Public Goods and Externalities

What is created when production does not provide the equilibrium quantity?

Efficiency losses or deadweight losses

_____________ means that buyers who are willing and able to pay the market price for the product obtain its benefits, but those unable or unwilling to pay the price do not.

Excludability

______________ means that sellers can keep people who do not pay for a product from obtaining its benefits.

Excludability

True or false: A nonrivalrous good means that when one person buys and consumes a product, it is not available for someone else to buy or consume.

False

True or false: Competitive markets produce equilibrium prices and quantities that minimize the sum of consumer and producer surplus.

False

True or false: Consumer surplus is the difference between the minimum price a consumer is willing to pay for a product and the actual price paid.

False

True or false: Government could correct the overallocation of resources by subsidizing consumers of the product.

False

True or false: Producer surplus is calculated as the difference between the actual price a producer receives and the maximum acceptable price.

False

True or false: When the benefits of pollution abatement exceed the costs to the community and society, the spending of scarce resources by government on other societal projects may be the best decision.

False

How are consumer surplus and price related?

Inversely

What do points on the demand curve represent?

Marginal benefit

____________ surplus is the difference between the actual price a seller receives and the minimum acceptable price.

Producer

What is achieved at equilibrium quantity?

Productive efficiency Allocative efficiency

__________ provides goods to correct a positive externality where positive externalities are extremely large.

The government

For a given supply curve, how do higher prices affect producer surplus?

They increase it.

True or false: A subsidy to a producer is a payment from the government to decrease the producer's cost to encourage more supply of a product beneficial to society.

True

True or false: As a result of producers knowingly or unknowingly passing some of the costs of production onto the community, the producer overallocates resources to the commodity and supplies too many units, causing negative externalities to occur.

True

True or false: At the equilibrium output, where the demand and supply curves intersect, marginal benefits equals marginal cost.

True

True or false: Demand-side failures arise in competitive markets when demand curve fail to reflect consumer's full willingness to pay for a good or service.

True

When markets fall to incorporate all benefits and/or ll costs into market supply and demand curves, then the competitive market system is experiencing

a market failure

A negative exterality occurs when:

an overproduction of a product occurs and there is an overallocation of resources to this product

The law of diminishing marginal utility is important to the provision of public goods because __________, thus explaining the downward slope of the collective demand curve.

as is true for private goods, successive units of any good yield less and less added benefit

The optimal size and scope of a project is determined by:

comparing marginal costs to marginal benefits

The supply curve for any good, private or public, is its marginal ______ curve.

cost

Market failures in competitive markets can be classified into __________-side and _________-side.

demand-side; supply-side

Government can use _______ controls and specific _______ to counter negative externalities and it may provide _________ or public goods to deal with positive externalities.

direct; taxes; subsidies

Government intervention may be needed to achieve:

economic efficiency when externalities affect large numbers of people or when community interest are at stake.

When all benefits and costs are fully reflected in the market demand and supply curves of a product, then resource use is considered:

efficient

A(n) _____________ is a cost or a benefit accruing to an individual or group, a third party, that is external to a market transaction.

externality

As a result of negative externalities that are imposed by producers, costs are transferred to society, thus:

firms incur higher production costs and have marginal cost or supply curves that are lower than the full-cost associated with producing their goods.

The situation when people can receive the benefits from a good without having to pay is called the ______-rider problem.

free

According to the Coase Theorem, __________ should restrict its involvement to remedying external costs or benefits.

government

Cost-benefit analysis can help the ____________ decide on the extent to which a public project should be pursued.

government

Consumer surplus is the difference between the ____________ price a consumer is willing to pay for a product and the price paid.

highest

Consumer surplus and price are __________ related because, with a given demand curve, higher prices reduce consumer surplus.

inversely

The optimal reduction of an externality occurs when society's marginal cost ___________ the marginal benefit of reducing that externality.

is equal to

The direct way to reduce negative externalities from a certain activity is to pass _____________ limiting that activity.

legislation

The cap and trade program is a ___________ approach where an appropriate government pollution-control agency determines the amount of pollutants that firms can discharge into the environment.

market-based

Reducing a ____________ externality has a cost and society must decide how much of a reduction in the externality it wants to pay for.

negative

Specific taxes and legislation are two government solutions for:

negative externalities

Another policy approach to ___________ externalities is for government to levy° ________ or a charge specifically on the related good.

negative; taxes

Public goods are distinguished by:

nonrivalry nonexcludability

The market demand curve for positive externalities reflects:

only the direct, private benefits to those who demand and use the product

A ___________ externality (or spillover benefit) resulting to an underallocation of resources to the market is a type of market failure.

positive

Education funding by government is an example of a __________ externality.

positive

Government can attempt to correct a market experiencing a __________ externality by subsidizing producers and/or consumers, or by government production of the product.

positive

Low-interest studentloans and government funding of school budgets are examples of correcting for a(n) __________ externality.

positive

There is a(n) __________ relationship between equilibrium and the amount of producer surplus.

positive

Goods that are provided by competitive markets because they incur profits are known as:

private goods

If a good is nonrival and and nonexcludable, then it is known as a:

public good

Government provision refers to the government providing a ___________ good in order to correct for positive externalities where the positive externality is extremely __________.

public; large

The collective demand curve for a ___________ good is found by _________ vertically the individual willingness-to-pay curves.

public; summing

A good that could be produced by he market system (since exclusion is possible), but government provides it to avoid an underallocation of resources is called a:

quasi-public good

Direct controls ________ the marginal cost of production because firms must operate and maintain pollution control equipment.

raise

Negative externalities such as pollution __________ the utility of people and the communities they live and work in, rather than ____________ it.

reduce; increase

When government subsidizes producers of a product, the supply curve for that particular product will shift to the __________.

right

The marginal cost to firms and hence to society _________ as more and more pollution is reduced.

rises

When the purchase and consumption of a good makes the purchase and consumption of the good unavailable to another person, it is known as:

rivalry

The collective demand curve measures:

society's willingness-to-pay for each additional marginal benefit of a particular public good

A positive externality is an uncompensated:

spillover benefit

If a third party to a market transaction is experiencing an uncompensated cost, then the transaction results in a market failure known as a _________ or __________.

spillover cost negative externality

When government gives money to a college student, this is an example of a consumer ___________.

subsidy

When government gives money to public colleges and universities in order to correct for an underallocation of resources, this is known as a producer ___________.

subsidy

The marginal cost or _________ curve measures society's marginal cost of each unit produced.

supply

A _______-side market failure arises in situation in which a _______ does not have to pay the full cost of production.

supply; firm

Government can finance the provision of public goods through ________.

taxes

The downward slope of the willing-to-pay curves of public goods can be explained by:

the law of diminishing marginal utility

When positive external benefits occur:

the market demand curve lies to the left of, or below, the full-benefits demand curve

A deadweight loss declines in size when a unit of output is produced, so that

the maximum willingness to pay exceeds acceptable prices

An externality causes some of the benefits or costs of a market transaction to e passed on to a:

third party

As a result of the law of diminishing (marginal) ____________, reducing pollution by one more unit or eliminating pollution might nit be economically desirable, even it is technologically feasible.

utility

The marginal benefit curve for pollution reduction slopes downward because of the law of diminishing marginal _________.

utility

Which of the following are true statements about competitive markets? ∙ A competitive market always results in underproduction of products. ∙ A competitive market allocates resources efficiently. ∙ A competitive market always results in overproduction of products. ∙ A competitive market makes private goods available to consumers.

∙ A competitive market allocates resources efficiently. ∙ A competitive market makes private goods available to consumers.

Adam's willingness-to-pay $3 for the second unit of the public good can best be explained by which of the following? ∙ Adams expects to receive $2 of extra benefit or utility from that unit. ∙ Adams expects to receive $3 of extra benefit or utility from that unit ∙ Adams expects to receive more than $3 of extra benefit or utility from that unit ∙ Adams expects to receive less than $3 of extra benefit or utility from that unit.

∙ Adams expects to receive $3 of extra benefit or utility from that unit

In the figure, the downward sloping demand curve represents the collective willingness to pay for a public good. Which of the following statements is correct using the figure? ∙ At $3 the public demands 2 units of public good ∙ At $3 the public demands 4 units of public good ∙ At $7 the public demands 4 units of a public good ∙ At $5 the public demands 5 units of a public good

∙ At $3 the public demands 4 units of

Which of the following describes the implications of the government's choice to use more resources in the public sector? ∙ Because the economy's resources are limited, decisions to use more resources in the private sector will mean fewer resources for the public sector. ∙ Because the economy 's resources are limited, decisions to use more resources in the public sector will mean fewer resources for the private sector. ∙ Because the economy 's resources are unlimited, decisions to use more resources in the public sector will mean fewer resources for the private sector. ∙ Because the economy 's resources are limited, decisions to use less resources in the public sector will mean fewer resources for the private sector.

∙ Because the economy 's resources are limited, decisions to use more resources in the public sector will mean fewer resources for the private sector.

Two children are about to start public school. One child comes from a local American family and the other comes from a family visiting America. Which of the following statements represent the characteristic of non-rivalry of a public good? ∙ Both children will be enrolled in the school ∙ A public school bus picks up each child ∙ Only the child of working American parents will be enrolled because there are no classroom seats left ∙ The child visiting America will not be permitted to enroll in the school because there are no classroom seats left

∙ Both children will be enrolled in the school ∙ A public school bus picks up each child

Which of the following refers to reduction of combined consumer and producer surplus associated with underproduction or overproduction of a product? ∙ Deadweight loss ∙ Inefficiency loss ∙ Surplus loss ∙ Triangle loss

∙ Deadweight loss

Which of the following happens when a market does not reflect consumers' full willingness to pay for a good or service? ∙ Consumer suplus ∙ Productive efficiency failure ∙ Demand-side market failure ∙ Supply-side market failure ∙ Allocative efficiency failure

∙ Demand-side market failure

Which of the following is one of the major requirements of the Clean Air Act of 1990? ∙ Required all household appliances be energy efficient ∙ Forced factories and businesses to install advanced pollution control technology to reduce emissions. ∙ Required coal burning power plants to convert to oil. ∙ Gave incentives to authorities to build aerodynamic cars ti reduce fuel consumption.

∙ Forced factories and businesses to install advanced pollution control technology to reduce emissions.

Which of the following explains how the government provides the optimal quantity of a public good? ∙ It compares the marginal benefit of an added unit of the good against the government total cost of providing it. ∙ It compares the marginal benefit of an added unit of the good against the government's marginal cost of providing it. ∙ It compares the benefit of an added unit of the good against the government's marginal cost of providing it. ∙ It compares the total benefit of an added unit of the good against the government's total cost of providing it.

∙ It compares the marginal benefit of an added unit of the good against the government's marginal cost of providing it.

Which of the following exemplify a rivalrous good? ∙ Jeff uses the public library. ∙ John eats an apple for lunch. ∙ Mary drinks a can of Pepsi. ∙ The National Guard offers your town help.

∙ John eats an apple for lunch. ∙ Mary drinks a can of Pepsi.

Which of the following justifies government intervention in the economy? ∙ Capital investment ∙ Resource allocation ∙ Market failures ∙ Tariffs and quotas

∙ Market failures

Which of the following has been stated to reduce society's costs by allowing pollution rights to be bought and sold? ∙ Market-based approaches to pollution abatement ∙ Direct controls to pollution abatement ∙ A cap-and-trade program

∙ Market-based approaches to pollution abatement ∙ A cap-and-trade program

Which of the following occurs due to an overallocation of resources to the production of a good or service? ∙ Negative externality ∙ Spillover benefit ∙ Positive externality ∙ Economic surplus

∙ Negative externality

In the figure, which of the following statements is correct concerning positive externalities? ∙ Quantity point Qe represents the equilibrium output point. ∙ Quantity point Qo represents the optimal output point. ∙ Quantity point Qe represents the optimal output point. ∙ Quantity point Qo represents the equilibrium output point.

∙ Quantity point Qe represents the equilibrium output point. ∙ Quantity point Qo represents the optimal output point.

Which curve shows the seller's minimum acceptable price for each unit of the product? ∙ Demand curve ∙ Supply curve ∙ Revenue curve

∙ Supply curve

Which of the following happens when a market does not reflect the full cost of producing a good or service? ∙ Allocative inefficiency ∙ Demand-side market failure ∙ Producer surplus ∙ Productive inefficiency ∙ Supply-side market failure

∙ Supply-side market failure

Which of the following does the figure illustrate? ∙ That some pollution may be economically efficient because beyond some level of control, further abatement may reduce society's net well-being. ∙ Society's optimal amount of pollution abatement. ∙ That some pollution is never economically efficient because beyond some level of control, further abatement may reduce society's net well-being.

∙ That some pollution may be economically efficient because beyond some level of control, further abatement may reduce society's net well-being. ∙ Society's optimal amount of pollution abatement.

Which of the following scenarios represents a reason for firms to "tap the market" ? ∙ The average industry profit margin is 40% for providing cell phone service. ∙ Scale of tradition tube TVs has fallen 95% in the last 3 years. ∙ The production of the vinyl records has not been able to keep up with demand. ∙ Classical opera ticket sales are not covering the cost of production

∙ The average industry profit margin is 40% for providing cell phone service. ∙ The production of the vinyl records has not been able to keep up with demand.

Which of the following highlight the free-rider problem associated with a public good? ∙ The presence of excludability of a good or service. ∙ There is no potential for revenue or profits. ∙ The presence of rivalry for a good or service. ∙ Non-payers can obtain benefit from the use of good or service.

∙ There is no potential for revenue or profits. ∙ Non-payers can obtain benefit from the use of good or service.

Which of the following goods would be considered a rivalrous private good? ∙ Tickets to a movie ∙ Police car ∙ Street Lights ∙ An air force fighter plane

∙ Tickets to a movie

Which of the following does the figure help to explain? ∙ When marginal benefit exceeds marginal cost, less abatement moves society toward economic efficiency ∙ When marginal cost exceeds marginal benefit, additional abatement reduces economic efficiency ∙ When marginal cost exceeds marginal benefit, additional abatement increases economic efficiency ∙ When marginal benefit exceeds marginal cost, additional abatement moves society toward economic efficiency

∙ When marginal cost exceeds marginal benefit, additional abatement reduces economic efficiency ∙ When marginal benefit exceeds marginal cost, additional abatement moves society toward economic efficiency

Which of the following would be considered private goods? ∙ automobiles ∙ clothing ∙ street lighting ∙ national defense

∙ automobiles ∙ clothing

Which of the following goods could be classified as nonexcludable? ∙ country roads ∙ Environmental Protection Agency ∙ i-Pods ∙ concert tickets

∙ country roads ∙ Environmental Protection Agency

Characteristics of pure private good include:

∙ excludability ∙ rivalry

Examples of a quasi-public goods include:

∙ fire departments ∙ libraries ∙ police

Resources should be shifted from the private to the public sector:

∙ if the cost of the forgone private goods is less than the benefit associated with the extra public goods ∙ if the benefit from the extra public goods exceeds the cost that results from having fewer private goods

The following are all examples of a public good, except: ∙ highway ∙ sneakers ∙ army helicopter ∙ police car ∙ fire station

∙ sneakers

The three options available to government in order to correct spillover benefits or the underallocation of resources are:

∙ subsidies to buyers ∙ subsidies to producers ∙government provision of public goods