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236.
When a producer cannot get all consumers of their product to pay for enjoying it, such as in
the case of a fireworks display, then we have a demand-side market failure.
237.
Whenever there are supply-side market failures in the form of costs that suppliers do not
have to shoulder, then there will be overproduction of the output.
238.
If the consumer is willing to pay a price higher than the actual price of a product, then the
consumer will not buy the product because the consumer surplus will be negative.
4-122
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AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04–02 Explain the origin of both consumer surplus and producer surplus,
and explain how properly functioning markets maximize their sum, total surplus, while
optimally allocating resources.
Test Bank: II
To pi c:
Efficiently Functioning Markets
239.
A significant amount of positive consumer surplus is the reason why sometimes a shopper
regrets having bought a particular item.
willing to pay for a glass of lemonade is, respectively, $1.50, $1.20, $1.00, and $0.90. If the
actual price of lemonade is $1.00 per glass, then consumer surplus in this market will
be
$0.70.
241.
When the marginal benefits exceed the marginal costs of producing a product, then
allocative efficiency is not achieved in the market.
4-123
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written consent of McGraw-Hill Education.
TRUE
242.
When there is allocative efficiency in a market, the buyers’ maximum willingness to pay for
the last unit traded is equal to the sellers’ minimum acceptable price for that unit.
243.
When the total consumer and producer surplus is at a maximum, the deadweight loss in the
market is zero.
244.
Excludability means that when someone is consuming a good, then others are excluded
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from using the good anymore.
245.
Nonrivalry in the use or consumption of a good means that only one person is consuming
the good without any rivals.
246.
The free-rider problem makes a good highly profitable for a private firm to provide.
247.
The free-rider problem refers to the local government’s problem of finding funds to provide
free bus rides in the city.
4-125
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written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04–03 Describe free riding and public goods, and illustrate why private
firms cannot normally produce public goods.
Test Bank: II
Topic:
Public Goods
248.
Rivalry means that when one person buys and consumes a product, it is not available for
purchase and consumption by another person.
249.
The government receives all of the benefits associated with the production of a public
good.
250.
The optimal quantity of a public good is where the total benefits from it are equal to the
total costs of producing it.
4-126
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04–03 Describe free riding and public goods, and illustrate why private
firms cannot normally produce public goods.
Test Bank: II
To pi c:
Public Goods
251.
If car makers are required to install gadgets to improve the cleanliness of car–exhaust, we
would expect the equilibrium quantity in the car market to decrease.
252.
If the lumber companies are required to internalize the negative externalities of
deforestation, then we should expect the equilibrium price of wooden furniture to decrease.
253.
The Coase Theorem suggests that the government does not have to be involved at all in
resolving a market failure due to externalities.
4-127
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written consent of McGraw-Hill Education.
Learning Objective: 04–04 Explain how positive and negative externalities cause under- and
overallocations of resources.
Test Bank: II
To pi c:
Externalities
254.
Production subsidies are a way of internalizing external costs among polluting firms.
255.
In dealing with market failures, the government always bases its decisions on economic
analysis of marginal cost and marginal benefit.
256.
An effective antipollution policy from the economic perspective requires that all pollution
be eliminated and banned.
4-128
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written consent of McGraw-Hill Education.
Topic:
Societys Optimal Amount of Externality Reduction
257.
Because in any period of time and in any region the quantity of pollutants that can be
absorbed by nature is fixed, the supply of “pollution rights” in a cap-and-trade system will be
perfectly elastic (horizontal).
258.
In a well-functioning cap-and-trade system for pollution rights, society benefits because
pollution will be brought down to insignificant levels.
259.
In a well-functioning cap-and-trade system for pollution rights, the right to pollute will go
to those who are able to acquire the largest net benefit from using the scarce resource “clean
air.”
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To pi c:
Societys Optimal Amount of Externality Reduction
Multiple Choice Questions
260.
Asymmetric information in a market transaction occurs when there is unequal knowledge
possessed by the
A.
buyer and the government.
261.
Which of the following does not illustrate the asymmetric information problem?
A.
Ordinary financial investors do not know the motivations of financial advisers.
262.
If Congress decreases the amount of government insurance on bank deposits, then this
action would
A.
create a moral hazard problem in banking.
4-130
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written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Understand
D i f f i c u l t y :
02 Medium
Learning Objective: 04–06 Appendix: Describe how information failures may justify
government intervention in some markets.
Test Bank: II
Topic:
Appendix: Information Failures
263.
When sellers are unable to distinguish “good” buyers from “bad” ones, they face the
problem of
A.
moral hazard.
264.
In the insurance business, the moral hazard problem arises when
A.
not–so-healthy people are the ones more eager to buy insurance.
265.
Which of the following would be an example of government intervention to correct a
market failure caused by buyers having inadequate information about sellers?
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A.
providing unemployment compensation insurance
266.
Refer to the provided graph. Suppose consumers do not know the safety risks associated with a
particular good and that the free-market equilibrium is at E, as shown in the diagram above. If
an independent agency now provides accurate information to consumers
about the harmful
characteristics of the product, then
A.
the supply curve will shift to the left.