Question 1

When a good is nonrivalrous in consumption,then:

Accepted Answer

A)   consumption by an additional individual will significantly reduce the benefits derived by others from a public good.
B)   individuals who refuse to pay for a public good cannot be excluded from benefiting from it.
C)   consumption by an additional individual does not prevent others from benefiting from a public good.
D)   individuals who refuse to pay for a public good can be excluded from benefiting from it.

Question 2

Economists prefer greater effort made to force internalization of externalities through taxes rather than using alternative approaches.

Accepted Answer

A) True 
 B)False

Question 3

An externality occurs when:

Accepted Answer

A)   people other than those making the demand and supply decisions share the benefits or the costs of an activity.
B)   only the people making the demand and supply decisions share the benefits or the costs of an activity.
C)   private costs of production equal the full social costs associated with production of a good.
D)   private costs of production are ignored.

Question 4

Differentiate between a public good and common resources.

Accepted Answer

A public good is neither rival nor exclu...

Question 5

Assume that production of a good imposes external costs on others.The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Accepted Answer

A)   too high; too high.
B)   too high; too low.
C)   too low; too high.
D)   too low; too low.

Question 6

Various new cars are sold with sensors that automatically turn on the headlights at night or any low light conditions.Would these sensors create a positive externality or a negative externality? How?

Accepted Answer

Cars with these new sensors would likely...

Question 7

The optimal quantity of pollution control occurs where:

Accepted Answer

A)   pollution equals zero.
B)   the total benefit of pollution control equals the total cost.
C)   the marginal social benefit of pollution control just equals the marginal social cost.
D)   the marginal external cost of pollution equals zero.

Question 8

Nancy loves to landscape her yard,but her neighbor Tom places a low value on his landscaping.When Tom's grass is neglected and gets long,Nancy will mow for Tom.This is an example of:

Accepted Answer

A)   the fallacy of composition.
B)   a pollution tax.
C)   a private solution to a negative externality problem.
D)   how lazy Tom is.

Question 9

The free rider problem suggests that a producer will tend to:
i.produce more than the optimal quantity of a public good.
ii.produce less than the optimal quantity of a public good.
iii.produce the optimal quantity of a public good if it is funded out of tax revenue.

Accepted Answer

A)   (i)  only
B)   (ii)  only
C)   (i)  and (iii)  only
D)   (ii)  and (iii)  only

Question 10

Sellers may choose not to sell in certain markets because:

Accepted Answer

A)   it is possible to practice price discrimination against customers.
B)   buyers are unable to perceive the high quality of their goods and are, therefore, less willing to pay for them.
C)   they are able to impose negative externalities on third parties.
D)   an above-average profit potential is projected.

Question 11

If a subsidy was imposed on an industry whose production imposed external benefits on others,then the goods' consumers of the good would be ____ and the result would be a(n) ____ in efficiency.

Accepted Answer

A)   better off; increase.
B)   better off; decrease.
C)   worse off; increase.
D)   worse off; decrease.

Question 12

Exhibit 8-2  Refer to Exhibit 8-2.Which of the following observations is correct?

Accepted Answer

A)   The equilibrium at P2 and Q2 is inefficient.
B)   From society's standpoint, Q1 is the efficient level of output.
C)   True supply curve is above the demand curve at Q1.
D)   The equilibrium at P1 and Q1 is efficient.

Question 13

Exhibit 8-1 0. B)  education is overproduced by Q1 minus Q0 units. C)  the socially optimal quantity of education is Q1 units. D)  the socially optimal quantity of education is Q0 units." class="answers-bank-image d-inline" rel="preload" > Refer to Exhibit 8-1.Suppose that education provides spillover benefits to the community as illustrated in the diagram.Based on this information,we can say that:

Accepted Answer

A)   the market would fall short of the desirable level of education, Q0.
B)   education is overproduced by Q1 minus Q0 units.
C)   the socially optimal quantity of education is Q1 units.
D)   the socially optimal quantity of education is Q0 units.

Question 14

Beginning from a situation where there were no clear property rights to clean air and water:

Accepted Answer

A)   subsidies could not improve efficiency in cases of external benefits.
B)   subsidies could not improve efficiency in cases of external costs.
C)   taxes could not improve efficiency in cases of external costs.
D)   neither external benefits nor external costs could improve efficiency in either the case of external benefits or the case of external costs.

Question 15

Someone who does not contribute toward covering the cost of a good he desires,and yet he cannot be excluded from receiving the good,is called a free rider.

Accepted Answer

A) True 
 B)False

Question 16

Public goods are those that are consumed:

Accepted Answer

A)   only by those who have paid for them.
B)   only by the government that provides them.
C)   by the private group that funds them.
D)   by the paying and nonpaying public alike.

Question 17

In a competitive market,

Accepted Answer

A)   demand will always reflect all spillover costs.
B)   demand will always reflect all spillover benefits.
C)   supply will always reflect all spillover costs.
D)   none of the above are true.

Question 18

When city beautification programs are funded privately:

Accepted Answer

A)   only contributing citizens are likely to benefit from a more beautiful city.
B)   only free riders are likely to benefit from a more beautiful city.
C)   an underallocation of resources toward the beautification project is likely to occur relative to what is socially efficient.
D)   none of the above

Question 19

Which of the following is not true of adverse selection?

Accepted Answer

A)   It can result when one of the parties to a transaction has little information about the quality of the goods involved.
B)   It can cause the quality of goods traded to fall, if quality detection costs are high.
C)   It can be a difficult problem to overcome, because it is not individually rational for the transactor with the superior information to provide a truthful and complete disclosure.
D)   All of the above are true.

Question 20

Exhibit 8-3  Refer to Exhibit 8-3.What would be the total cost if the government established a standard of 3 tons maximum pollution per firm in order to decrease pollution by a total of 6 tons?

Accepted Answer

A)   $800
B)   $1,050
C)   $1,850
D)   $2,100

Exam 8: Market Failure

The free rider problem suggests that a producer will tend to: i.produce more than the optimal quantity of a public good. ii.produce less than the optimal quantity of a public good. iii.produce the optimal quantity of a public good if it is funded out of tax revenue.

Correct AnswerverifiedShow Answer

Various new cars are sold with sensors that automatically turn on the headlights at night or any low light conditions.Would these sensors create a positive externality or a negative externality? How?

Correct AnswerverifiedCars with these new sensors would likely...View AnswerShow Answer

Differentiate between a public good and common resources.

Correct AnswerverifiedA public good is neither rival nor exclu...View AnswerShow Answer

Nancy loves to landscape her yard,but her neighbor Tom places a low value on his landscaping.When Tom's grass is neglected and gets long,Nancy will mow for Tom.This is an example of:

Correct AnswerverifiedShow Answer

When city beautification programs are funded privately:

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Exhibit 8-2 Refer to Exhibit 8-2.Which of the following observations is correct?

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Which of the following is not true of adverse selection?

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The optimal quantity of pollution control occurs where:

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An externality occurs when:

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Assume that production of a good imposes external costs on others.The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Correct AnswerverifiedShow Answer

Exhibit 8-1 Refer to Exhibit 8-1.Suppose that education provides spillover benefits to the community as illustrated in the diagram.Based on this information,we can say that:

Correct AnswerverifiedShow Answer

In a competitive market,

Correct AnswerverifiedShow Answer

Sellers may choose not to sell in certain markets because:

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Public goods are those that are consumed:

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Economists prefer greater effort made to force internalization of externalities through taxes rather than using alternative approaches.

Correct AnswerverifiedShow Answer

Beginning from a situation where there were no clear property rights to clean air and water:

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If a subsidy was imposed on an industry whose production imposed external benefits on others,then the goods' consumers of the good would be ____ and the result would be a(n) ____ in efficiency.

Correct AnswerverifiedShow Answer

Exhibit 8-3 Refer to Exhibit 8-3.What would be the total cost if the government established a standard of 3 tons maximum pollution per firm in order to decrease pollution by a total of 6 tons?

Correct AnswerverifiedShow Answer

Someone who does not contribute toward covering the cost of a good he desires,and yet he cannot be excluded from receiving the good,is called a free rider.

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When a good is nonrivalrous in consumption,then:

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Cars with these new sensors would likely...
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A public good is neither rival nor exclu...
View Answer

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Assume that production of a good imposes external costs on others.The equilibrium price will be and the equilibrium quantity for efficient resource allocation.

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If a subsidy was imposed on an industry whose production imposed external benefits on others,then the goods' consumers of the good would be and the result would be a(n) in efficiency.

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