Chapter 16

Without any government intervention, the steel market will produce

1 billion tons of steel and total surplus will not be maximized.

The table above shows the marginal social benefit (willingness to pay) of steel consumers and the marginal cost of production to steel producers. Producing a ton of steel also imposes a marginal external cost of $60 per ton. The market equilibrium quantity of steel is __________ and the socially optimal quantity of steel is _________.

4 tons; 2 tons.

The socially optimal quantity of steel production is

800 million tons.

A Pigouvian Tax

A Pigouvian Tax

Which of the following statements is TRUE? I. An inefficiency occurs if there is too much pollution. II. An inefficiency occurs if there is too little pollution. III. It's possible for there to be an efficient level of pollution.

I, II, and III

Which of the following statements is TRUE? I. In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output. II. If vaccinations create an external marginal benefit, the marginal social benefit of vaccinations will always exceed their private marginal benefit. III. In unregulated markets, the presence of negative externalities—but not positive externalities—create deadweight losses.

IandII

To create an incentive for firms to produce the socially optimal quantity of steel, the government could impose a

Pigouvian tax of $30.

A situation of market failure exists when a market

ails to achieve the efficient quantity.

A good for which there is a negative externality results in

an over-allocation of resources to production of the good.

6. The marginal social cost of steel production reflects

both the private cost and the external cost of steel production.

Sport utility vehicles (SUVs) consume a lot of gasoline. Production and purchase of SUVs

create a negative externality.

A coal-powered electrical generator that discharges smoke into the air and causes uncompensated costs and discomfort to residents of a town has a(n):

external cost.

(Figure: Correcting for Market Failure) Use Figure: Correcting for Market Failure. There is an external cost in the market illustrated in the figure, and the two upward- sloping lines reflect private and social marginal costs. When the government intervenes to correct for the external cost, the output will _____ from _____ to _____.

fall; R; W

Suppose that each person in a community had to pay for his or her own education from kindergarten through high school. One would expect that:

less education would be acquired than at present since an individual may not consider the positive external benefits of education to society.

There are no externalities in the market for brim hats; therefore, the:

marginal social cost curve equals the supply curve.

If drivers decide to make phone calls without considering the costs imposed on others, the:

number of phone calls made while driving will be more than the socially optimal quantity.

In the case of consuming a good with a positive externality, a person will likely consider only the:

private marginal benefits of consumption and not the external marginal benefits, which cause less output to be consumed than is socially optimal.

(Figure: Correcting for Market Failure) Use Figure: Correcting for Market Failure. There is an external cost in the market illustrated in the figure, and the two upward- sloping lines reflect private and social marginal costs. If the government intervenes to correct for the external cost, the new _____ will now reflect _____ costs.

supply curve S2; both private and external