Chapter 05 – Market Failures: Public Goods and Externalities
52. If the production of a product or service involves external benefits, then the government
can improve efficiency in the market by:
53. When producing a good generates external costs, the private market for that good tends to
produce too:
54. When external benefits occur in the production of a particular product, the private market
tends to provide:
Chapter 05 – Market Failures: Public Goods and Externalities
55. Where there are spillover (or external) benefits from having a particular product in a
society, the government can make the quantity of the product approach the socially optimal
level by doing the following except:
56. Where there are spillover (or external) costs from the production of a good, the
government can make the quantity of the good approach the socially optimal level by doing
the following except:
Chapter 05 – Market Failures: Public Goods and Externalities
57. In the situation described above, we would expect an:
58. Refer to the above information. Which of the following policies would be most
appropriate for dealing with this problem?
59. If the government intervenes and corrects the externality in the situation described above,
we would expect:
Chapter 05 – Market Failures: Public Goods and Externalities
60. If the government intervenes and corrects the externality in the situation described above,
we would expect:
Chapter 05 – Market Failures: Public Goods and Externalities
61. Refer to the above supply and demand graph. In the graph, line S is the current supply of
this product, while line S1 is the optimal supply from the society’s perspective. This figure
suggests that there is (are):
62. Refer to the above supply and demand graph. In the graph, line S is the current supply of
this product, while line S1 is the optimal supply from the society’s perspective. The externality
to the society from producing each unit of this product is measured by amount:
63. Refer to the above supply and demand graph. In the graph, line S is the current supply of
this product, while line S1 is the optimal supply from the society’s perspective. One solution to
this externality problem is to:
Chapter 05 – Market Failures: Public Goods and Externalities
64. Refer to the above supply and demand graph. In the graph, line S is the current supply of
this product, while line S1 is the optimal supply from the society’s perspective. If government
corrects this externality problem and shifts production to the socially optimal level, then the
product price will be equal to:
Chapter 05 – Market Failures: Public Goods and Externalities
65. Refer to the above supply and demand graph. S1 and D1 represent the current market
supply and demand, respectively. S2 and D2 represent the socially optimal supply and
demand. The positions of the graphs indicate that there is (are):
66. Refer to the above supply and demand graph. S1 and D1 represent the current market
supply and demand, respectively. S2 and D2 represent the socially optimal supply and
demand. One way that the government could shift supply to its socially optimal level is to:
67. Refer to the above supply and demand graph. S1 and D1 represent the current market
supply and demand, respectively. S2 and D2 represent the socially optimal supply and
demand. One way that the government could shift demand to its socially optimal level is to:
Chapter 05 – Market Failures: Public Goods and Externalities
68. Refer to the above supply and demand graph of Product X. What would happen if the
government taxed the producers of this product because it has negative externalities in
production?
Chapter 05 – Market Failures: Public Goods and Externalities
69. Refer to the above supply and demand graph of Product X. If there are positive
externalities from the consumption of Product X, then the socially optimal demand curve
would be:
70. Refer to the above supply and demand graph of Product X. What would happen if the
government subsidized the buyers of Product X?
71. Refer to the above supply and demand graph of Product X. What would happen if the
government decided to also start providing Product X in the market?
Chapter 05 – Market Failures: Public Goods and Externalities
72. 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:
73. According to the Coase Theorem, externality problems:
74. Which antipollution policy would be least likely to make use of cost-benefit analysis?
Chapter 05 – Market Failures: Public Goods and Externalities
75. An emission fee levied against polluters will tend to:
76. It has been proposed that a government agency be charged with the task of determining
the amount of pollution which the atmosphere or a body of water can safely absorb, establish
“rights” to this limited amount of pollution, and sell these limited rights to polluters in a cap-
and-trade system. What would be the advantage of such a market for pollution rights?
77. A market for pollution rights, such as in a cap-and-trade system, can be expected to:
Chapter 05 – Market Failures: Public Goods and Externalities
78. By requiring car producers to install emission control devices on cars, the government
forces these producers to internalize some of the external costs of auto pollution. This will
lead to the equilibrium price of cars:
79. From an economist’s perspective, an important consideration for policies to address global
warming is:
80. Oftentimes, the socially optimal quantity for a product that imposes external costs on the
society is not zero, but something greater than zero. This is because completely eliminating
the externality involves:
Chapter 05 – Market Failures: Public Goods and Externalities
81. Sometimes, public goods whose benefits are less than their costs still get produced
because:
82. Market failures refer to those situations where the sellers are not producing as much as the
buyers are wanting to buy.
83. Demand-side market failures refer to those situations when there is a shortage in the
market because buyers want to buy more than what is available in the market.
Chapter 05 – Market Failures: Public Goods and Externalities
84. Just as there are market failures, there can also be “government-failures”.
85. Whenever there are supply-side market failures in the form of costs that suppliers do not
have to face, then there will be overproduction of the output.
86. 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.
87. Consumer surplus is the reason why sometimes a shopper regrets having bought a
particular item.
Chapter 05 – Market Failures: Public Goods and Externalities
88. Assume that there are four consumers A, B, C, and D, and the prices that each of them is
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
$2.70.
89. When the marginal benefits exceed the marginal costs of producing a product, then
allocative efficiency is not achieved in the market.
90. When there is allocative efficiency in a market, the buyers’ maximum willingness to pay is
equal to the sellers’ minimum acceptable price.
Chapter 05 – Market Failures: Public Goods and Externalities
91. Deadweight losses occur when there is overproduction of a product.
92. Excludability means that when someone is consuming a good, then others are excluded
from using the good anymore.
93. One distinguishing characteristic of public goods is the nonrivalry in their usage or
consumption.
94. The free-rider problem makes a good highly profitable to provide by a private firm.
Chapter 05 – Market Failures: Public Goods and Externalities
95. The free-rider problem refers to the local government’s problem of finding funds to
subsidize public transportation.
96. Rivalry means that when one person buys and consumes a product, it is not available for
purchase and consumption by another person.
97. The government receives all of the benefits associated with the production of a public
good.
98. If the car-makers are required to install gadgets to improve the cleanliness of car-exhaust
fumes, we would expect the equilibrium quantity in the car market to decrease.
Chapter 05 – Market Failures: Public Goods and Externalities
99. 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.
100. The optimal quantity of a public good is where the total benefits from it are equal to the
total costs of producing it.
101. Government should subsidize a product whose consumption results in external costs, in
order to achieve the optimal level of output.
102. Whenever there are negative or positive externalities, the Coase Theorem suggests that it
is always economically efficient for the government to intervene to resolve the externality
problem.
Chapter 05 – Market Failures: Public Goods and Externalities
103. Excise taxes are a way of internalizing external costs among polluting firms.
104. The types and quantities of public goods produced are ultimately determined through the
political process.
105. In dealing with market failures, the government always bases its decisions on economic
analysis of marginal cost and marginal benefit.
106. An effective antipollution policy from the economic perspective requires that all
pollution be eliminated and banned.
Chapter 05 – Market Failures: Public Goods and Externalities
107. 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.
108. In a well-functioning “cap-and-trade system” for pollution rights, the society benefits
because pollution will be brought down to insignificant levels.
109. 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”.