Deck 5: Market Failures: Public Goods and Externalities

Question 1

"Excludability" means that:

A) sellers can restrict the benefits of a good to those who pay for it.
B) buyers can restrict other buyers from making purchases in that market.
C) when one person buys a good,it is not available for others to buy.
D) government can prevent consumers from buying the good.

Answer 1

A

Question 2

Market failures occur when:

A) the government sets price floors and ceilings.
B) the competitive market system under- or overallocates resources to production of goods.
C) there are no externalities.
D) goods are rival in consumption.

Answer 2

B

Question 3

Suppose that people want bike paths through town,but no private individual or business is willing to build it.This is an example of:

A) negative externalities.
B) government failure.
C) market failure.
D) productive inefficiency.

Answer 3

C

Question 4

From the economist's perspective,"market failures" basically arise when:

A) the quantity demanded for a good or service is greater than the quantity supplied of the good or service.
B) the quantity supplied of a good or service is greater than the quantity demanded for a good or service.
C) demand and supply do not accurately reflect all the benefits and all the costs of production.
D) the market system is unable to adapt to or to accommodate change.

Question 5

If an economy is being "productively efficient," then that means the economy is:

A) producing the products most wanted by society.
B) fully employing all economic resources.
C) maximizing the returns to factors of production.
D) using the least costly production techniques.

Question 6

"Rivalry" in consumption means that:

A) there are multiple sellers of the good.
B) there are many buyers of the good.
C) a buyer may purchase goods from multiple sellers.
D) when one person buys a good,it is not available for another person to buy.

Question 7

Which of the following statements is true?

A) A competitive market can achieve allocative efficiency without achieving productive efficiency.
B) A competitive market can achieve productive efficiency without achieving allocative efficiency.
C) A competitive market economy cannot achieve both productive efficiency and allocative efficiency simultaneously.
D) A competitive market cannot achieve productive efficiency without also achieving allocative efficiency.

Question 8

Which of the following is the best example of market failure?

A) Lucian wants more video games but doesn't buy them because his willingness to pay is less than the equilibrium price in the market.
B) Kara's Kitten Shop won't sell more purebred cats because the equilibrium price in the market is less than it would cost her to provide more.
C) Alex and others in a community want a new outdoor soccer field and are willing to pay to use it,but no private business is willing to build it.
D) Government fixes the price of gasoline,resulting in a shortage.

Question 9

An organization that provides a public good is:

A) the United Parcel Service.
B) Federal Express.
C) DHL Overnight.
D) the U.S.Post Office.

Question 10

If an economy is being "allocatively efficient," then that means the economy is:

A) using the least costly production techniques.
B) producing the goods and services most wanted by society.
C) fully employing all economic resources.
D) maximizing the returns to factors of production.

Question 11

For which of the following goods would you most likely observe the characteristic of excludability?

A) A concert in the city park
B) A professional baseball game
C) Exterior Christmas lights
D) An interstate highway

Question 12

Private firms cannot profitably produce a public good because of:

A) liability rules and lawsuits.
B) inflation and unemployment.
C) nonrivalry and nonexcludability.
D) positive and negative externalities.

Question 13

Once a government has provided a public good,everyone:

A) pays the cost.
B) can obtain the benefit.
C) experiences positive externalities.
D) experiences negative externalities.

Question 14

What are the two characteristics that distinguish public goods from private goods?

A) Liability rules and lawsuits
B) The Coase theorem and efficiency
C) Positive and negative externalities
D) Nonrivalry and nonexcludability

Question 15

When the competitive market system does not allocate resources to economically desirable goods,economists say what has occurred?

A) Market failure
B) Government failure
C) Externalities
D) Productive inefficiency

Question 16

With allocative efficiency:

A) the state of technology-or methods used to produce output-does not change.
B) the available supplies of factors of production are fixed in both quantity and quality.
C) production of any particular mix of goods and services occurs in the least costly way.
D) production of any particular mix of goods and services is that mix most wanted by society.

Question 17

Allocative efficiency means that:

A) the law of increasing opportunity costs has reached a maximum.
B) the least costly methods are being used to produce goods and services.
C) resources are being devoted to the production of goods and services most desired by society.
D) the amount of other products that must be sacrificed to obtain production of a given product is at a minimum.

Question 18

Which of the following is most likely to be a private good?

A) Road
B) Bicycle
C) Park
D) City fireworks display

Question 19

Which is an example of a market failure?

A) There are not enough tickets available to concerts of extremely popular performers.
B) The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and techniques.
C) Polio shots and chest x-rays provide widespread benefits to the community as a whole as well as to the individuals who get them.
D) Extensive decreases in the prices of electronic equipment resulted in large numbers of bankruptcies in the computer industry.

Question 20

Private goods are characterized by:

A) rivalry and excludability.
B) rivalry and nonexcludability.
C) nonrivalry and excludability.
D) nonrivalry and nonexcludability.

Question 21

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 above information.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 22

Refer to the above supply and demand graph for a public good.Which line segment indicates 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 23

Waybelow 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. Refer to the above information.Based on cost-benefit analysis,Waybelow should undertake:

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

Question 24

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 above information.In equilibrium,the marginal benefit and marginal cost of the public good will be:

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

Question 25

Refer to the above 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 26

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 above information.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 $3.

Question 27

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects.The marginal cost and the marginal benefit of each of the four projects is provided in the table. Refer to the above table and information.What project should the government select to achieve the maximum net benefit?

A) A
B) B
C) C
D) D

Question 28

Waybelow 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. Refer to the above information.If Waybelow undertakes Level Three:

A) total benefits will be less than total costs.
B) marginal costs will exceed marginal benefits.
C) there would be an underallocation of resources to crime control.
D) there would be an overallocation of resources to crime control.

Question 29

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 above information.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.
For 4 units,Person (a)is willing to pay $2 and Person (b)is willing to pay $3,for a total of $5.

Question 30

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 31

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

A) The supply curve reflects the marginal cost and the demand curve reflects the marginal benefit of this public good.
B) The demand curve reflects the marginal cost and the supply curve reflects the marginal benefit of this public 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 32

A public good:

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

Question 33

Which of the following statements is correct about measuring collective demand for public and private goods?

A) Public good demand is found by horizontally adding individual demand curves;private good demand is found by vertically adding individual demand curves.
B) Private good demand is found by horizontally adding individual demand curves;public good demand is found by vertically adding individual demand curves.
C) Both public and private good demand are found by horizontally adding individual demand curves.
D) Both public and private good demand are found by vertically adding individual demand curves.

Question 34

Waybelow 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. Refer to the above information.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 35

Waybelow 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. Refer to the above information.The marginal benefits of crime control for Level Two are:

A) $20,000.
B) $40,000.
C) $60,000.
D) $140,000.

Question 36

Refer to the above 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 37

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects.The marginal cost and the marginal benefit of each of the four projects is provided in the table. Refer to the above table and information.What are the total costs and total benefits of doing projects A,B,and C?

A) Total cost is $5 billion and total benefit is $7 billion.
B) Total cost is $4 billion and total benefit is $7 billion.
C) Total cost is $9 billion and total benefit is $12 billion.
D) Total cost is $16 billion and total benefit is $20 billion.

Question 38

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects.The marginal cost and the marginal benefit of each of the four projects is provided in the table. Refer to the above table and information.What is the net benefit of undertaking all four projects?

A) $2 billion
B) $3 billion
C) $4 billion
D) $5 billion
To calculate net benefit,one must compare total costs with total benefits.Total cost of all four projects is $16B and total benefit is $20B,for a net benefit of $4B.

Question 39

Because of free riders,the demand for a public good:

A) gets expressed in the market,but the good does not get produced by private sellers.
B) does not get expressed in the market,but the good does get produced by private sellers.
C) does not get expressed in the market,and the good does not get produced by private sellers.
D) gets expressed in the market,and the good does get produced by private sellers.

Question 40

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

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

Question 41

If an activity results in a spillover benefit,then in a pure market economy the:

A) quantity produced is too low.
B) quantity produced is too high.
C) market supply is too low.
D) market supply is too high.

Question 42

When external or spillover benefits occur in the production of a particular product,the private market tends to provide:

A) none of the product.
B) too much of the product.
C) too little of the product.
D) the socially optimal amount of the product.

Question 43

A government is considering undertaking one or more construction projects.The estimated marginal cost and benefit of each project are given in the table. Refer to the above table and information.What is the total amount that the government should spend on construction projects?

A) $8 million
B) $14 million
C) $19 million
D) $37 million

Question 44

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river.Operators of hydroelectric generating plants on the river find they must clean up the river's water before it flows through their equipment. Refer to the above information.Which of the following policies would be most appropriate for dealing with this problem?

A) Levy a tax on the consumers of paper goods and use the tax revenues to conduct research on new energy sources.
B) Levy a tax on the consumers of electricity and use the tax revenues to subsidize the consumers of paper goods.
C) Levy a tax on the producers of electricity and use the tax revenues to clean up the river.
D) Levy a tax on the producers of paper goods and use the tax revenues to clean up the river.

Question 45

A government is considering undertaking one or more construction projects.The estimated marginal cost and benefit of each project are given in the table. Refer to the above table and information.What is the net benefit of project 2?

A) $1 million
B) $2 million
C) $3 million
D) $5 million

Question 46

A government is considering undertaking one or more construction projects.The estimated marginal cost and benefit of each project are given in the table. Refer to the above table and information.What is the total cost and total benefit of projects 1,2,and 3?

A) Total cost is $18 million and total benefit is $19 million.
B) Total cost is $24 million and total benefit is $27 million.
C) Total cost is $37 million and total benefit is $41 million.
D) Total cost is $65 million and total benefit is $66 million.

Question 47

If there are external or spillover benefits associated with consumption and production of a product,it can be said that the:

A) government should consider placing a special tax on producers.
B) government should consider prohibiting the production of the commodity.
C) supply curve for the product lies too far to the right to provide an efficient allocation of resources.
D) demand curve understates the total benefit from the product and resources are underallocated to its production.

Question 48

If a good that generates negative externalities were priced to account for spillover costs,then its:

A) price would decrease and its output would increase.
B) output would increase,but its price would remain constant.
C) price would increase and its output would decrease.
D) price would increase,but its output would remain constant.

Question 49

Which is an example of a negative externality?

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 neighborhood where several houses are burglarized
D) The higher price you pay when you buy a heavily advertised product

Question 50

When production creates external costs greater than external benefits,a market is:

A) not producing the product without government intervention.
B) producing a socially optimal quantity of the product.
C) allocating too few resources to production of the product.
D) allocating too many resources to production of the product.

Question 51

When producing a good generates negative externalities,the private market for that good tends to produce too:

A) much of the product at too low a price.
B) much of the product at too high a price.
C) little of the product at too low a price.
D) little of the product at too high a price.

Question 52

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river.Operators of hydroelectric generating plants on the river find they must clean up the river's water before it flows through their equipment. Refer to the above information.If nothing is done to correct this situation:

A) there will be an overallocation of resources to the production of electricity.
B) there will be an underallocation of resources to the production of paper goods.
C) there will be an overallocation of resources to the production of paper goods.
D) the price of electricity will be lower than it should be.

Question 53

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river.Operators of hydroelectric generating plants on the river find they must clean up the river's water before it flows through their equipment. The above situation is an example of:

A) an external economy.
B) a spillover cost.
C) the exclusion principle.
D) a spillover benefit.

Question 54

Most economists believe that:

A) all spillover costs should be eliminated.
B) the control of spillovers is costless.
C) spillover costs do not cause a misallocation of resources.
D) spillover costs should be considered in determining optimal output.

Question 55

In a free-market economy,a product that entails a spillover benefit will be:

A) overproduced.
B) underproduced.
C) produced at the optimal level.
D) associated only with goods and services provided by the government.

Question 56

If some activity creates positive externalities as well as private benefits,then economic theory suggests that the activity ought to be:

A) taxed.
B) prohibited.
C) subsidized.
D) left alone under the idea of laissez faire.

Question 57

Suppose that the ABC industry produces a good that results in significant spillover costs to society.Such production suggests that:

A) resources are underallocated to the industry.
B) resources are overallocated to the industry.
C) the firms in this industry are not maximizing profits.
D) at the market price,quantity demanded is less than quantity supplied.

Question 58

If the production of a product or service involves external or spillover benefits,then the government can improve efficiency in the market by:

A) providing a subsidy to correct for an overallocation of resources.
B) providing a subsidy to correct for an underallocation of resources.
C) imposing a corrective tax to correct for an overallocation of resources.
D) imposing a corrective tax to correct for an underallocation of resources.

Question 59

In a market where there are external or spillover costs 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 60

If there are positive externalities associated with the consumption of a good or service:

A) the private demand curve will overestimate the true demand curve.
B) the private demand curve will underestimate the true demand curve.
C) consumers will be willing to pay for all these benefits in private markets.
D) the market demand curve will be the vertical summation of the individual demand costs.

Question 61

Which antipollution policy would be least likely to make use of cost-benefit analysis?

A) Creating a market for pollution rights
B) Charging polluters an emission fee
C) Enacting legislation that bans pollution
D) Using private bargaining when the property rights are clearly defined,the number of people involved is small,and negotiation costs are small

Question 62

Refer to the above supply and demand graph.In the graph,point A is the current equilibrium level of output of this product and point B is the optimal level of output from society's perspective.S is the supply curve without a tax and S_t is the supply curve with a tax.One solution to this externality problem is to:

A) give consumers a subsidy of the amount FG.
B) give producers a subsidy of the amount AB.
C) tax producers by the amount DE.
D) tax consumers by the amount EF.

Question 63

Refer to the above supply and demand graph.In the graph,point A is the current equilibrium level of output of this product and point B is the optimal level of output from society's perspective.S is the supply curve without a tax and S_t is the supply curve with a tax.This figure indicates that there is (are):

A) positive externalities created in the production of this product.
B) negative externalities created in the production of this product.
C) an underallocation of resources to product production.
D) a surplus of the good produced.

Question 64

The graph above shows the market for a product where S₁ is the original supply curve and S₂ is the new supply curve following a tax on producers to reduce pollution.The tax per unit of output is:

A) AB.
B) AC.
C) BG.
D) AJ.

Question 65

Refer to the above supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.The amount of the subsidy to be given to producers to correct this externality problem would be:

A) AB.
B) GH.
C) EF.
D) IJ.

Question 66

Refer to the above supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.If government decides to correct this externality with a subsidy to consumers,then the:

A) demand curve will shift from D₂ to D₁.
B) supply curve will shift from S₁ to S₂.
C) demand curve will shift from D₁ to D₂.
D) supply curve will shift from S₂ to S₁.

Question 67

In a market economy with well-defined property rights,the potential threat of a lawsuit or a liability judgment against a firm will give firms an incentive to:

A) decrease negative externalities from production.
B) increase negative externalities from production.
C) increase positive externalities from production.
D) turn to the government to provide public goods.

Question 68

Which is not one of the conditions for the Coase theorem to hold?

A) The ownership of property is clearly defined.
B) The number of people involved is small.
C) The amount of money disputed is minor.
D) The costs of bargaining are negligible.

Question 69

According to a study by economists Ian Ayres and Steven Levitt,the division of the total benefit of the Lojack to its owners and all other car owners is:

A) 100 percent to the car owner with a Lojack,0 percent to other car owners.
B) 75 percent to the car owner with a Lojack,25 percent to other car owners.
C) 50 percent to the car owner with a Lojack,50 percent to other car owners.
D) 10 percent to the car owner with a Lojack,90 percent to other car owners.

Question 70

One condition for individual bargaining to occur,according to the Coase theorem,is that there must be:

A) clearly defined property rights.
B) many people affected and involved.
C) government intervention to establish bargaining.
D) government creation of a market for externalities.

Question 71

An emission fee levied against polluters will tend to:

A) internalize the internal cost of pollution.
B) externalize the internal cost of pollution.
C) internalize the external cost of pollution.
D) externalize the external cost of pollution.

Question 72

Refer to the above supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.This supply and demand graph indicates that there is (are):

A) spillover benefits to the production of this product.
B) spillover costs to the production of this product.
C) an overallocation of resources to the production of this product.
D) a negative externality from the production of this product.

Question 73

Refer to the above supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.If government decides to correct this spillover problem by subsidizing producers,then the:

A) demand curve will shift from D₁ to D₂.
B) supply curve will shift from S₁ to S₂.
C) supply curve will shift from S₂ to S₁.
D) demand curve will shift from D₂ to D₁.

Question 74

To internalize the external costs of pollution is to:

A) levy taxes on manufacturing firms located in crowded urban areas.
B) auction off pollution rights to those willing to pay the most for them.
C) make the polluter pay all of the costs associated with the polluting activity.
D) require that private citizens rather than taxpayers pay for the harmful effects of pollution.

Question 75

It has been proposed that a government agency be charged with the responsibility for determining the amount of pollution that the atmosphere or a body of water can safely recycle,and selling these limited rights to polluters.From an economist's perspective,what would be the advantage of such a market for pollution rights?

A) Government agencies can make a great deal of money.
B) Pollution would be eliminated because nobody would want to pay for such a right.
C) The quality of water or air can be maintained at some acceptable standard through economic incentives.
D) The social consciousness of people would be raised as they obtain more appreciation for the importance of conservation.

Question 76

Refer to the above supply and demand graph.Point A represents the current equilibrium level of output of this product and point B represents the optimal level of output from society's perspective.The amount of the subsidy to be given to consumers to correct this externality problem would be measured by:

A) AB.
B) GH.
C) EF.
D) IJ.

Question 77

Near an ocean beach,a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building.The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings would best be resolved by:

A) the owners themselves.
B) city government officials.
C) a zoning ordinance restricting high-rise buildings.
D) a government fine for the builder of the high-rise.

Question 78

Private car alarm systems with red blinking lights would tend to:

A) decrease the likelihood of car thefts to all car owners.
B) increase the likelihood of car thefts to all car owners.
C) redistribute the likelihood of a car theft from those car owners with such a device to those car owners without such a device.
D) offer a positive externality to those car owners who did not pay for the device.

Question 79

Refer to the above supply and demand graph.In the graph,point A is the current equilibrium level of output of this product and point B is the optimal level of output from society's perspective.S is the supply curve without a tax and S_t is the supply curve with a tax.The external cost to society from the production of this product is measured by:

A) DE.
B) EF.
C) FG.
D) AB.

Question 80

The Lojack is an example of a product that:

A) produces a positive externality.
B) produces a negative externality.
C) contributes to global warming.
D) contributes to illegal gambling on cards.