Micro Chapter 4 Quiz

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.

externality

some of the costs or benefits of a good or service are passed onto or "spilled over to" someone than the immediate buyer or seller

Producer surplus is the difference between

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

What are positive externalities also called?

free riders

Negative Externality

A cost imposed without compensation on third parties by the production or consumption of sellers or buyers.

asymmetric information

A situation where one party to a market transaction has more information about a product or service than the other. The result may be an under- or overallocation of resources.

efficiency loss

Reductions in combined consumer and producer surplus caused by an under allocation or overallocation of resources to the production of a good or service. Also called deadweight loss.

consumer surplus

The difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay

Coase theorem

The idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations among the affected parties.

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

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

Which of the following would be an example of a moral hazard problem?

a person who purchases auto insurance and then drives more recklessly

Pigovian taxes

are used to correct negative externalities.

Example of a Negative externality

breathing polluted air

Asymmetric information in a market transaction occurs when there is unequal knowledge possessed by the

buyer and seller

Market failure is said to occur whenever

competitive markets do not allocate resources in the most economically desirable way.

Which of the following is an example of a negative externality?

falling property values in a neighborhood where a disreputable nightclub is operating

Sellers will opt out of markets in which

information about buyers is inadequate which allows some buyers to consequently impose high costs on the sellers.

Where there is asymmetric information between buyers and sellers

markets can produce inefficient outcomes.

positive externality

occur when people who are not directly involved in a market transaction receive benefits from the market transaction without having to pay for them

There is an adverse selection problem in the market for used cars because

owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars.

Example of a Positive externality

people living near Disneyland who enjoy the parks fireworks display even though they did not purchase admission to the park

A positive externality or spillover benefit occurs when

the benefits associated with a product exceed those accruing to people who consume it.

A negative externality or spillover cost occurs when

the total cost of producing a good exceeds the costs borne by the producer.

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.

Another example of a positive externality is_______

vaccinations