it was when all benefits were not taken into account. 
C) more output will be produced than if all benefits were not taken into account. 
D) a and c 
E) a, b, and c 
A) output will be at the socially optimal level. 
B) the price of the product will be the same as it was when all benefits were not taken into account. 
C) more output will be produced than if all benefits were not taken into account. 
D) a and c 
E) a, b, and c

Exam 30: Market Failure Externalities Public Goods and Asymmetric Information

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

When a good is nonexcludable, then individuals

A negative externality is internalized when __________ until the socially optimum level of production is obtained.

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

Which of the following statements is false?

Marginal social costs are equal to

When a professor announces to the class that she will grade on a curve and that no one in the class will receive a grade lower than a "C"

The rivalry versus nonrivalry issue is

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

A __________ good is one that once produced and provided to one person, provides benefits to other persons.

A good is rivalrous in consumption if

Exhibit 30-5 ​ -Refer to Exhibit 30-5. If a positive externality exists, then the market ____________ output by the amount ________________.

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

Marginal social benefits are equal to

The primary difference between private goods and public goods is that

When negative externalities are connected with the production of a good,

Which of the following statements is false?

The government's provision of nonexcludable public goods such as national defense is accepted because

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

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Exhibit 30-5 -Refer to Exhibit 30-5. If a positive externality exists, then the market output by the amount ____.

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