Deck 4: B: Market Failures: Public Goods and Externalities

Question 1

A demand-side market failure occurs when demand curves do not reflect consumers' full willingness to pay for a good or service.

Answer 1

True

Question 2

Market for asparagus.At the market price of $2, area A represents:

A)total consumer utility.
B)total revenue to sellers.
C)consumer surplus.
D)economic profit.

Answer 2

C

Question 3

Consumer surplus and the market price are positively related.

Answer 3

False

Question 4

A demand-side market failure occurs when demand curves do not reflect consumers' lack of willingness to pay for a good or service.

Question 5

Productive efficiency means that the society is producing the combination of the output most desirable by consumers.

Question 6

Market failures

A)fall only on the demand-side.
B)fall only on the supply-side.
C)can fall on either the demand-side or the supply-side.
D)fall on non-competitive markets only.

Question 7

Supply-side market failure

A)arises in situations in which a firm does not have to pay the full cost of producing its output.
B)arises when it is impossible to charge consumers what they are willing to pay for a product.
C)exists in equilibrium with supply-side market failure.
D)happens only when the quantity of a good demanded is less than that which is supplied.

Question 8

A supply-side market failure occurs when supply curves do not reflect the full cost of producing a good or service.

Question 9

Market for asparagus.At the market price of $2, area A + B represents:

A)total consumer benefit.
B)total revenue to sellers.
C)consumer surplus.
D)returns to capital and to labour.

Question 10

Refer to the diagram.The area of consumer surplus would be represented by triangular area:

A)a.
B)b.
C)c.
D)d.

Question 11

There is a positive relationship between equilibrium price and the amount of producer surplus.

Question 12

If there are significant external benefits associated with the production or consumption of a good or service, there will be an under-allocation of resources to its production unless some corrective action is taken.

Question 13

Society's optimal amount of pollution moderation is where society's marginal benefit of moderation is zero.

Question 14

Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or service.

Question 15

Society's marginal cost of pollution moderation curve slopes upward because of the law of diminishing marginal utility.

Question 16

Market failure

A)does not occur in competitive markets.
B)sometimes can occur in competitive markets.
C)occurs only when markets underproduce.
D)occurs only when markets overproduce.

Question 17

The principle that private negotiation can resolve potential externalities without resort to government intervention is known as the Coase Theorem.

Question 18

A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good.

Question 19

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

Question 20

Demand-side market failure

A)arises in situations in which a firm does not have to pay the full cost of producing its output.
B)arises when it is impossible to charge consumers what they are willing to pay for a product.
C)exists in equilibrium with supply-side market failure.
D)happens only when the quantity of a good demanded is less than that which is supplied.

Question 21

Which of the following is correct?

A)Private goods are subject to rivalry and excludability
B)Private goods are indivisible.
C)Private goods are subject to the free-rider problem.
D)Private goods are produced in efficient or optimal amounts despite substantial externalities.

Question 22

The term "Efficiency losses" refers to:

A)the producer loss due to the high cost of production.
B)the reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product.
C)the consumer surplus minus the producer surplus.
D)the sum of consumer and producer surplus.

Question 23

The term "productive efficiency" refers to:

A)the situation where producer surplus is greater than consumer surplus.
B)the production of the product-mix most desired by consumers.
C)the production of a good in the least costly way.
D)the production of any good which producer desires to produce.

Question 24

The term "allocative efficiency" refers to:

A)the production of the product-mix most desired by society.
B)the allocation of resources to the production of a particular product.
C)the production of the product-mix most desired by producers.
D)the production of a good at the lowest average total cost.

Question 25

A public good:

A)is not subject to rivalry and excludability.
B)entails no externalities.
C)is subject to rivalry and excludability.
D)can not be produced by private firms.

Question 26

Refer to the diagram.The area of producer surplus would be represented by triangular area:

A)a.
B)b.
C)c.
D)d.

Question 27

Consumer surplus refers to:

A)The total amount consumer pays for the product
B)The area under the demand curve
C)The price consumer pays for the product
D)The difference between the total amount consumers pays for the product and the value of the purchase to the consumers

Question 28

The following table presents the demand schedule for product Z: If the price of product Z increases to $15, what would be the consumer surplus?

A)$3
B)$8
C)$5
D)$15

Question 29

Producer surplus refers to:

A)The total amount producer spends for making the product
B)The area under the demand curve above the equilibrium price
C)The price the producer receives.
D)The difference between producer's revenue from selling the product and the cost of producing it.

Question 30

A public good can be best defined as one that:

A)has no externality associated with its production or consumption.
B)entails rising costs of production.
C)yields widespread benefits which cannot readily be denied to the public at large.
D)yields benefits only to individuals who decide to buy it.

Question 31

If the price of a product increases:

A)the consumer surplus will increase.
B)the producer surplus will increase.
C)the price increase has no effect on the producer surplus.
D)the consumer surplus will not change.

Question 32

Which of the following is a characteristic of a private good:

A)free-rider problem
B)external benefits
C)external costs
D)excludability

Question 33

Which of the following is a private good?

A)a ballpoint pen
B)national defence
C)a highway
D)a lighthouse

Question 34

If the price of a product increases:

A)the consumer surplus will decrease.
B)the consumer surplus will increase.
C)total revenue will increase if demand is price elastic.
D)total revenue will decrease if demand is price inelastic.

Question 35

Which is a characteristic of a public good?

A)the possibility of excluding payers from non-payers
B)non-rivalry and non-excludability
C)it is possible to withhold it from those who would not pay for it
D)it is provided by the private sector

Question 36

Efficiency loss refers to:

A)the situation where the maximum willingness to pay for a product is less than minimum acceptable price.
B)the situation where the maximum willingness to pay for a product is equal to the minimum acceptable price.
C)the difference between consumer and producer surplus.
D)the sum of consumer and producer surplus.

Question 37

The following table presents the demand schedule for product Z: Assuming that the price of Z at equilibrium is $12, what is the total consumer surplus?

A)$12
B)$11
C)$8
D)$20

Question 38

Which is a characteristic of a public good?

A)rivalry among firms
B)excludability
C)non-excludability
D)no free-rider problem

Question 39

In a purely competitive industry at equilibrium price and quantity

A)the producer surplus exceeds the consumer surplus.
B)the sum of consumer and producer surplus is maximized.
C)the consumer surplus exceeds producer surplus.
D)the willingness of consumers to pay exceeds the opportunity cost of producing the product.

Question 40

A public good:

A)generally results in substantial negative externalities.
B)can never be provided by a nongovernmental organization.
C)can't be provided to one person without making it available to others as well.
D)costs essentially nothing to produce and thus is provided by the government at a zero price.

Question 41

Cost-benefit analysis attempts to:

A)compare the real worth, rather than the market values, of various goods and services.
B)compare the relative desirability of alternative distributions of income.
C)determine whether it is better to cut government expenditures or reduce taxes.
D)compare the benefits and costs associated with any economic project or activity.

Question 42

The major difficulty in asking people to pay voluntarily what a government program is worth to them is:

A)the free-rider problem.
B)people have poor judgment.
C)the fact that people don't know what programs they want.
D)we would increase government expenditures too much.

Question 43

The following information is for a public good.P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it.These people are the only two members of society.If this good were a private good instead of a public one, the total quantity demanded at a $3 market price would be:

A)2 units.
B)3 units.
C)6 units.
D)4 units.

Question 44

Assume there is no way to prevent someone from using an inter-provincial highway, regardless of whether or not he or she helps pay for it.This characteristic is associated with:

A)rival goods.
B)complementary goods.
C)public goods.
D)capital goods.

Question 45

Answer the next question on the basis of the following information is for public good.P_a and P_b represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Q_c) of the public good.Q_s represents the quantity of the public good supplied by government at each of the collective prices.Refer to the information below.If the collective willingness to pay for an additional unit of this public good is $6, then the collective quantity demanded will be:

A)1 unit and the socially optimal quantity supplied will be 5 units.
B)2 units and the socially optimal quantity supplied will be 4 units.
C)3 units and the socially optimal quantity supplied will be 3 units.
D)4 units and the socially optimal quantity supplied will be 2 units.

Question 46

Government must provide economically desirable public goods because:

A)private production of these goods would entail unacceptably high levels of external costs.
B)the availability of such goods yields no benefits to individual consumers.
C)the benefits yielded by such goods cannot be withheld from those who refuse to pay for them.
D)their provision is necessary if we are to reduce unemployment and inflation.

Question 47

For which one of the following would we need to sum individual demand curves vertically to obtain the total demand curve?

A)frozen yogurt
B)bubble gum
C)microwave popcorn
D)courts of law

Question 48

Answer the next question on the basis of the following information for public good.P_a and P_b represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Q_c) of the public good.Q_s represents the quantity of the public good supplied by government at each of the collective prices.The collective willingness of this nation to pay for the fourth unit of the public good is:

A)$7
B)$6
C)$5
D)$3

Question 49

Which of the following statements is correct?

A)Private goods yield direct benefits to the purchaser and are financed by government.
B)Public goods yield widespread external benefits and are purchased by government with tax revenues.
C)Public goods are bought voluntarily out of private incomes and yield no significant external benefits.
D)Public goods are bought voluntarily out of private incomes and yield widespread external benefits.

Question 50

The market demand curve for a public good:

A)is derived in the same manner as demand curves for private goods.
B)is derived by horizontally summing all individual demand curves.
C)shows the total value that all individuals place on each unit of the good.
D)shows the total number of units that would be produced by the private sector at each possible price.

Question 51

The following information is for a public good.P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it.These people are the only two members of society.Refer to the data below.If the marginal cost of this good at the optimal quantity is $4, the optimal quantity must be:

A)1 unit.
B)2 units.
C)3 units.
D)4 units.

Question 52

Refer to the below diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it.The collective willingness to pay for the 1^st unit of this public good is:

A)$18
B)$14
C)$10
D)$6

Question 53

The production of economically desirable public goods must be sponsored by government because:

A)the existence of large external costs precludes their production in the private sector.
B)public goods have characteristics which make it difficult or impossible for private firms to produce them profitably.
C)the benefits derived from their production exceed the costs of producing them.
D)the law of increasing marginal opportunity costs does not apply to public goods.

Question 54

The following information is for a public good.P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it.These people are the only two members of society.Suppose the government has already produced 4 units of this public good.The amount individual B is willing to voluntarily pay for the 4^th unit is:

A)$14
B)$5
C)$2
D)$0

Question 55

The right and efficient amount of a public good will be produced when:

A)the government follows the rule of MR = MB.
B)the government applies the rule of MB = MC.
C)the government makes the highest level of profit from producing it.
D)the government can exclude the payers from non-payers.

Question 56

The following information is for a public good.P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it.These people are the only two members of society.The collective willingness of this society to pay for the 2^nd unit of this public good is:

A)$2
B)$4
C)$6
D)$8

Question 57

Ed, Mike, and Scott are the only three people in a community and Ed is willing to pay $20 for the 5^th unit of a public good; Mike, $15; Scott, $25.The government should produce the 5^th unit of the public good if the marginal cost is:

A)less than $150.
B)less than $100.
C)less than $60.
D)less than $300.

Question 58

A demand curve for a public good is determined by:

A)summing vertically the individual demand curves for the public good.
B)summing horizontally the individual demand curves for the public good.
C)combining the amounts of the public good that the individual members of society demand at each price.
D)multiplying the per-unit cost of the public good by the quantity made available.

Question 59

Refer to the diagrams below in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it.If the marginal cost of the optimal quantity of this public good is $10, the optimal quantity must be:

A)1 unit.
B)2 units.
C)3 units.
D)4 units.

Question 60

Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the third unit of a public good.Also, assume that the marginal cost of the third unit is $17.We can conclude that:

A)the third unit should not be produced.
B)the third unit should be produced.
C)zero units should be produced.
D)4 units should be produced.

Question 61

Answer the question based on the following information.Way-Below Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism.The university is now considering several alternative levels of crime control.This table shows the expected annual costs and benefits of these alternatives.The marginal costs of additional levels of crime control are:

A)$60,000 for Level Two.
B)$20,000 for Level Three.
C)$5,000 for Level Five.
D)$10,000 for Levels Two, Three, Four, and Five.

Question 62

Refer to the supply and demand graph for a public good.Point c on the graph shows where the:

A)total benefit equals the total cost of the public good.
B)marginal benefit equals the marginal cost of the public good.
C)average benefit equals the average cost of the public good.
D)total benefit equals the marginal cost of the public good.

Question 63

Refer to the information below: A government is considering undertaking one or more construction project(s).The estimated marginal costs and benefits of each project are given in the above table.What is the total amount that the government should spend on construction project?

A)$8 million.
B)$11 million.
C)$18 million.
D)$19 million.

Question 64

Refer to the supply and demand graph for a public good.Line segment ad represents the amount at Q₁ by which the:

A)marginal benefit of this public good is less than the marginal cost.
B)total benefit of this public good is less than the total cost.
C)marginal benefit of this public good is greater than the marginal cost.
D)total benefit of this public good is greater than the total cost.

Question 65

In a market where there are external or negative externalities associated with consumption and production, the equilibrium will not be efficient because:

A)price will be greater than MC.
B)firms will shut down until costs are reduced.
C)costs of production will, on average, be too high.
D)too many resources will be allocated to production of the good.

Question 66

Quasi-public goods are:

A)government produced goods that can be produced so that exclusion is possible.
B)government produced goods that can be produced so that exclusion is not possible.
C)privately produced goods that can be produced so that exclusion is possible.
D)privately produced goods that can be produced so that exclusion is not possible.

Question 67

The following data are for a series of increasingly extensive flood control projects: For Plan D marginal costs and marginal benefits are:

A)$72,000 and $64,000 respectively.
B)$28,000 and $12,000 respectively.
C)$24,000 and $18,000 respectively.
D)$16,000 and $28,000 respectively.

Question 68

The following information is for four highway programs of increasing scope.All figures are in millions of dollars.The data indicate that:

A)there is no highway program which is economically justifiable on the basis of cost-benefit analysis.
B)the marginal cost and marginal benefit of Program A are $2 and $9 respectively.
C)the marginal cost and marginal benefit of Program C are $12 and $21 respectively.
D)the marginal cost and marginal benefit of Program A cannot be determined.

Question 69

Answer the question based on the following information.Way-Below Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism.The university is now considering several alternative levels of crime control.This table shows the expected annual costs and benefits of these alternatives.The marginal benefits of crime control for Level Two are:

A)$20000
B)$40000
C)$60000
D)$140000

Question 70

Examples of quasi-public goods include:

A)education.
B)highways.
C)museums.
D)all of the given possible answers are examples of quasi-public goods.

Question 71

A negative externality or external cost occurs when:

A)firms fail to achieve allocative efficiency.
B)firms fail to achieve productive efficiency.
C)price exceeds marginal cost.
D)the total cost of producing a good exceeds the costs borne by the producer.

Question 72

Refer to the graph given below. The graph above shows the supply of and the demand for a public good.Which of the following statements is correct?

A)The supply curve reflects the marginal cost of producing each unit of the good, and the demand curve reflects the marginal benefit of consuming each unit of the good.
B)The demand curve reflects the marginal cost of producing each unit of the good, and the supply curve reflects the marginal benefit of consuming each unit of the good.
C)There will be an overallocation of resources at output level Q₁.
D)There will be an underallocation of resources at output level Q₃.

Question 73

Answer the next question on the basis of the following information is for public good.P_a and P_b represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Q_c) of the public good.Q_s represents the quantity of the public good supplied by government at each of the collective prices.In equilibrium, the marginal benefit and cost of the public good will be:

A)$7
B)$6
C)$5
D)$3

Question 74

Answer the next question on the basis of the following information is for public good.P_a and P_b represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Q_c) of the public good.Q_s represents the quantity of the public good supplied by government at each of the collective prices.If only 1 unit of this public good is produced, then the marginal benefit is:

A)$3 and the marginal cost is $9.
B)$4 and the marginal cost is $7.
C)$6 and the marginal cost is $3.
D)$9 and the marginal cost is $5.

Question 75

Refer to the supply and demand graph for a public good.Which line segment would indicate the amount by which the marginal benefit of this public good is greater than the marginal cost?

A)de
B)da
C)ef
D)ab

Question 76

The following information is for four highway programs of increasing scope.All figures are in millions of dollars.On the basis of the data we can say that:

A)Program D is the most efficient on economic grounds.
B)Program C is the most efficient on economic grounds.
C)Program B is the most efficient on economic grounds.
D)Program A is the most efficient on economic grounds.

Question 77

Answer the question based on the following information.Way-Below Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism.The university is now considering several alternative levels of crime control.This table shows the expected annual costs and benefits of these alternatives.If Way-Below Normal undertakes Level Three:

A)total benefits will be less than total costs.
B)marginal costs will exceed marginal benefits.
C)there would be an under-allocation of resources to crime control.
D)there would be an over-allocation of resources to crime control.

Question 78

By levying taxes on households and businesses, governments:

A)reduce private demand for goods and services.
B)change the total utility realized by consumers.
C)decrease the amount of quasi-public goods offered.
D)decrease the amount of public goods offered.

Question 79

Which of these is an example of an external cost?

A)an increase in the value of land you own when a nearby development is completed.
B)the costs paid by a company to build an automated factory.
C)decreased property values in a neighbourhood where several houses are burglarized.
D)the higher price you pay when you buy a heavily advertised product.

Question 80

Answer the question based on the following information.Way-Below Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism.The university is now considering several alternative levels of crime control.This table shows the expected annual costs and benefits of these alternatives. Based on cost-benefit analysis, Way-Below Normal should undertake

A)Two.
B)Three.
C)Four.
D)Five.