Deck 17: Market Failure: Externalities, Public Goods, and Asymmetric Information

Question 1

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

Answer 1

True

Question 2

When a positive externality exists, the market is said to fail because it overproduces the good associated with the positive externality.

Answer 2

False

Question 3

From an economist's point of view, zero pollution is always preferable to some pollution.

Answer 3

False

Question 4

A good is nonexcludable if no externalities, either negative or positive, are associated with its production or consumption.

Question 5

For a good where network externalities are present, having an early lead in the race for customers may be the only lead necessary to ultimately win the race for dominance in the good's market.

Question 6

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.

Question 7

When a negative externality exists, the market is said to underproduce the good connected with the negative externality.

Question 8

When an insurance company specifies certain precautions that an insured person must take it is trying to control for moral hazard.

Question 9

Ronald Coase stressed the necessity of using taxes to internalize negative externalities.

Question 10

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.

Question 11

Positive externalities can be internalized using persuasion, but persuasion is not effective with negative externalities.

Question 12

Market failure is a situation in which

A)the market does not provide the ideal or optimal amount of a particular good.
B)there are too many buyers but not enough sellers.
C)prices are too high for "average" people to buy necessities.
D)there is a question over the quality of a product for sale.

Question 13

The free rider problem is the main source of market failure in the provision of nonexcludable public goods.

Question 14

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

Question 15

Moral hazard occurs when the parties on once 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.

Question 16

A public good can be excludable or nonexcludable.

Question 17

Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called

A)Coase effects.
B)externalities.
C)public goods.
D)internalities.

Question 18

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

Question 19

Social media, such as the online social networking portal Meetup, have increased the likelihood of people forming social tribes by reducing the transaction costs associated with forming such groups.

Question 20

According to the Coase theorem, under certain conditions the market can internalize externalities.

Question 21

Exhibit 30-1 ​

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, the triangle ABC is representative of

A)social failure.
B)optimal failure.
C)market failure.
D)socially optimal output.

Question 22

A negative externality is

A)a type of tax.
B)a type of subsidy.
C)a type of money price.
D)linked to external costs.
E)linked to external benefits.

Question 23

Suppose the production of a good results in negative externalities. If output is at the intersection of the demand curve and the marginal social cost curve, then

A)the socially optimal level of output will be produced.
B)society will incur a net social cost.
C)society will want less output produced, and producers will be willing to satisfy this desire at a price that society deems acceptable.
D)There is not enough information provided to answer the question.

Question 24

Negative externalities arising from the production of a good

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 25

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

A)output will not occur at the socially optimal level.
B)the price of the product will be higher than if all costs are not taken into account.
C)more output will be produced than if all costs are not taken into account.
D)the price of the product will be the same as it would be if all costs are not taken into account.

Question 26

If society is experiencing a net social cost from the production of a good, this implies that

A)the socially optimal level of output is being produced and society is willing to accept the costs that result.
B)producers would rather produce the output at which marginal social cost equals the demand for the good.
C)negative externalities are involved in the production of this good.
D)positive externalities must be involved in the production of this good.

Question 27

Exhibit 30-1 ​

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, the social cost of expanding output from Q₂ to Q₁ is the area of

A)ABC.
B)Q₂BCQ₁.
C)Q₂BAQ₁.
D)Q₂EAQ₁.

Question 28

Exhibit 30-1 ​

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, the net social cost of expanding output from Q₂ to Q₁ is the area of

A)ABC.
B)BEA.
C)Q₂BAQ₁.
D)Q₂EAQ₁.

Question 29

When a negative externality exists,

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.

Question 30

Which of the following situations probably would not yield a negative externality?

A)a rock concert in the quad next to the library
B)one person who is smoking cigarettes in a closed room where several other people are present
C)a tutor quietly instructs a student in economics as a bystander willingly listens in without the tutor knowing it
D)mowing your lawn early on a Saturday morning when you live in a densely populated neighborhood

Question 31

Exhibit 30-1 ​

Refer to Exhibit 30-l. If the exhibit represents a negative externality situation, the private cost of expanding output from Q₂ to Q₁ is the area of

A)ABC.
B)Q₂BCQ₁.
C)Q₂BAQ₁.
D)Q₂EAQ₁.

Question 32

In which of the following situations would a negative externality most likely be involved?

A)It is night and Kenneth is sitting in his easy chair reading a novel by John Grisham. The lamp he is reading by has only a 40-watt light bulb. He is having a hard time reading.
B)Alyson lives near an airport. At five o'clock in the morning every day she can hear the airplanes taking off and it awakens her.
C)Lucy went to a fancy restaurant last night and ordered the most expensive meal on the menu. She hated it.
D)Richard is taking an economics class from Professor Franklin. Professor Franklin often says things that confuse Richard.

Question 33

A consequence of a negative externality is that social costs __________ private costs, and the socially optimal level of output __________.

A)equal; is not equal to social costs or private costs
B)do not equal; is obtained
C)do not equal; is not obtained
D)equal; is obtained
E)equal; is not obtained

Question 34

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

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

Question 35

When negative externalities are connected with the production of a 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 36

Exhibit 30-1 ​

Refer to Exhibit 30-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?

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

Question 37

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

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)There is not enough information provided to answer this question.

Question 38

Exhibit 30-1 ​

Refer to Exhibit 30-1. If the exhibit represents a negative externality situation, then what is Q₁?

A)It is the quantity of output at which marginal social costs (MSC)equal marginal private costs (MPC).
B)It is the quantity of output at which MPC > MSC.
C)It is the market output; it is the quantity of output that exists if the external costs associated with the negative externality are not taken into account.
D)It is the socially optimal output; it is the quantity of output that exists if the external costs associated with the negative externality are taken into account.

Question 39

Exhibit 30-1 ​

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

A)ABC.
B)Q₂BCQ₁.
C)Q₂BAQ₁.
D)Q₂EAQ₁.

Question 40

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

A)output will be at a lower level than if all costs are not taken into account.
B)output will be at a lower level than the socially optimal level.
C)the marginal private cost curve will lie above and to the left of the marginal social cost curve.
D)output will be at a higher level than if all costs are not taken into account.

Question 41

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

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 42

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

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)less output will be produced than if all benefits were not taken into account.
D)output will be at the market level.

Question 43

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?

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 44

Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a

A)negative externality.
B)positive externality.
C)substitute good.
D)complementary good.

Question 45

When a positive externality exists,

A)external benefits are necessarily greater than private benefits.
B)social benefits are greater than private benefits.
C)social benefits are less than private benefits.
D)social benefits equal private benefits.

Question 46

The side effect of an action that increases the well-being of others is called

A)an augmentation.
B)an elasticity.
C)a passive benefit.
D)a positive externality.

Question 47

Exhibit 30-2 ​

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

A)Q₁ABQ₂.
B)Q₁AEQ₂.
C)Q₁CBQ₂.
D)ABE.

Question 48

Exhibit 30-2 ​

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

A)Q₁ABQ₂.
B)Q₁AEQ₂.
C)CBA.
D)ABE.

Question 49

In which of the following situations would a positive externality most likely be involved?

A)Shawn is sitting at home one day when she gets a telephone call, informing her that she has won $10,000 in a contest she entered three months ago.
B)There are eight houses in the neighborhood where Rodney lives. Rodney likes nice-looking yards, and last week his neighbors began to beautify their yards.
C)Willy needs eight hours of sleep each night to feel good. Last night he got eight hours of sleep.
D)Patrick received an A on a biology exam. He is feeling better about his chances of getting admitted to medical school.

Question 50

When negative externalities are involved, the market is said to

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

Question 51

An externality is internalized

A)when the person(s)or group that generated the externality incorporate into their own private cost-benefit calculations the external benefits (in the case of a positive externality)or the external costs (in the case of a negative externality)that third parties bear.
B)when people are made aware of it and realize that social benefits are less than private benefits (in the case of a positive externality)and that social costs are less than private costs (in the case of a negative externality).
C)when the person(s)or group that generated the externality do not incorporate into their own private cost-benefit calculations the external benefits (in the case of a positive externality)or the external costs (in the case of a negative externality)that third parties bear.
D)it creates negative spillovers to society.

Question 52

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

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

Question 53

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

A)Q₁ABQ₂.
B)Q₁AEQ₂.
C)Q₁CBQ₂.
D)ABE.

Question 54

Which of the following statements is false ?

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 55

When positive externalities are involved, the market is said to

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 56

Exhibit 30-2 ​

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

A)Q₁ABQ₂.
B)Q₁AEQ₂.
C)Q₁CBQ₂.
D)ABE.

Question 57

Exhibit 30-2 ​

Refer to Exhibit 30-2. If Exhibit 30-2 exhibits a positive externality situation, then what is Q₂?

A)It is the quantity of output at which marginal social benefits (MSB)equal marginal private benefits (MPB).
B)It is the quantity of output at which MPB > MSB.
C)It is the market output-the quantity of output that exists if the external benefits associated with the positive externality are not taken into account.
D)It is the socially optimal output-the quantity of output that exists if the external benefits associated with the positive externality are taken into account.

Question 58

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

A)output will be at a higher level than if all benefits were not taken into account.
B)output will be at a lower level than the socially optimal level.
C)the marginal private benefit curve will lie above and to the right of the marginal social benefit curve.
D)there will be underproduction.

Question 59

Which of the following statements is true?

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)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 be a net change for the better.

Question 60

If a person who generates a negative externality incorporates into his or her private cost-benefit calculations the effects that this externality will have on third parties, the externality has been

A)substituted.
B)accommodated.
C)compounded.
D)internalized.

Question 61

Asymmetric information exists when

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 62

Suppose a particular production process results in a large amount of pollution and the government decides to impose a tax to correct for this externality, such that the socially optimal output will be produced. The tax will have the effect of shifting the

A)marginal private benefit curve to the right.
B)marginal social benefit curve to the right.
C)marginal private cost curve to the left.
D)marginal social cost curve to the left.
E)marginal private cost curve to the right.

Question 63

Some pollution may be preferable to zero pollution because

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 64

Externalities can be internalized through voluntary agreements as long as

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 65

Which of the following statements is true?

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 tax applied to an activity that generates a positive externality may bring about the socially optimal level of output.
D)A tax applied to an activity that generates a negative externality may bring about the socially optimal level of output.

Question 66

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

A)more air pollution.
B)less air pollution.
C)the same amount of air pollution that exists without private property rights in the air.
D)better weather.

Question 67

The Coase theorem

A)shows that under certain conditions the market can internalize externalities.
B)states that economic units should specialize in the production of those goods in which they have a comparative advantage.
C)asserts that the firm should produce that output at which marginal cost is equal to marginal revenue.
D)holds that the firm should produce that output at which marginal factor cost is equal to marginal revenue product.

Question 68

Which of the following statements is not an example of the use of persuasion to correct (or adjust for)an externality?

A)Maggie asks her neighbor to keep his dog quiet at night.
B)An environmental group conducts a sit-in at a chemical factory to demand that the firm stop polluting rivers.
C)A judicial court imposes a fine on a reckless driver.
D)The government taxes an oil refinery for creating air pollution.

Question 69

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

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

Question 70

A good is a nonexcludable if

A)its consumption by one person does not reduce its consumption by others.
B)it is impossible to prevent people from obtaining the benefits of the good once it has been produced.
C)no negative externalities are associated with its production and consumption.
D)it is free in the first place; that is, it is so abundant that people can get all they want at zero price.

Question 71

Which of the following statements is false ?

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 72

Which of the following statements is true?

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)Coase agrees with Pigou that taxing those activities associated with positive externalities is a good idea.

Question 73

Which of the following statements is false ?

A)A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality.
B)Ronald Coase stressed the reciprocal nature of externalities.
C)One way to deal with negative externalities is for government to apply regulations directly to the activity that generates the externalities.
D)Simply because taxes and subsidies are sometimes used to adjust for negative and positive externalities, respectively, it does not necessarily follow that the socially optimal level of output will be reached.

Question 74

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

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

Question 75

The Coase theorem is significant because it

A)implies that no transaction costs are associated with solving externalities.
B)shows that property rights can be assigned.
C)shows that under certain conditions externalities can be corrected in the market without resorting to nonmarket means.
D)shows that property rights should never be assigned.

Question 76

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

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)the government heavily taxed landowners.

Question 77

The primary difference between private goods and public goods is that

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 78

The Coase theorem states that

A)positive externalities are directly related to the weather-the better the weather, the more positive externalities.
B)in the case of trivial or zero transaction costs, negative externalities are more likely to appear.
C)when transaction costs are high, positive externalities will be minimized.
D)in the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome.

Question 79

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

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

Question 80

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

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.