micro final chapter 5

Factors that cause inefficiencies in a market or cause "market failure"

1. lack of competition 2. externalities 3. public goods 4. poor information

Criteria of ideal economic efficiency requires that (I) all actions generating more social benefit than cost be undertaken and (II) no actions generating more social cost than social benefit be undertaken. a. Both I and II are true. b. Both I and II are false. c. I is true; II is false. d. II is true; I is false.

a

Driving your automobile in Los Angeles during the rush hour causes externalities because a. it adds congestion and pollution from auto exhaust, reducing the welfare of others. b. gasoline is scarce and you must pay for it. c. gasoline is a public good. d. your actions will benefit others even though you will be unable to charge them for the service.

a

Externalities are due to which of the following? a. poorly defined or enforced private property rights b. individuals not caring sufficiently about the welfare of others c. the choice of a capitalist, rather than socialist, economy d. poor information on the part of buyers and sellers

a

In the absence of government intervention, goods with external costs tend to be a. overproduced. b. underproduced. c. efficiently produced. d. offset by goods generating external benefits.

a

Free rider

a person who receives the benefits of a good without helping pay for its cost

It is difficult for the market process to provide public goods because a. private firms generally cannot undertake large-scale projects. b. it will be difficult to get potential consumers to pay for such goods because there is not a direct link between payment for and receipt of the good. c. consumers do not really want public goods, even though such goods are best for them. d. individuals are generally made worse off by the production of public goods.

b

The problem created when it is difficult to exclude nonpaying customers is called the a. consumption-payment link problem. b. free-rider problem. c. public sector dilemma. d. asymmetric information problem.

b

Which of the following "goods" is the best example of a pure public good? a. highways b. national defense c. mail delivery d. welfare programs

b

Which of the following are the four major factors that may undermine the ability of the invisible hand to produce market efficiency? a. externalities, private goods, poorly informed buyers or sellers, lack of competition b. public goods, externalities, lack of competition, poorly informed buyers or sellers c. competition, poorly informed buyers or sellers, externalities, public goods d. public goods, lack of competition, well-informed buyers and sellers, externalities

b

A public good is defined as a good with which of the following characteristics? a. non-rivalry, rivalry b. excludability, rivalry c. non-rivalry, non-excludability d. rivalry, non-excludability

c

The absence of well-defined and enforceable private property rights often a. causes people to work together for the common good. b. improves society because it avoids the selfish actions of private property owners. c. causes difficulties for society due to externalities. d. brings about efficiency by providing incentives to conserve resources.

c

Which of the following correctly describes an external benefit resulting from an individual's purchase of a winter flu shot? a. The flu shot is cheaper than the cost of treatment when you get the flu. b. The income of doctors increases when you get the flu shot. c. The flu shot reduces the likelihood of others catching the flu. d. The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income.

c

Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce too a. much of both goods. b. little of both goods. c. much of the good that generates external benefits and too little of the good that generates external cost. d. little of the good that generates external benefits and too much of the good that generates the external cost.

d

The major distinction between private and public goods is that a. private goods are goods produced by private firms whereas public goods are goods produced by government--the public sector. b. unlike private goods, public goods are nonexcludable--it is difficult or impossible to prevent nonpaying customers from receiving the good. c. unlike private goods, public goods are nonrival in consumption--the consumption of a unit by one person does not detract from the amount available to others. d. both b and c are correct.

d

Which of the following activities is least likely to give rise to external costs or benefits? a. spraying to control mosquitos in your backyard b. driving one's car during rush hour c. inoculating your children during a flu epidemic d. buying a hamburger and eating it for lunch

d

Which of the following are ways in which the private market provides consumers with valuable information to help them make better decisions? a. brand names b. franchising c. private sector certification firms and consumer report magazines d. all of the above

d

Which one of the following would reduce the efficiency of the market process? a. promoting competitive markets b. protecting persons from fraud and theft c. providing a stable monetary environment d. protecting consumers by imposing legally mandated price ceilings

d

What is the "rule" you should apply when thinking on the margin?

engage in an activity as long as the additional benefit is greater than the additional cost, but stop when they are equal

externalities

exists when market fails to register fully costs and benefits

Provide an example of a positive externality.

external benefits - flu shot

Provide an example of a negative externality.

external cost - pollution

When a market has a negative externality, is the actual market quantity greater than or less than the efficient quantity?

greater

Public goods

jointly consumed goods (individuals can simultaneously enjoy the consumption of the same product or service) and non-excludable (impossible to restrict the availability of a good to only those who pay for it)

When a market has a negative externality, is the actual market price greater than or less than the efficient price?

less

When a market has a positive externality, is the actual market price greater than or less than the efficient price?

less

When a market has a positive externality, is the actual market quantity greater than or less than the efficient quantity?

less

example of public good

national defense, clean air, broadcast radio

External costs

present when the actions of individuals, group, or firms harm the property of others without their consent; this problem arises because property rights are imperfectly defined and/or enforced; ex: pollution

External benefits

present when the actions of individuals, groups, or firms generate benefits for nonparticipating parties; ex: flu shot

when competition is absent

sellers may gain by restricting output and raising price; too few units will be produced

poor information

the more information you have, the more efficient decision you can make, vise versa

Economic efficiency

wise use of available resources so as to obtain the greatest benefits possible