Chapter 4

Non excludability describes a condition where

there is no effective way to keep people from using a good once it comes into being.

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:

under the demand curve and above the actual price

Demand-side market failures occur when

demand curves don't reflect consumers' full willingness to pay for a good or service.

If many people in a community get flu shots, the whole community benefits including those that did not get flu shots. Therefore, not enough people may decide to get the shots. This is one illustration of:

demand-side market failure

Market failures

result in overproduction or underproduction of a good

In the market for a particular pair of shoes, Jena is willing to pay $75 for a pair while Jane is willing to pay $85 for a pair. The actual price that each has to pay for a pair of shoes is $65. What is the combined amount of consumer surplus of Jena and Jane?

$30

Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the fifth unit of a public good; Kara, $15; and Susie, $25. Government should produce the fifth unit of the public good if the marginal cost is less than or equal to:

$60

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences:

a consumer surplus of $9, and Nathan experiences a producer surplus of $3

Graphically, producer surplus is measured as the area:

above the supply curve and below the actual price

Pigovian taxes

are used to correct negative externalities

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a:

demand-side market failure

At the optimal quantity of a public good,

marginal benefit equals marginal cost

Which of the following statements about market failure is NOT true? -market failure can come from causes on the demand side or the supply side of a market -market failure can result from the number of sellers in a market being too few to ensure competition -market failure causes an inefficient allocation of resources, even in a competitive market -market failure always results from some government action or policy in a market

market failure always results from some government action or policy in a market

The two main characteristics of a public good are

nonrivalry and nonexcludability

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. In the situation described above, we would expect an:

overproduction of paper in the mills

The market system does not produce public goods because:

private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them

Which of the following statements in NOT true? -private provision of public goods is usually unprofitable -some public goods are paid for by private philanthropy -public goods are only provided by government -the free-rider problem results from the characteristics of nonrivalry and nonexcludability

public goods are only provided by government

Suppose that a new band, "Balin and the Wolf Riders," tries to sell its music on the Internet. Economists would expect

some of those enjoying the music to "free ride" through illegal file sharing and digital piracy

What two conditions must hold for a competitive market to produce efficient outcomes?

supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes, what has occurred?

supply-side market failure

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: -taxing the sellers of the product -subsiding the buyers of the product -subsidizing the sellers of the product -providing the product itself

taxing the sellers of the product

What is an example of a public good? -the movies produced by Hollywood -the airline tickets bought by vacationers -the laptops used by students in a college or university -the bike paths around a city or town

the bike paths around a city or town

Allocative efficiency occurs only at that output where

the combined amounts of consumer surplus and producer surplus are maximized

Producer surplus is the difference between

the minimum prices producers are willing to accept for a product and the higher equilibrium price