Question 1

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 2

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 3

Exhibit 30-5
​
  
-Refer to Exhibit 30-5. 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 4

Exhibit 30-2
​
  
-Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private 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

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 6

Exhibit 30-3
  
-Refer to Exhibit 30-3. 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 7

Which of the following is not a method to internalize or adjust for externalities?

Accepted Answer

A) persuasion 
B) assignment of property rights 
C) unilateral transfers 
D) voluntary agreements 
A) persuasion 
B) assignment of property rights 
C) unilateral transfers 
D) voluntary agreements

Question 8

A nonexcludable public good is characterized by nonrivalry in

Accepted Answer

A) production and nonexcludability. 
B) consumption and rivalry in production. 
C) consumption and excludability. 
D) consumption and nonexcludability. 
E) none of the above 
A) production and nonexcludability. 
B) consumption and rivalry in production. 
C) consumption and excludability. 
D) consumption and nonexcludability. 
E) none of the above

Question 9

There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to Coase,

Accepted Answer

A) there will be the same number of divorces under both laws if transaction costs are zero. 
B) there will be more divorces under law A. 
C) there will be more divorces under law B. 
D) taxes should be imposed on those parties who seek divorces. 
E) subsidies should be granted to those persons who unwillingly get divorces. 
A) there will be the same number of divorces under both laws if transaction costs are zero. 
B) there will be more divorces under law A. 
C) there will be more divorces under law B. 
D) taxes should be imposed on those parties who seek divorces. 
E) subsidies should be granted to those persons who unwillingly get divorces.

Question 10

A negative externality exists when

Accepted Answer

A) a person's or group's actions cause a benefit that is felt by others. 
B) a person's or group's actions cause a cost that is felt by others. 
C) market output is less than socially optimal output. 
D) a and c 
E) b and c 
A) a person's or group's actions cause a benefit that is felt by others. 
B) a person's or group's actions cause a cost that is felt by others. 
C) market output is less than socially optimal output. 
D) a and c 
E) b and c

Question 11

The primary characteristic of a public good is that it is nonrivalrous in consumption.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 30-4
​
  
-Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points __________, and the socially optimal output is __________.

Accepted Answer

A) A and C; Q2 
B) D and B; Q1 
C) C and B; Q2 
D) A and B; Q2 
E) none of the above 
A) A and C; Q2 
B) D and B; Q1 
C) C and B; Q2 
D) A and B; Q2 
E) none of the above

Question 13

Asymmetric information exists when

Accepted Answer

A) both parties to an exchange have all relevant facts about that exchange. 
B) a good that is either nonrivalrous or nonexcludable is being sold on a market. 
C) the two parties to an exchange differ in what they know about the good being exchanged. 
D) neither party to an exchange is knowledgeable about the quality of the good being exchanged. 
A) both parties to an exchange have all relevant facts about that exchange. 
B) a good that is either nonrivalrous or nonexcludable is being sold on a market. 
C) the two parties to an exchange differ in what they know about the good being exchanged. 
D) neither party to an exchange is knowledgeable about the quality of the good being exchanged.

Question 14

According to information in the textbook, in the early West, many of the open lands were overgrazed. This was largely because

Accepted Answer

A) landowners charged ranchers a fee to graze their cattle. 
B) the lands were unowned. 
C) a government policy in effect at the time subsidized cattle production. 
D) none of the above 
A) landowners charged ranchers a fee to graze their cattle. 
B) the lands were unowned. 
C) a government policy in effect at the time subsidized cattle production. 
D) none of the above

Question 15

Generally, negative externalities result in

Accepted Answer

A) too much of a good being produced. 
B) the socially optimal output of a good being produced. 
C) too little of a good being produced. 
D) either a or c 
E) any of the above 
A) too much of a good being produced. 
B) the socially optimal output of a good being produced. 
C) too little of a good being produced. 
D) either a or c 
E) any of the above

Question 16

Exhibit 30-2
​
  
-Refer to Exhibit 30-2. 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 17

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 18

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 19

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

Accepted Answer

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

Question 20

If the consumption of a good by one person reduces the amount of it that can be consumed by others, the good is

Accepted Answer

A) excludable. 
B) nonexcludable. 
C) rivalrous in consumption. 
D) nonrivalrous in consumption. 
A) excludable. 
B) nonexcludable. 
C) rivalrous in consumption. 
D) nonrivalrous in consumption.

Exam 30: Market Failure Externalities Public Goods and Asymmetric Information

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

Which of the following statements is false?

Exhibit 30-5 ​ -Refer to Exhibit 30-5. If a positive externality exists then the socially optimal output is

Exhibit 30-2 ​ -Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q1 to Q2 is the area of

Exhibit 30-3 -Refer to Exhibit 30-3. What is the cost to Firm C of eliminating 2 tons of pollution?

Which of the following is not a method to internalize or adjust for externalities?

A nonexcludable public good is characterized by nonrivalry in

There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to Coase,

A negative externality exists when

The primary characteristic of a public good is that it is nonrivalrous in consumption.

Exhibit 30-4 ​ -Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points __________, and the socially optimal output is __________.

Asymmetric information exists when

According to information in the textbook, in the early West, many of the open lands were overgrazed. This was largely because

Generally, negative externalities result in

Exhibit 30-2 ​ -Refer to Exhibit 30-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?

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

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

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

If the consumption of a good by one person reduces the amount of it that can be consumed by others, the good is

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Filters

Exhibit 30-5 -Refer to Exhibit 30-5. If a positive externality exists then the socially optimal output is

Exhibit 30-2 -Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q₁ to Q₂ is the area of

Exhibit 30-4 -Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points , and the socially optimal output is .

Exhibit 30-2 -Refer to Exhibit 30-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?

Lemon laws the problem in the used car market.