Chapter 5

13. Which of the following best explains why making automobiles completely safe is not efficient?

a. After some level of safety is reached, making cars even safer will not be worth the additional cost.

10. Which of the following is true when externalities are present?

a. Competitive market outcomes may be inconsistent with ideal economic efficiency

4. Which of the following is true because of the free-rider problem?

a. Competitive markets will tend to undersupply public goods

6. When does a market transaction cause an externality?

a. If someone not directly involved in the transaction receives uncompensated benefits or costs from it.

5. Suppose a firm generates external benefits. How could a more efficient outcome be achieved?

a. If the firm produced a larger output level

11. Which of the following about public goods is true?

a. It is extremely difficult to limit the benefits of a public good to only the people who pay for it

1. A free-rider problem exists when a good that has the following characteristic?

a. Nonexcludable

9. Suppose external benefits are present in a market which results in the actual market price of $34 and market output of 126 units. How does this outcome compare to the efficient, ideal equilibrium?

a. The efficient outcome would be greater than 126 units.

12. Suppose external costs are present in a market which results in the actual market price of $50 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

a. The efficient outcome would be less than 800 units.

15. When do markets fail to allocate resources efficiently?

a. When property rights are poorly enforced or not well established.

8. "Government failure" exists when political decision-makers choose actions that

a. conflict with efficient allocation of resources.

2. A good that is both nonexcludable and nonrival-in-consumption is called a

a. public good

3. In economics, a free rider is the term used for a person who

a. receives the benefit of a good without contributing to its costs of production

7. Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce

a. too little of the good that generates external benefits and too much of the good that generates external costs.

14. As a general rule, if pollution costs are external, firms will produce

a. too much of a polluting good.