Chapter 1 Microeconomics

An externality can best be defined as

a consequence of a transaction that spills over to affect third parties

an example of positive externality

a neighbor's flower garden that you enjoy seeing

An example of third parties in the market of automobiles is

a pedestrian that is affected by the polluted air from automobiles

A price system is considered to be efficient when

all resources all allocated to the highest-valued uses

A situation in which a benefit or a cost associated with an economic activity spills over to third parties is called

an externality

pollution is caused by a market failure, in an industry in which there is

an over-allocation of resources in production

Market failure occurs when

an unrestrained market economy leads to too few or too many resources going to a specific economic activity.

Costs that spill over to third parties are called

external costs

Market failures occur when

externalities exist

which of the following is NOT an example of a negative externality

inoculation against disease

when costs spill over to third parties, there is an

negative externality

When there is an external cost, the unregulated market

overproduces the good or service

Market failure

prevent the price system from economic efficiency.

In its model ideal form, a price system allows

resources to move from lower-valued uses to higher-valued uses through voluntary exchange.

assume the production of a good gives rise to external benefits. the government may increase efficiency by

subsidizing consumption of the good that provides external benefits

what would happen in a free market system when production of a good generates negative externalities

the equilibrium quantity of the good is more than the efficient amount

Which of the following is a benefit of the price system?

the freedom of consumers to decide what they want to purchase.

When market failures occur when

the government can step in to correct the market failure.

Market failure occurs when

the price system fails to generate an efficient allocation of resources

an example of a negative externality

there is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.

When the price system fails to generate an efficient allocation of resources

too few or too many goods will be produced