The term market failure refers to



Homework 8

1. The term market failure refers to

a. a market that fails to allocate resources efficiently.

b. an unsuccessful advertising campaign which reduces demand.

c. ruthless competition among firms.

d. a firm that is forced out of business because of losses.

2. The impact of one person's actions on the well-being of a bystander is called

a. an economic dilemma.

b. deadweight loss.

c. a multi-party problem.

d. an externality.

3. When externalities exist, buyers and sellers

a. neglect the external effects of their actions, but the market equilibrium is still efficient.

b. do not neglect the external effects of their actions, and the market equilibrium is efficient.

c. neglect the external effects of their actions, and the market equilibrium is not efficient.

d. do not neglect the external effects of their actions, and the market equilibrium is not efficient.

4. Which of the following represents a way that a government can help the private market to internalize an externality?

a. taxing goods that have negative externalities

b. subsidizing goods that have positive externalities

c. The government cannot improve upon the outcomes of private markets.

d. Both a and b are correct.

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5. This graph represents the tobacco industry. The industry creates

a. positive externalities.

b. negative externalities.

c. no externalities.

d. no equilibrium in the market.

6. This graph represents the tobacco industry. The socially optimal price and quantity are

a. $1.90 and 38 units, respectively.

b. $1.80 and 35 units, respectively.

c. $1.60 and 42 units, respectively.

d. $1.35 and 58 units, respectively.

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7. Refer to Figure 2. Suppose that the production of soccer balls creates a social cost which is depicted in the graph above. Without any government regulation, how many soccer balls will be produced?

a. 3

b. 10

c. 25

d. 50

8. Suppose that the production of soccer balls creates a social cost which is depicted in the graph above. If the government wanted to force the firm to internalize the cost of the externality, what action should it take?

a. Impose a tax of $7.50 per soccer ball.

b. Impose a tax of $7 per soccer ball.

c. Offer a subsidy of $3 per soccer ball.

d. Offer a subsidy of $2.50 per soccer ball

9. A negative externality will cause a private market to produce

a. less than is socially desirable.

b. more than is socially desirable.

c. exactly the quantity that is socially desirable.

d. less than the same market would produce in the presence of a positive externality.

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10. To internalize the externality in this market, the government should

a. impose a tax on this product.

b. provide a subsidy for this product.

c. forbid production.

d. produce the product itself.

11.When a market experiences a positive externality,

a. the demand curve does not reflect the value to society of the good.

b. too much of the good is being produced.

c. the government can internalize the externality by imposing a tax on the product.

d. the private value is greater than the social value.

12. Private contracts between parties with mutual interests

a. will reduce the well-being of society.

b. will lead to market outcomes in which the public interest is sacrificed for personal gain.

c. can solve some inefficiencies associated with positive externalities.

d. will create negative externalities.

13. The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called

a. the transaction cost theorem.

b. a corrective tax.

c. the externality theorem.

d. the Coase theorem.

14. The Coase theorem suggests that private solutions to an externality problem

a. are effective under all conditions.

b. will always allocate resources efficiently if private parties can bargain without cost.

c. are only efficient when there are negative externalities.

d. may not be possible because of the distribution of property rights.

15. If it is illegal for a biochemical manufacturer to release its waste into a nearby stream, then this is an example of

a. a market-based policy.

b. a command-and-control policy.

c. tradable pollution permits.

d. transaction costs

16. Corrective taxes are preferred over regulations to deal with pollution because corrective taxes

a. reduce pollution at a lower cost to society.

b. raise revenue and reduce pollution simultaneously, although efficiency is reduced.

c. obtain faster results than regulations.

d. allow for an accurate monitoring of pollution levels.

17. A good is excludable if

a. one person's use of the good diminishes another person's enjoyment of it.

b. the government can regulate its availability.

c. it is not a normal good.

d. people can be prevented from using it.

18. Both public goods and common resources are

a. rival in consumption.

b. nonrival in consumption.

c. excludable.

d. nonexcludable.

19. A view of a spectacular sunset along a private beach is an example of a

a. private good.

b. public good.

c. nonrival but excludable good.

d. rival but nonexcludable good.

20. If a road is congested, then use of that road by an additional person would lead to a

a. negative externality.

b. positive externality.

c. Pigovian externality.

d. free-rider problem with rush hour drivers stuck in traffic.

21. Private goods are both

a. excludable and nonrival in consumption.

b. nonexcludable and rival in consumption.

c. excludable and rival in consumption.

d. nonexcludable and nonrival consumption.

22. Which of the following statements is correct?

a. Private goods are rival in consumption and excludable.

b. Public goods are rival in consumption but nonexcludable.

c. Collecting tolls on all roads is a practical solution to traffic congestion.

d. Governments serve their citizens best when they refrain from addressing market failures.

23. The fish in the ocean are an example of a

a. common resource.

b. public good.

c. private good.

d. natural monopoly.

24. Which of the following goods is rival and not excludable?

a. an uncongested toll road

b. an uncongested nontoll road

c. a congested nontoll road

d. a congested toll road

25. Who among the following is a free rider?

a. Barry steals candy from the store where he works.

b. Betty rides to work with Sally, but she pays Sally for gasoline and other travel-related expenses.

c. Joe drives 20,000 miles a year on public streets, but he pays no more in property taxes than Sam, who only drives 1,000 miles.

d. Fred watches many public television programs, but he has never sent in a contribution to the station.

26. The national defense of the United States is not rival because

a. my enjoyment of the national defense does not diminish your enjoyment of the national defense of the United States.

b. my enjoyment of the national defense does diminish your enjoyment of the national defense of the United States.

c. my enjoyment of the national defense excludes you from enjoying the national defense of the United States.

d. Both b and c are correct.

27. To achieve the optimal provision of public goods, the

a. market should be allowed to arrive at an equilibrium without government intervention.

b. government must limit the provision of the goods.

c. government must tax producers of the goods.

d. government must either provide the goods or subsidize their production.

28. Private companies will invest in medical research if

a. they will produce general knowledge.

b. they will produce a specific product for which they may receive a patent.

c. there is no government intervention in the market for medical products.

d. others will benefit from their discoveries.

29. Basic research is a public good partly because it

a. is difficult to exclude those who might benefit from it.

b. is used to develop public goods.

c. always benefits developed countries at the expense of developing countries.

d. is a good that is rival in consumption.

30. Because general knowledge is not excludable,

a. the government contributes to its production.

b. the cost generally outweighs the benefit to society.

c. private markets will not supply any general knowledge to society.

d. general knowledge cannot be "supplied" to the market by anyone since it is not a product.

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