ECON CHAPTER 17

___________________ is a phenomenon in which the parties on one side of the market have information not known to the others and self-select in a way that adversely affects the parties on the other side of the market.

b.Adverse selection

___________________is the phenomenon that occurs when parties on one side of a market have information that the parties on the other side of the market do not have access to and act in such a way that adversely impacts those on the other side of the market.

b.Adverse selection

______________ is equal to _________________ plus _____________.

b.MPC, MPB, MSC

Which of the following statements is true?

b.The lower transaction costs are, the more likely individuals will solve negative externality problems through a voluntary exchange.

If society is experiencing a net social cost from the current level of production of a good, this implies that

b.a negative externality exists in the production of the good.

When a good is nonexcludable, then individuals

b.can obtain the benefits of consuming the good without having to pay for it. c.have an incentive to be "free riders".

If an asymmetry of information is removed and laborers' preferences change against employment in a labor market, it would __________ employment and __________ the wage at the equilibrium in the market.

b.decrease; raise

Suppose that the production of a good involves asymmetric information in which the producer has some negative information about the good that the buyer does not have. If the buyer eventually has access to that information, the result will be that the ___________ curve for the good will shift ____________ and ______________units of the good will be bought and sold when there is symmetric information than when there was asymmetric information.

b.demand, leftward, fewer

Suppose a particular production process results in a large amount of pollution and the government decides to impose a tax to correct for this externality, such that the socially optimal output will be produced. The tax will have the effect of shifting the

b.marginal private cost curve to the left.

When positive externalities are connected with the production of a good, the

b.market output will be less than the socially optimal output.

A side effect of an action that adversely affects the well-being of others is called a

b.negative externality.

A nonexcludable public good is _______________ and ________________.

b.nonrivalrous in consumption, nonexcludable

The Coase theorem

b.shows that under certain conditions the market can internalize externalities.

When the marginal private cost is equal to marginal social cost in the production of a good,

b.the good does not incur any negative externalities. c.a negative externality has been successfully internalized.

Suppose the production of a good results in positive externalities. The market will tend to _______________ this good and the good's marginal social benefits curve will ______________________.

b.underproduce, lie to the right of the good's demand curve

Given a positive externality, the marginal social benefit curve __________ of the demand curve, with the market output __________ the socially optimal output.

c.lies to the right, less than

Lydia has a homeowner's insurance policy with ZZZ Insurance Company. If ZZZ requires Lydia to install a smoke detector and have a fire extinguisher in her home prior to selling her an insurance policy, then the insurance company is trying to combat the problem of

c.moral hazard.

The free-rider problem arises if goods are

c.nonexcludable.

A good whose consumption by one person does not reduce its consumption by others is said to be

c.nonrivalrous in consumption.

There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to the Coase theorem,

c.there will be the same number of divorces under both laws if transaction costs are zero.

Most economists believe that the market __________ produce nonexcludable public goods because of __________.

c.will not; free rider problem

Lemon laws __________ the problem of __________________ in the used car market.

a.are meant to reduce, adverse selection

Externalities _________ arise because someone consumes something that has an external benefit or cost for others, _____________ because someone produces something that has an external benefit or cost for others.

a.can, or

There is an average price for a used car that accounts for both good used cars and bad used cars ("lemons"). At the current market price for used cars, the persons __________ likely to offer their used cars for sale are people who own __________.

a.most; "lemons" b.least; good used cars

A nonexcludable public good is

a.nonrivalrous in consumption b.a good for which it is impossible, or prohibitively costly, to exclude someone from receiving the benefits of its services after it has been produced.

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

a.output will occur at the socially optimal level. b.less output will be produced than if all costs are not taken into account. c.the price of the product will be higher than if all costs are not taken into account

Suppose the production of a good results in negative externalities. The market will tend to _______________ this good and the good's marginal social cost curve will ______________________.

a.overproduce, lie to the left of the good's supply curve

Flora is given a flu shot by her doctor, reducing the probability that she will get the flu and reducing the probability that others will get the flu, too. The benefit to Flora is a(n) _______________ benefit and the benefit to other people is a(n) ____________________ benefit. This is an example of __________________ externality.

a.private, external, positive

The excludability versus nonexcludability issue is

a.relevant to the issue of market failure. c.relevant to the free-rider problem.

A subsidy that is used to internalize a positive externality will ideally cause the demand curve to shift __________ to the _____________ curve and output will ____________ to the socially optimal output.

a.rightward, MSB, increase

A voluntary agreement can be used to internalize an externality as long as

a.transaction costs are low relative to expected benefits of the agreement.

It seems quite possible that cigarette companies concealed information about the effect of smoking on health, causing cigarette prices to be __________ and cigarette sales to be __________ than would have been the case under symmetric information.

c.higher; higher

Negative externalities that arise from the production of a good

c.impose a cost on third parties.

Negative externalities arising from the production of a good always

c.incur external costs.

A good is rivalrous in consumption if

c.its consumption by one person reduces its consumption by others.

A consequence of a negative externality is that social costs __________ private costs, and the socially optimal output __________ the market output.

d.are greater than, is less than

According to the Coase Theorem, externalities

d.can be internalized by the market under certain conditions.

Which of the following is not a method used to internalize externalities?

d.market failure

Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then

d.output will be at a higher level than if all benefits were not taken into account.

When a negative externality exists,

e.social costs are greater than private costs.