Chapter 5/6 Economics Exam Questions

Government can correct for negative externalities by

Increasing taxes or regulation.

Refer to the above figures. Prior to the shift of the curves, which panel and which curve involve the existence of negative externality?

Panel 1 and S1

Market failures

Prevent the price system from attaining economic efficiency

Suppose that one firm produces a product that results in negative external costs to society. This information suggests that

Resources are over-allocated to the firm.

Markets tend to under-allocate resources to the production of a good when

There are positive externalities.

When the price system fails to generate an efficient allocation of resources

Too few or too many goods will be produced.

A negative externality is a situation in which

A cost associated with an economic activity is borne by a third party.

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.

Which of the following leads to an under-allocation of resources to a specific economic activity?

External benefits.

Which of the following often involves positive external benefits?

Inoculation programs.

Unit excise taxes imposed on gasoline, alcohol, and cigarettes are

Largely paid by consumers because they are not very responsive to price changes.

The imposition of a unit excise tax on beer will

Lower equilibrium quantity and raise equilibrium price in the market.

FullSizeRender.jpg Refer to the above figures. Which of the panels would be consistent with the situation in which external benefits exist?

Panel 2.

IMG_8422.jpg According to the above figure, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be

Q1.

According to the above figure, then the supply curve will

Shift from S1 to S2.

Assume the production of a good gives rise to external benefits. The government may increase efficiency by

Subsidizing consumption of the good.

When market failures occur

The government can step in to correct the market failure.

The price system allocates resources efficiently except when

The production of a good effects parties other than its buyers and sellers.