Deck 6: Market Efficiency and Market Failure

Question 1

FIGURE 6-1

Refer to Figure 6-1. What area identifies the producer surplus created when the market price equals P₂?

A) area D
B) area B + E
C) area C + D+ F
D) area A + B + E

Answer 1

area C + D+ F

Question 2

Harry pays only $15 000 to purchase a new car that he would have been willing to pay as much as $25 000 for. What would an economist say about this situation?

A) The seller of the car earned a $15 000 consumer surplus on the sale of the car.
B) Harry reaped $10 000 of consumer surplus from the transaction.
C) Harry reaped $15 000 of consumer surplus from the transaction.
D) The seller earned a $10 000 profit on the sale of the car.

Answer 2

Harry reaped $10 000 of consumer surplus from the transaction.

Question 3

Why does producer surplus arise?

A) Consumers buy less of some commodities than they need.
B) Sellers' costs of production for some goods are less than the market price.
C) Producers make more off some commodities than the consumers desire.
D) Sellers manufacture more units of a good than consumers are willing to purchase.

Answer 3

Sellers' costs of production for some goods are less than the market price.

Question 4

The schedule below represents the willingness of a typical vintner to produce wine in a year. Suppose there are 100 identical producers in the market.
TABLE 6-4

Refer to Table 6-34. If the market price of wine is $20, what is the total producer surplus equal to?

A) $1 000 000
B) $2 000 000
C) $3 000 000
D) $4 000 000

Question 5

Which of the following best explains the source of consumer surplus for Good A?

A) Many consumers would be willing to pay more than the market price for some units of Good A.
B) Many consumers pay prices that are greater than the equilibrium price of Good A.
C) Many consumers of Good A place a value on it that is less than the market price.
D) Many consumers think the market price of Good A is greater than its cost.

Question 6

Phil and Lasca have always wanted to take a cruise. Although willing to pay $5000 for a Caribbean cruise for two, they were able to purchase a cruise vacation for two for $3500. What was their total consumer surplus?

A) $750
B) $1500
C) $3500
D) $5000

Question 7

Why does consumer surplus arise?

A) Sellers manufacture more units of a good than consumers are willing to purchase.
B) Consumers buy less of some commodities than they need.
C) Consumers value some goods purchased higher than the price they have to pay to acquire them.
D) Consumers buy more of some commodities than they need.

Question 8

What is the term for the difference between the value of a good to consumers and its price?

A) demand
B) marginal utility
C) total utility
D) consumer surplus

Question 9

FIGURE 6-1

Refer to Figure 6-1. What area identifies the consumer surplus created when the market price equals P₂?

A) area A
B) area C + D + F
C) area B + E
D) area A + B + E

Question 10

The schedule below represents the willingness of a typical consumer to pay for wine in a year. Suppose there are 10 000 identical consumers in the community. TABLE 6-3

Refer to Table 6-3. If the market price of wine is $20, what is the total consumer surplus for the community equal to?

A) $20 000
B) $30 000
C) $50 000
D) $60 000

Question 11

Lance's demand schedule for pizza is indicated below:TABLE 6-2

Refer to Table 6-2. If the current price of pizza is $1.00 per slice, what is Lance's consumer surplus?

A) 0
B) $1.00
C) $1.20
D) $1.50

Question 12

Graphically, how is consumer surplus measured?

A) by the area below the demand curve, but above the upward-sloping supply curve
B) by the area below the market demand curve, but above the supply curve
C) by the area below the demand curve
D) by the area below the demand curve, but above the market price

Question 13

Ceteris paribus, which of the following will a decrease in the price of a good cause?

A) the quantity supplied of the good to increase
B) the supply of the good to decrease
C) the consumer surplus derived from the good to increase
D) the quantity demanded of the good to decrease

Question 14

The schedule below represents the willingness of a typical consumer to pay for wine in a year. Suppose there are 10 000 identical consumers in the community. TABLE 6-3

Refer to Table 6-3. If the market price of wine is $30, what is the total consumer surplus for the community equal to?

A) $20 000
B) $30 000
C) $50 000
D) $60 000

Question 15

As the market price of a good falls due to an increase in supply, what happens to consumer surplus?

A) It rises.
B) It falls.
C) It does not change.
D) It can fall, rise, or stay the same.

Question 16

Which of the following would lead to the creation of some consumer surplus?

A) Sam refuses to pay $10 for a haircut because it is only worth $8 to him.
B) Fred buys a car for $4000, the maximum amount that he would be willing to pay for it.
C) Danette pays $30 a month for phone service, but it is worth $70 to her.
D) When Florence purchases a candy bar for 50 cents, she uses a $20 bill to pay for it.

Question 17

TABLE 6-1
Henry demands jazz CDs according to the following demand schedule:

Refer to Table 6-1. If the price of jazz CDs equals $15, what is the consumer surplus Henry receives from purchasing jazz CDs?

A) $15
B) $25
C) $30
D) $55

Question 18

TABLE 6-1
Henry demands jazz CDs according to the following demand schedule:

Refer to Table 6-1. If the price of jazz CDs equals $20, what is the consumer surplus Henry receives from purchasing jazz CDs?

A) $10
B) $15
C) $20
D) $55

Question 19

The schedule below represents the willingness of a typical vintner to produce wine in a year. Suppose there are 100 identical producers in the market.
TABLE 6-4

Refer to Table 6-4. If the market price of wine is $30, what is the total producer surplus equal to?

A) $1 000 000
B) $2 000 000
C) $3 000 000
D) $4 000 000

Question 20

What does the area between the market price and the supply curve provide a measure of?

A) marginal utility
B) producer surplus
C) consumer surplus plus producer surplus
D) consumer surplus

Question 21

As the market price of a good falls due to a decrease in demand, what happens to producer surplus?

A) It does not change.
B) It rises.
C) It falls.
D) It can fall, rise, or stay the same.

Question 22

What are costs that accrue to the total population referred to as?

A) positive costs
B) negative costs
C) social costs
D) private costs

Question 23

What do economists use the term externalities to refer to?

A) the shipment of goods and services to foreign nations
B) the importation of goods and services from foreign nations
C) benefits or costs of actions that spill over onto third parties
D) management decisions made outside of one's own department or division

Question 24

Why does the presence of negative externalities lead to a misallocation of societal resources?

A) because whenever external costs are imposed on outside parties, the good should not be produced at all
B) because the government always intervenes in markets when negative externalities are present
C) because less of the good than is ideal for society is produced
D) because there are some costs associated with production that the producer fails to take into consideration

Question 25

How are the total social costs of production defined?

A) private costs plus private benefits
B) private benefits minus private costs
C) private costs plus external costs
D) private costs minus external costs

Question 26

Which of the following activities represents an external cost?

A) the costs a company imposes on others
B) the pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard
C) the increase in property values of vacant lots in an area near where a new amusement park is constructed
D) the benefits that accrue to society when an individual receives a college education

Question 27

How are gains from trade measured?

A) by the sum of consumer and producer surplus
B) by producer surplus
C) by producer surplus minus consumer surplus
D) by consumer surplus

Question 28

If negative externalities are created in the production of a good, what will society do?

A) It will produce too much of the good, since the marginal private cost to firms is greater than the marginal social cost.
B) It will produce too little of the good, since the marginal private cost to firms is less than the marginal social cost.
C) It will produce too much of the good, since the marginal private cost to firms is less than the marginal social cost.
D) It will produce too little of the good, since the marginal private cost to firms is greater than the marginal social cost.

Question 29

If a negative externality results from the refining of oil, what can be said of the cost of production as seen by the oil refinery?

A) It does not include the external cost.
B) It includes the external benefit.
C) It includes the external cost.
D) It does not include the external benefit.

Question 30

Which of the following activities represents an external cost?

A) the increase in local property values when the city creates a neighbourhood park
B) the price you pay for the prime ribs that you consume at a local restaurant
C) the reduction in the incidence of chicken pox when children are inoculated against the disease
D) the damage to a person's health from second-hand smoke

Question 31

Ruth loves to get up early and get busy in the morning. Her roommate, Elizabeth, likes to sleep in every morning. When Ruth gets up she likes to hum, sing, and clean up the kitchen, rattling pots and pans. Which of the following statements best describes Ruth?

A) She is a great and thoughtful roommate.
B) She is inflicting a negative externality on Elizabeth.
C) She is providing Elizabeth with a positive externality.
D) She is demonstrating the fallacy of composition.

Question 32

In a market where firms are able to reduce their private costs by shifting costs onto others, which of the following will NOT happen?

A) Negative externalities will be observed.
B) Output of the good being produced will be too low.
C) Prices will be too low relative to the social optimum.
D) Inefficiencies will occur.

Question 33

What are external costs?

A) costs paid by corporations rather than by individuals
B) costs incurred by foreigners rather than domestic consumers and producers
C) costs borne by nonconsenting secondary parties not directly engaged in the transaction
D) costs unique to market economies

Question 34

Which of the following does NOT provide an example of an externality?

A) the view that passers-by and neighbours enjoy when observing your rose garden
B) the pleasure you get from purchasing a new pair of shoes
C) the air pollution generated when you drive your car
D) the free concerts neighbours hear when an accomplished musician practices at home

Question 35

What are external costs?

A) costs borne by the government
B) costs borne by free riders
C) costs borne by exporting firms
D) costs borne by parties not directly involved in a transaction

Question 36

Which of the following is an example of a negative externality?

A) the benefit you receive when your neighbour installs a smoke detector
B) the reduction in profits for your company that occurs when there is a decrease in consumer demand for the product you manufacture
C) the change in the property values of your neighbours' homes when you paint your house and landscape your front yard
D) the sleep you lose when your neighbour throws a loud party next door that keeps you awake

Question 37

When is an externality present?

A) when the private marginal cost of an activity exceeds the private marginal benefit
B) when the social marginal cost of an activity exceeds the private marginal cost
C) when the social marginal cost of an activity exceeds the social marginal benefit
D) when the social marginal benefit of an activity is less than the private marginal benefit

Question 38

Suppose that firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. If this is the case in a competitive market, how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?

A) Price is too low and output is too small.
B) Price is too high and output is too large.
C) Price is too low and output is too large.
D) Price is too high and output is too small.

Question 39

When does an externality occur?

A) when only the people making the demand and supply decisions share the benefits or the costs of an activity
B) when private costs of production are ignored
C) when private costs of production equal the full social costs associated with production of a good
D) when people other than those making the demand and supply decisions share the benefits or the costs of an activity

Question 40

What are private costs?

A) costs borne by the government
B) costs borne by both an item's producer and outside parties affected by a negative externality
C) costs borne by the producer of an item
D) costs borne by outside parties affected by a negative externality

Question 41

If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm understates the cost to society associated with this product. In order to move towards efficiency, what should happen to output?

A) It should decrease.
B) It should increase.
C) It should stay the same.
D) It should cease.

Question 42

FIGURE 6-2

Refer to Figure 6-2. Currently Q₀ of electrical power is being produced. The demand curve is represented by D, and the current market supply is represented by S₀. It is discovered that the Rocky Mountain Electrical Co-op and Power Company is discharging waste into the area water supply. As a result, S₁ represents the supply curve with external costs included. Which of the following price levels would represent the True internalized cost of production at that level of output (Q₀)?

A) P0
B) P1
C) There is insufficient information available to provide an accurate answer.
D) P2

Question 43

Why does education lead to external benefits?

A) Little pollution is created when educating people.
B) People who become better educated get better jobs.
C) Better educated people are more motivated to succeed.
D) Better educated people commit less crimes.

Question 44

Under what circumstances will people or firms "internalize externalities"?

A) whenever spillover costs and/or benefits are created
B) whenever the private marginal costs and private marginal benefits are calculated more carefully
C) whenever less consideration is given to others
D) whenever responsibility for the consequences of actions is assigned to the acting party.

Question 45

What is the term for the benefit that your neighbour receives when you landscape your front yard?

A) a positive externality
B) an external cost
C) a social externality
D) social efficiency

Question 46

FIGURE 6-2

Refer to Figure 6-2. If the all the costs of production are internalized, what will the equilibrium price and quantity be?

A) P1 and Q0
B) P0 and Q0
C) P2 and Q1
D) P0 and Q0.

Question 47

What are golf course developers who buy the land around the golf course they build attempting to do?

A) Internalize external benefits.
B) Guarantee economic losses for tax purposes.
C) Impose external costs on nonconsenting third parties.
D) Turn a private good into a public good.

Question 48

Which of the following activities represents an external benefit?

A) the decrease in travel time for someone who flies a lot when a new airport is built in their neighbourhood
B) the increase in the value of property belonging to your neighbours when you hire a landscaper to beautify your front yard
C) the profits owners get from the building of a new factory
D) the benefit to a consumer from watching a film on DVD

Question 49

What effect would a tax equal to the external cost on firms that emit pollutants have?

A) It would provide firms with very little incentive to become eco-friendly.
B) It would provide firms with little incentive to search for less environmentally damaging production methods.
C) It would provide firms with the incentive to decrease the level of activity creating the pollution.
D) It would provide firms with the incentive to slightly increase the level of activity creating the pollution to cover the costs of the tax.

Question 50

If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, which of the following would likely occur?

A) an increase in production
B) a decrease in production
C) a greater misallocation of resources
D) a decrease in the market price of the product

Question 51

What results from a per-unit tax on output in a market?

A) The quantity traded does not change.
B) A surplus is created at the new equilibrium price.
C) The quantity traded increases.
D) The quantity traded decreases.

Question 52

Which of the following is an example of a positive externality?

A) beautiful trees on property along a parkway
B) airport noise
C) pollution in a resort lake
D) a busy freeway

Question 53

If positive externalities are present in the production of a good, what will society do?

A) It will produce too much of the good, since the marginal private benefit to consumers is less than the marginal social benefit.
B) It will produce too little of the good, since the marginal private benefit to consumers is less than the marginal social benefit.
C) It will produce too little of the good, since the marginal private benefit to consumers is greater than the marginal social benefit.
D) It will produce too much of the good, since the marginal private benefit to consumers is greater than the marginal social benefit.

Question 54

If a positive externality results from the consumption of higher education, what can be said of the marginal benefit students receive from education?

A) It includes the marginal external benefit.
B) It exceeds the marginal social benefit.
C) It equals the marginal social benefit.
D) It is less than the marginal social benefit.

Question 55

If the production of a particular good involves significant external costs, what might the government do to force the externality to be internalized?

A) Offer a subsidy for production of the good in order to increase production.
B) Offer a subsidy for production of the good in order to decrease production.
C) Impose a tax on production of the good in order to decrease production.
D) Impose a tax on production of the good in order to increase production.

Question 56

What results from the imposition of a tax on a product?

A) Some government surplus is transferred to the consumers and producers.
B) Some consumer surplus is transferred from buyers to producers.
C) Some producer surplus is transferred from sellers to consumers.
D) Some consumer and producer surplus is transferred from buyers and sellers to the government.

Question 57

Which of the following statements describes the best way to internalize a negative externality?

A) A producer's cost could be reduced by an amount greater than the external cost resulting from the production of a good.
B) A producer could receive a subsidy equal to the external cost resulting from the production of a good.
C) A producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good.
D) A producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.

Question 58

What will a corrective tax equal to the external cost imposed on polluters result in?

A) It will increase the level of pollution.
B) It will force polluters to internalize the external cost resulting from their actions.
C) It will eliminate all pollution.
D) It will usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government.

Question 59

Unlike pollution taxes, what do pollution permits allow governments to do?

A) Remove the source of the externality.
B) Give preferential treatment to industries deemed essential.
C) Place the burden of the cleanup on polluters.
D) Set limits on the amount of pollution generated.

Question 60

Which of the following will most likely generate positive externalities?

A) a city bus
B) public education
C) an automobile
D) a hot dog vendor

Question 61

Which of the following statements might be used by an economist to argue that the government, rather than the market, should finance the provision of certain economic goods and services?

A) Decision makers in the market sector are motivated by self-interest, whereas political decision makers are primarily motivated by altruism (the desire to help others).
B) Public goods tend to be undersupplied by private business because of nonpaying consumers; the government can use taxes to overcome this problem of non-payment.
C) When the government provides economic goods, they are free; costs are incurred when such goods are provided by private firms.
D) Voters tend to be better informed than market consumers are.

Question 62

Why is national defence commonly provided by the government, while food is NOT?

A) Food manufacturers have successfully lobbied the government to stay out of the food industry.
B) Food can easily be withheld from those who refuse to pay for it.
C) Food provision is subject to a free-rider problem.
D) Food is too essential to survival to be provided by a bureaucratic organization.

Question 63

What kinds of goods are nonrivalrous in consumption and are unable to exclude nonpaying consumers from using the goods?

A) private
B) durable
C) public
D) nondurable

Question 64

Consider two goods-one that generates external benefits and another that generates external costs. What would a competitive market economy tend to produce?

A) too little of both goods, relative to the social optimum
B) too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs
C) too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs
D) too much of both goods, relative to the social optimum

Question 65

Which of the following is an example of a public good?

A) electricity generated by a city-owned public utility
B) a city-owned bus
C) national defence
D) telephone service

Question 66

What is a public good?

A) a good or service that is consumed by private individuals and financed by private contributions
B) any good or service that is produced by the government
C) a good or service for which it is relatively easy to exclude nonpaying customers from consumption
D) a good or service that is consumed by both the paying and nonpaying customers

Question 67

When city beautification programs are funded privately, which of the following is likely to result?

A) The private costs exceed the marginal benefits of the beautification programs.
B) Only contributing citizens are likely to benefit from a more beautiful city.
C) Both free riders and contributing citizens are likely to benefit from a more beautiful city.
D) An overallocation of resources toward the beautification project is likely to occur relative to what is socially efficient.

Question 68

Which of the following goods is least likely to be provided by the private sector?

A) a good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good
B) a good characterized by rivalry in consumption from which nonpaying customers can be excluded
C) a good characterized by nonrivalry in consumption from which nonpaying customers can be excluded
D) a good characterized by nonrivalry in consumption from which paying customers cannot be excluded

Question 69

London Mayor Anne Marie DeCicco believes strongly that education provides great benefits to the community and urges the provincial government to provide the city with more money. What does this say about Mayor DeCicco?

A) She believes that there are positive external benefits associated with education.
B) She believes that there are nontrivial external costs associated with education.
C) She believes that since teachers are overpaid, the city needs more money to hire enough teachers for its classrooms.
D) She believes that public schools provide a higher quality education than private schools.

Question 70

Many in the public are unwilling to contribute money toward neuromuscular disease research until members of their own families suffer from a neuromuscular ailment. If left strictly to the private market, what is the likely outcome?

A) an overallocation of resources to neuromuscular disease research, relative to the efficient level
B) an efficient quantity of resources devoted to neuromuscular disease research
C) an underallocation of resources to neuromuscular disease research, relative to the efficient level
D) zero dollars devoted to neuromuscular disease research

Question 71

FIGURE 6-3

Refer to Figure 6-3. What area (bounded by letters) represents the associated efficiency loss resulting when there are external benefits associated with education?

A) Q0, c, b, Q1
B) a, b, c
C) O, P1, b, Q1
D) O, P0, a, Q0

Question 72

If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, other things being equal, which of the following would likely occur?

A) a greater misallocation of resources
B) a decrease in the market price of the product
C) an increase in consumption
D) a decrease in consumption

Question 73

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

A) A flu shot is less expensive than the cost of treatment when you get the flu.
B) The income of doctors increases when you get a flu shot.
C) A flu shot reduces the likelihood that others will catch the flu from you.
D) A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income.

Question 74

Which of the following is the best example of a private good?

A) a local park
B) a can of soda
C) a television program broadcast unscrambled over the airwaves
D) an outdoor fireworks display

Question 75

Which of the following is the best example of a public good?

A) telephone service
B) an amusement park
C) city street lights
D) a national system of healthcare

Question 76

As an additional consumer obtains the benefits of a public good such as national defence, what happens to the benefits to existing consumers?

A) They increase in the short run, but decrease in the long run.
B) They decline.
C) They do not change.
D) They increase.

Question 77

If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer understates the relative importance of this product to society. In order to move towards efficiency, what should happen to output?

A) It should decrease.
B) It should increase.
C) It should cease.
D) It should stay the same.

Question 78

If the production of a particular good involves significant external benefits, what might the government do to force the externality to be internalized?

A) Impose a tax on production of the good in order to decrease production.
B) Impose a tax on production of the good in order to increase production.
C) Offer a subsidy for production of the good in order to increase production.
D) Use a production permit for the good in order to decrease production.

Question 79

FIGURE 6-3

Refer to Figure 6-3. Suppose that education provides spillover benefits to the community as illustrated in the above diagram. Based on this information, which of the following statements is the most accurate?

A) The socially optimal quantity of education is Q1 units.
B) The market would fall short of the desirable level of education, Q0.
C) The socially optimal quantity of education is Q0 units.
D) Education is overproduced by Q1 minus Q0 units.

Question 80

Which of the following statements describes the best way to internalize a positive externality?

A) A producer could move its operation to a less populated area.
B) Consumers of the good could pay a tax equal to the external benefit resulting from the production or consumption of the good.
C) The consumers of a good could receive a subsidy equal to the external benefit resulting from the production or consumption of the good.
D) A producer's costs could be increased by an amount equal to the external benefit resulting from the production of the good.