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