Deck 4: Market Failures: Public Goods and Externalities

Question 1

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

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

Answer 1

a.

Question 2

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.

Answer 2

can fall on either the demand-side or the supply-side.

Question 3

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.

Answer 3

the reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product.

Question 4

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 5

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 6

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

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

Question 7

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 8

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 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

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 11

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 12

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 13

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.

Question 14

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 15

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 16

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 17

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 18

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

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

Question 19

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 20

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 21

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 22

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 23

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 24

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 25

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 26

Which is a characteristic of a public good?

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

Question 27

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 28

A public good can be best defined as one which:

A) has no externals 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 the individual who decides to buy it.

Question 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

Which of the following is a private good?

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

Question 40

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 41

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 42

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 43

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 44

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 45

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 46

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 47

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 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

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 50

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.

Question 51

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 52

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 53

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 54

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 55

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 5th 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 56

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 57

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 58

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 59

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 60

Refer to the 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 61

A positive externality or external benefit occurs when:

A) product differentiation increases the variety of products available to consumers.
B) the benefits associated with a product exceed those accruing to people who consume it.
C) a firm produces at the P = MC output.
D) economic profits are zero in the long run.

Question 62

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 63

When producing a good generates external or 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 64

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

A) taxed.
B) prohibited.
C) subsidized.
D) left alone.

Question 65

Refer to the below diagram of the market for product X.Curve S_t embodies all costs (including spillovers)and D_t embodies all benefits (including spillovers)associated with the production and consumption of X.Assuming the equilibrium output is Q₂,we can conclude that the existence of spillover:

A) costs have resulted in an over-allocation of resources to X.
B) benefits have resulted in an over-allocation of resources to X.
C) costs have resulted in an under-allocation of resources to X.
D) benefits have resulted in an under-allocation of resources to X.

Question 66

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 67

Refer to the below competitive market diagram for product Z.Assume that the current market demand and supply curves for Z are D₂ and S₂.If there are substantial positive externalities associated with the production of Z,it can be argued that:

A) efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits.
B) an output smaller than G would improve resource allocation.
C) government should levy a per unit excise tax on Z to shift the demand curve toward D₁.
D) an output greater than G would result in a more efficient allocation of resources.

Question 68

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 69

Refer to the below diagram of the market for product X.Curve S _t embodies all costs (including spillovers)and D_t embodies all benefits (including spillovers)associated with the production and consumption of X.Assuming the equilibrium output is Q₁,we can conclude that the existence of spillover:

A) costs have resulted in an over-allocation of resources to X.
B) benefits have resulted in an over-allocation of resources to X.
C) costs have resulted in an under-allocation of resources to X.
D) benefits have resulted in an under-allocation of resources to X.

Question 70

If there are external benefits or 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 71

The Coase Theorem states that:

A) government should levy excise taxes on firms which generate spillover or external costs.
B) taxes should be levied such that they change private behavior as little as possible.
C) under the right conditions,bargaining between private parties will remedy externality problems without the need for government intervention.
D) trading of votes to secure favorable voting outcomes may increase efficiency.

Question 72

If a good that generates negative externalities was priced to take into account these negative externalities,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 73

Which of the following is an example of externalities?

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 74

Refer to the below 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) positive externalities to the production of this product.
B) negative externalities 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 75

If there are external benefits or positive externalities 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 under-allocated to its production.

Question 76

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 77

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 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

The Coase Theorem:

A) applies only to circumstances in which externalities are extensive and bargaining costs are high.
B) holds that the median voter will decide the outcome of elections.
C) states that in some circumstances majority voting can yield inconsistent results.
D) suggests that in some circumstances government intervention is not needed to resolve externality problems.