chapter 5 complete quiz eco

A public good is

good or service that can be consumed by both paying and nonpaying customers. Feedback: Correct. Yes. A public good is a good or service that can be consumed by both paying and nonpaying costumers. The defining characteristics of a public good are non-excludability and non-rivalry. The former implies that once the good has been produced, non-payers cannot be excluded from consuming the good; the latter implies that everyone can consume the good simultaneously.

A free-rider problem arises whenever:

goods cannot be provided exclusively to those who pay for them. Feedback: Correct. Yes! A free-rider problem arises whenever goods cannot be provided exclusively to those who pay for them. Such is the case of public goods, and also of common-property goods.

The market system fails to provide the efficient output of public goods because:

private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them. Feedback: Correct. Yes. That is the essence of the problem. Because public goods are non-excludable, private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them, once the public goods come into existence. There are many "free riders" out there, who do not pay voluntarily for goods they can obtain for free.

Which of the following is not true of adverse selection?

. It can be a difficult problem to overcome, because it is often not in the self-interest of the transactor with the superior information to provide a truthful and complete disclosure. B. It can result when both parties to a transaction have little information about the quality of the goods involved. C. It can cause the quality of goods traded to fall, if quality detection costs are high.

A situation in which the winner of an auction is worse off than the loser because of inaccurate valuation is known as:

A winner's curse is a situation that arises in certain actions in which the winner is worse off than the loser because he overestimates and bids up the good's value.

If, after she buys a car with air bags, Maria Andretti starts to drive recklessly, that would be an illustration of:

That would be an example of the moral hazard problem: Maria drives recklessly because she now feels protected by the air bags. In general terms, moral hazard refers to the possibility that individuals alter their behavior after having entered into a contract.

The consumption of public goods is

Yes. When goods are non-excludable and non-rivalrous they are public goods. National defense, law enforcement and police protection, lighthouses and traffic signs, disease prevention, public health and sanitation, scientific research, broadcast television and radio are all examples of public goods.

Which of the following goods is least likely to be provided by the private sector

a good characterized by nonrivalry in consumption from which nonpaying customers cannot be excluded Feedback:This is the case of a good that is non-rivalrous and non-excludable, i.e. national defense or any public good. The private sector would be an unlikely provider of a good with those characteristics.

To internalize a negative externality:

a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good. Feedback:When negative externalities are present, the free market left by itself produces more than is socially optimal since it doesn't take into consideration the cost it is imposing on society by producing a given good. Internalizing the negative externality means altering the incentives in such a way the producers take account of the external effects of their actions. The government can internalize a positive externality by increasing the producer's costs, imposing taxes for example, in the amount of the external costs to reduce the original equilibrium quantity to the socially optimal quantity.

If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, other things being equal, there would probably be:

an increase in consumption. Feedback: Correct. Yes. There would probably be an increase in consumption. If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, the full-benefits social demand curv

Which of the following is a rival good that is nonexcludable?

common resource Feedback: Correct. A common resource good! For a good to be defined as a common resource good it has to be rivalrous and non-excludable. Such is the case common fisheries. The good is rivalrous: the consumption by one individual does prevent the simultaneous consumption by others; the good is non-excludable: no one can be excluded from consumption.

When a good is nonrivalrous in consumption, then:

consumption by an additional individual does not prevent others from benefiting from a public good. Rivalrous goods are those which can be consumed by only one person at the same time; non-rivalrous goods may be consumed by many at the same time at no additional cost.

negative externalities

costs incurred by individuals other than buyers and sellers in a particular market

Negative externalities are:

costs incurred by individuals other than buyers and sellers in a particular market. Feedback: Correct. A negative externality occurs when people other than those making the demand decisions (buyers) and supply decisions (sellers) share the costs of an activity.

If there are important spillover benefits from consumption of a good,

he market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production. Feedback: Correct. True. The market demand curve for the good understates the value of the product. The market demand curve presents the relationship between the good's quantity demanded and the price consumers are willing and able to pay for the good. Thus, price represents the value of an additional unit of the good to consumers. However, if other individuals receive benefits from the positive externality — even though they are not part of the market transaction — those benefits that spill over society are not included in the market demand curve or private demand Dprivate (see graph below). If they were included, then the social demand curve Dsocial (private value plus the value of the positive externality) would be to the right of the private demand curve Dprivate (only private value). For a given supply curve (private supply), the equilibrium quantity QM resulting from the intersection (market equilibrium pount EM) of the private demand and the private supply is less than the optimal quantity QO resulting from the intersection (optimal or efficient equilibrium point EO) of the private supply and the social demand. The market fails to produce enough of the good (QM < QO) and consequently resources are under allocated.

If the production of a particular good involves significant external costs, to force the externality to be internalized the government might:

impose a tax on production of the good in order to decrease production. Feedback: Correct. By imposing the tax, the firm faces higher cost and the supply curve shifts to the right. For a given demand curve, the quantity produced and supplied will decline. To internalize a negative externality implies to take into account the external costs.

The median voter model implies that:

many people will be dissatisfied with the amount of spending on government funded projects. C. a candidate may adopt more extreme views when seeking her party's nomination than during the general election.

If negative externalities are created in the production of a good, then society will:

produce too much of the good since the marginal private cost to firms is less than the marginal social cost. Feedback: Correct. Both, premise and conclusion, are valid. The premise is valid: the marginal private cost to firms is less than the marginal social cost since the marginal private costs only consider the private costs whilst marginal social cost considers both private costs plus the costs imposed to society by the negative externality. The conclusion is also valid: society would produce too much of the product since the good will not be supplied at the level where the social supply curve intersects the demand curve, but rather at the level where the private supply curve intersects the demand curve (higher quantity, lower price). In the graph below, the market equilibrium quantity is QM (only private costs are consider), which is greater than the optimal equilibrium quantity QO (private costs plus the cost of the externality are consider). Keep in mind that anything that affects the cost of production would impact the supply: higher costs would shift the supply to the left (decrease in supply), lower costs would shift the supply to the right (increase in supply). That explains why the social supply curve (private plus external costs included) curve lies to the left of the private supply curve (only private costs included).

If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will:

produce too much of the product. Feedback: Correct. If a good that features a net negative externality is produced in an unregulated free market, the good will be over-produced and over-priced. In the model of supply and demand (see graph below), one should differentiate between the private supply curve Sprivate (only the private costs are considered) and the social supply curve Ssocial (external costs are included besides the private costs). The Ssocial lies to the left of Sprivate. There is only one demand curve, the private one Dprivate . The market equilibrium point Em (intersection between Sprivate and Dprivate) is not efficient since the true supply curve is Ssocial. The optimal equilibrium point Eo is given by the intersection of Ssocial and Dprivate. That point implies a lower level of quantity supplied and it lies below and to the left of the market equilibrium point. From society's standpoint, efficiency would be gained by producing less (Qo) at a higher price (Po).

Which of the following will most likely generate positive externalities?

public education Feedback: Correct. A very good choice. The many benefits of public education spill over to society in general, not only to those attending school. So, education generates positive externalities. More education leads to higher worker productivity and higher living standards for society in general. In addition, a well-educated and better informed society is more likely to make good overall decisions (social, political, economic or financial decisions).

Where a free-rider problem exists, goods tend to be:

underproduced ...The non-excludability condition implies that private firms would not produce public goods, because once they are produced, buyers are able to consume them for free and thus have no reason to pay. Thus, the public good will be most likely under produced or even no produced at all.