Deck 12: Market Failure and Government Failure

Question 1

Which of the following conditions will lead a market away from an efficient allocation of resources?

A) The market is perfectly competitive.
B) Consumers cannot use any goods or services without paying for them.
C) Positive externalities are present.
D) Consumers and firms have all of the information that is relevant to their decision making.

Answer 1

C

Question 2

_____ refers to the situation where markets fail to allocate resources efficiently.

A) Negative externality
B) The tragedy of the commons
C) Free-riding
D) Market failure

Answer 2

D

Question 3

_____ markets are essential for achieving an efficient allocation of resources.

A) Monopoly
B) Monopolistically competitive
C) Perfectly competitive
D) Regulated

Answer 3

C

Question 4

If the marginal social benefit from consuming a good is greater than the marginal private benefit, then the consumption of the good involves:

A) positive externality.
B) negative externality.
C) no externality.
D) no deadweight loss.

Question 5

If beekeepers benefit from their neighbor's flower garden, then the flower garden is a source of:

A) negative externality.
B) positive externality.
C) asymmetric information.
D) tragedy of the commons

Question 6

The marginal social benefit is the sum of marginal private benefit and marginal:

A) private cost.
B) external benefit.
C) external cost.
D) private revenue.

Question 7

If the purchase of a good creates a positive externality, then the marginal _____ benefit is greater than the marginal _____ benefit.

A) private; social
B) social; external
C) external; private
D) social; private

Question 8

Which of the following statements is NOT true?

A) If the purchase of a good involves a positive externality, then the marginal social benefit exceeds the marginal private benefit.
B) If the purchase of a good involves a positive externality, then the marginal external benefit is positive.
C) If the purchase of a good involves a positive externality, then there is no deadweight loss.
D) If the purchase of a good involves a positive externality, then the quantity purchased is less than socially optimal.

Question 9

Which of the following statements is TRUE?

A) If the purchase of a good involves a positive externality, then the marginal social benefit is less than the marginal private benefit.
B) If the purchase of a good involves a positive externality, then the marginal external benefit exceeds the marginal private benefit.
C) If the purchase of a good involves a positive externality, then there is no deadweight loss.
D) If the purchase of a good involves a positive externality, then the quantity purchased is less than the socially optimal quantity.

Question 10

The extra benefit received by everyone in the society by the purchase of one more unit of a good is called the _____ benefit.

A) marginal external
B) marginal social
C) total social
D) total external

Question 11

Suppose that the purchase of a good involves a marginal external benefit of $2 per unit. In this case, the purchase of the good involves a _____ externality, and it will be purchased in an amount that is _____ than socially optimal.

A) positive; less
B) positive; more
C) negative; less
D) negative; more

Question 12

Suppose that the marginal social benefit curve of a good lies above the marginal private benefit curve. In this case, the purchase of the good involves a _____ externality, and the good will be purchased in an amount that is _____ than the socially optimal.

A) negative; less
B) negative; more
C) positive; less
D) positive; more

Question 13

Suppose that beekeepers' bees pollinate a neighbor's flower garden. In this case, the bee keepers have created a _____ externality, and the marginal private benefit to the beekeepers is _____ than the marginal social benefit.

A) positive; more
B) positive; less
C) negative; more
D) negative; less

Question 14

If the purchase of a good involves a positive externality, then the equilibrium quantity that is purchased in a free market is _____ than socially optimal, and the equilibrium price is _____ than socially optimal.

A) less; less
B) less; more
C) more; less
D) more; more

Question 15

Which of the following statements is NOT true?

A) If the purchase of a good involves a positive externality, then the equilibrium quantity that is purchased in a free market is less than socially optimal.
B) If the purchase of a good involves a positive externality, then the equilibrium price of the good in a free market is higher than the socially optimally price.
C) If the purchase of a good involves a positive externality, then the marginal social benefit is greater than the marginal private benefit.
D) If the purchase of a good involves a positive externality, then free markets lead to a deadweight loss.

Question 16

Suppose that the marginal private benefit from buying an extra unit of a good is $10 and the marginal social benefit of buying the extra unit is $13. In this case, the purchase of the good involves a _____ externality, and the equilibrium quantity purchased in a free market will be ____ than socially optimal.

A) negative; more
B) negative; less
C) positive; more
D) positive; less

Question 17

Desirable effects that are felt by people who are uninvolved in the decisions that created those effects are known as:

A) free-riding.
B) negative externalities.
C) positive externalities.
D) the tragedy of the commons.

Question 18

The reason that a good is underpurchased in cases with positive externalities is that the marginal _____benefits are greater than the marginal _____ benefits.

A) social; external
B) private; social
C) social; private
D) private; external

Question 19

It is widely known that the marginal social benefit from having a more educated population is greater than the marginal private benefit received from education. Therefore, education creates _____ externalities, and the free market leads to _____ education compared to the social optimal.

A) positive; more
B) positive; less
C) negative; more
D) negative; less

Question 20

Which of the following actions can help eliminate the deadweight loss that results from positive externalities?

A) taxing the purchase of the good
B) providing subsidies for the purchase of the good
C) rationing the amount of the good that can be supplied
D) buying insurance along with the purchase of the good

Question 21

If the marginal private benefit from consuming a good is $5 and the marginal social benefit from consuming the good is $7, then the consumption of the good involves a _____ externality, and the government must _____ the consumption of the good to ensure that the socially optimal amount of the good is purchased.

A) positive; tax
B) negative; tax
C) positive; subsidize
D) negative; subsidize

Question 22

If the marginal private benefit from consuming a good is $5 and the marginal social benefit from the consuming the good is $7, then the marginal external benefit from consuming the good is _____, and the government must _____ the consumption of the good to ensure that the socially optimal amount of the good is purchased.

A) $12; tax
B) $12; subsidize
C) $2; tax
D) $2; subsidize

Question 23

Use Figure: Externalities and Deadweight Loss I. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. Based on the figure, the marginal external benefit from purchasing the good is:
​
Figure: Externalities and Deadweight Loss I

A) $5.
B) $10.
C) $15.
D) $20.

Question 24

Use Figure: Externalities and Deadweight Loss I. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The free-market equilibrium price of the good is _____, and the equilibrium quantity is _____ units.
​
Figure: Externalities and Deadweight Loss I

A) $15; 30
B) $20; 40
C) $20; 30
D) $15; 40

Question 25

Use Figure: Externalities and Deadweight Loss I. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The socially optimal price of the good is _____, and the socially optimal quantity is_____ units.
​
Figure: Externalities and Deadweight Loss I

A) $25; 40
B) $30; 30
C) $25; 30
D) $30; 40

Question 26

Use Figure: Externalities and Deadweight Loss I. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The deadweight loss because of the externality is equal to:
​
Figure: Externalities and Deadweight Loss I

A) $25.
B) $50.
C) $75.
D) $100.

Question 27

Use Figure: Externalities and Deadweight Loss I. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The government should offer a _____ subsidy to arrive at the socially optimal quantity.
​
Figure: Externalities and Deadweight Loss I

A) $5
B) $10
C) $15
D) $20

Question 28

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The free-market equilibrium price of the good is _____, and the equilibrium quantity is _____ units.
​
Figure: Positive Externalities and Deadweight Loss

A) $10; 70
B) $15; 50
C) $10; 50
D) $15; 70

Question 29

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The marginal external benefit from purchasing the good is _____ per unit.
​
Figure: Positive Externalities and Deadweight Loss

A) $2
B) $3
C) $5
D) $7

Question 30

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The socially optimal price of the good is _____, and the socially optimal quantity is_____ units.
​
Figure: Positive Externalities and Deadweight Loss

A) $8; 50
B) $13; 50
C) $8; 70
D) $13; 70

Question 31

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The deadweight loss because of the externality is equal to:
​
Figure: Positive Externalities and Deadweight Loss

A) $20.
B) $30.
C) $50.
D) $70.

Question 32

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The government should offer a _____ subsidy to arrive at the socially optimal quantity.
​
Figure: Positive Externalities and Deadweight Loss

A) $5
B) $10
C) $15
D) $13

Question 33

Suppose that the purchase of a good creates a positive marginal external benefit. Given this, which of the following statements is NOT true?

A) The marginal social benefit from purchasing the good will be greater than marginal private benefit.
B) The free-market equilibrium quantity of the good purchased will be less than the social optimal.
C) The government can reach the socially optimal level by taxing the purchase of the good.
D) The purchase of the good creates a positive externality.

Question 34

Suppose that the consumption of a good involves a positive externality. In this case, at the free-market equilibrium quantity, the marginal _____ will exceed the marginal:

A) social benefit; private cost.
B) cost; social benefit.
C) private benefit; private cost.
D) private benefit; social benefit.

Question 35

Suppose that the consumption of a good involves a positive externality. Which of the following actions by the government can lead to the purchase of a socially optimal quantity?

A) imposing a tax on the purchase of the good
B) passing a regulation that makes people buy a minimum amount of the good
C) imposing a tax on the production of the good
D) passing a regulation that puts a quota on the amount that people can buy

Question 36

The undesirable side effects that are felt by people who were not involved in the decision that created those effects are called:

A) positive externalities.
B) negative externalities.
C) market failures.
D) the tragedy of the commons.

Question 37

The use of modern insecticides in farms also leads to the destruction of the habitats for honey bees and other pollinators. Therefore, heavy insecticide use is a source of:

A) the tragedy of the commons.
B) menu costs.
C) positive externalities.
D) negative externalities.

Question 38

If the marginal private cost of producing the fiftieth unit of a good is $3 and the marginal social cost of producing the fiftieth unit of the good is $5, then producing the good creates _____ externalities, and the marginal external cost is:

A) positive; $8.
B) positive; $2.
C) negative; $8.
D) negative; $2.

Question 39

If the marginal external cost of producing a good is positive, then the production of the good involves a _____ externality, and the marginal social cost curve lies _____ the marginal private cost curve.

A) negative; below
B) negative; above
C) positive; below
D) positive; above

Question 40

If the production of a good involves a negative externality, then the marginal social cost is _____ than the marginal private cost, and the equilibrium quantity produced is _____ than the socially optimal quantity.

A) lower; lower
B) higher; lower
C) lower; higher
D) higher; higher

Question 41

If the production of a good involves a negative externality, then the free-market equilibrium price is _____ than socially optimal, and the equilibrium quantity is _____ than socially optimal.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 42

The marginal private cost of producing a good is $8, and the marginal social cost is $9. Therefore, the production of the good creates a ______ externality, and the equilibrium quantity produced will be _____ the socially optimal quantity.

A) negative; lower
B) negative; higher
C) positive; higher
D) positive; lower

Question 43

If the marginal social cost of producing a good is $8 and the marginal external cost of producing it is $2, then the marginal private cost of producing the good is _____, and the production of the good creates a _____ externality.

A) $6; positive
B) $10; positive
C) $6; negative
D) $10; negative

Question 44

Which of the following statements is NOT true?

A) If the production of a good involves a negative externality, then the marginal external cost is greater than zero.
B) If the production of a good involves a negative externality, then the marginal social cost is greater than the marginal private cost.
C) If the production of a good involves a negative externality, then the equilibrium quantity with free markets is less than the socially optimal level.
D) If the production of a good involves a negative externality, then the free-market equilibrium creates a deadweight loss.

Question 45

Which of the following statements is NOT true?

A) If the production of a good involves a negative externality, then the equilibrium quantity with free markets is greater than the socially optimal level.
B) If the production of a good involves a negative externality, then at the free-market equilibrium the marginal private cost is equal to the marginal private benefit.
C) If the production of a good involves a negative externality, then the free-market equilibrium creates a deadweight loss.
D) If the production of a good involves a negative externality, then at the free-market equilibrium the marginal social cost is less than the marginal social benefit.

Question 46

The secondhand smoke that results from smoking cigarettes is harmful to people who do not smoke but still inhale others' smoke. Therefore, cigarette smoking creates:

A) positive externalities.
B) negative externalities.
C) tragedy of commons.
D) menu costs.

Question 47

Use Figure: Negative Externality and Deadweight Loss I. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. Based on the graph, producing the good involves a marginal external cost of:
​
Figure: Negative Externality and Deadweight Loss I

A) $2.
B) $3.
C) $4.
D) $5.

Question 48

Use Figure: Negative Externality and Deadweight Loss I. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The free-market equilibrium price of the good is _____, and the equilibrium quantity is _____ units.
​
Figure: Negative Externality and Deadweight Loss I

A) $8; 80
B) $8; 60
C) $11; 80
D) $11; 60

Question 49

Use Figure: Negative Externality and Deadweight Loss I. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The socially optimal price is _____, and the socially optimal quantity is _____ units.
​
Figure: Negative Externality and Deadweight Loss I

A) $8; 80
B) $8; 60
C) $11; 80
D) $11; 60

Question 50

Use Figure: Negative Externality and Deadweight Loss I. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. At the free-market equilibrium, the deadweight loss resulting from the externality is:
​
Figure: Negative Externality and Deadweight Loss I

A) $30.
B) $40.
C) $50.
D) $60.

Question 51

Use Figure: Negative Externality and Deadweight Loss I. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The government should impose an excise tax of _____ to arrive at the socially optimal quantity.
​
Figure: Negative Externality and Deadweight Loss I

A) $5
B) $4
C) $3
D) $2

Question 52

Use Figure: Negative Externality and Deadweight Loss II. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The marginal external cost that is associated with producing the good is:
​
Figure: Negative Externality and Deadweight Loss II

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

Question 53

Use Figure: Negative Externality and Deadweight Loss II. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The free-market equilibrium price of the good is _____, and the equilibrium quantity is _____ units.
​
Figure: Negative Externality and Deadweight Loss II

A) $18; 45
B) $18; 55
C) $16; 45
D) $16; 55

Question 54

Use Figure: Negative Externality and Deadweight Loss II. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The socially optimal price of the good is _____, and the socially optimal quantity is _____ units.
​
Figure: Negative Externality and Deadweight Loss II

A) $18; 45
B) $18; 55
C) $16; 45
D) $16; 55

Question 55

Use Figure: Negative Externality and Deadweight Loss II. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. At the free-market equilibrium, the deadweight loss associated with the externality is:
​
Figure: Negative Externality and Deadweight Loss II

A) $10.
B) $20.
C) $30.
D) $40.

Question 56

Use Figure: Negative Externality and Deadweight Loss II. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The government should impose an excise tax of _____ to arrive at the socially optimal quantity.
​
Figure: Negative Externality and Deadweight Loss II

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

Question 57

When either the buyer or seller has more information that the other party, the market is said to have _____ information.

A) rational
B) asymmetric
C) perfect
D) bounded

Question 58

If Raj buys car insurance and then drives the car irresponsibly because he thinks that the insurance covers any accident, then Raj's behavior is an example of:

A) adverse selection.
B) moral hazard.
C) negative externality.
D) positive externality.

Question 59

_____ refers to the problem that arises when people take on additional risks when they are insured against the consequences.

A) Moral hazard
B) Adverse selection
C) Negative externality
D) Positive externality

Question 60

Michael is selling a used PlayStation video game console on eBay. However, this PlayStation does not work properly, and the buyers are not aware of the problem. This situation is an example of:

A) moral hazard.
B) adverse selection.
C) positive externality.
D) negative externality.

Question 61

_____ involves one party that takes advantage of information that a second party lacks when the second party is deciding what to buy or sell.

A) Positive externality
B) Negative externality
C) Moral hazard
D) Adverse selection

Question 62

The U.S Federal Reserve (Fed) acts as a lender of last resort to commercial banks, meaning that that the Fed will bail out the banks when they encounter financial problems. It is often argued that this leads the banks to take on additional risks and therefore creates the problem of:

A) negative externalities.
B) moral hazard.
C) adverse selection.
D) tragedy of the commons.

Question 63

Which one of the following is NOT a remedy for moral hazard?

A) a copayment
B) coinsurance
C) a subsidy
D) a deductible

Question 64

A fixed amount of money that someone with insurance must pay each time the individual incurs a cost that is covered by insurance is called:

A) coinsurance.
B) a copayment.
C) a deductible.
D) a subsidy.

Question 65

An amount that insurance customers must pay before their insurance starts covering costs is called _____, and it is used as a remedy for the _____ problem.

A) coinsurance; adverse selection
B) a deductible; adverse selection
C) coinsurance; moral hazard
D) a deductible; moral hazard

Question 66

Public goods are both:

A) nonrival and nonexcludable.
B) rival and nonexcludable.
C) nonrival and excludable.
D) rival and excludable.

Question 67

Goods that are both rival and excludable are known as _____ goods.

A) public
B) private
C) common
D) luxury

Question 68

National defense is an example of a service that is both:

A) rival and excludable.
B) nonrival and excludable.
C) rival and nonexcludable.
D) nonrival and nonexcludable.

Question 69

A national highway that requires its users to pay a toll is an example of a good that is both:

A) nonrival and excludable.
B) nonrival and nonexcludable.
C) rival and excludable.
D) rival and nonexcludable.

Question 70

Because public goods are both nonrival and nonexcludable, it is possible for people to use these goods without having to pay for them. Enjoying the benefits of a good without paying for it is known as:

A) the tragedy of the commons.
B) moral hazard.
C) a positive externality.
D) free-riding.

Question 71

Which of the following is a solution to the free-riding problem of providing public goods?

A) Require users to pay coinsurance.
B) Require users to pay a high deductible.
C) Provide a subsidy for the use of the public good.
D) Fund the provision of the public good through taxes.

Question 72

Alice decides to lend $100 to someone, but it takes $200 to hire a lawyer to write a contract for the loan agreement. In this case, the lawyer's fee is an example of a:

A) marginal external cost.
B) transaction cost.
C) fixed cost.
D) menu cost.

Question 73

Karim wants to invest $100 in the stock market and does eight hours of research to decide which stock to buy. In this case, the value of Karim's time spent on doing the research will be an example of a:

A) marginal external cost.
B) sunk cost.
C) transaction cost.
D) menu cost.

Question 74

David lives in a farm that is 100 miles away from the nearest grocery store, so he must spend $25 in gas every time he goes grocery shopping. In this case, the cost of gas is an example of a _____ cost.

A) marginal external
B) transaction
C) sunk
D) fixed

Question 75

After a government introduces a new regulation, it must spend considerable resources to ensure compliance with that regulation. The resources spent toward ensuring the compliance is an example of _____ costs.

A) sunk
B) external
C) fixed
D) transaction

Question 76

The antitrust laws enacted by the federal government are aimed at preventing market failure arising from:

A) negative externalities.
B) asymmetric information.
C) free-riding,
D) imperfect competition,

Question 77

In an imperfectly competitive market, the market fails because the free-market equilibrium price is _____ than the socially optimal price, and the resulting quantity is _____ than the socially optimal quantity.

A) less; greater
B) less; less
C) greater; less
D) greater; greater

Question 78

New ideas and innovations by innovators are nonrival goods. That is, the same idea or innovation can be copied and used by several people without diminishing the original ones. Given this, do you think that the free market allocates resources toward innovation efficiently? If not, how does the government remedy this problem and encourage innovation in an economy?

Question 79

For each of the following goods, state whether they are rival/nonrival and excludable/nonexcludable. Justify your answer in each case.
a. national defense
b. a personal laptop
c. streetlights
d. private parks

Question 80

Plastic manufacturing is one of the most environmentally polluting production processes. Suppose that plastic is produced in a perfectly competitive market and that each unit of plastic produced creates a negative externality of $2.
a. Draw a supply and demand graph clearly marking the following:
1) marginal private benefit curve (assume that marginal social benefit and marginal private benefit are the same)
2) marginal private cost curve
3) marginal social cost curve
b) On the graph, mark the points that show the free-market equilibrium and the socially optimal level of price and quantity.
c) Mark the area of deadweight loss, and explain why the free-market equilibrium leads to a deadweight loss.
d) Provide one remedy for the negative externality associated with the production of plastic.