Chapter 7 Concept Quiz

C. public goods The textbook mentions that cost-benefit analysis is used to determine whether the benefits of providing a public good outweigh the costs.

For which type of good does the textbook describe the use of cost-benefit analysis? A. private goods B. club goods C. public goods D. All goods that are excludable

C. pools Public goods are both nonrival and nonexcludable. Since some pools are subject to congestion, they can be considered rival. In addition, most pools require a membership, identification, or admission fee before entry, which makes them excludable.

Which of the following is NOT an example of a public good? A. street performers B. national defense C. pools D. lighthouses

B. the number of parties involved is large. The Coase theorem states that if there are no barriers to negotiation, interested parties will bargain to settle any externalities that exist. As the number of parties involved increases, the bargaining costs increases and reaching a private solution becomes impossible.

Based on the Coase theorem, private solutions to externalities will be impossible if A. the number of parties involved is small. B. the number of parties involved is large. C. there are no barriers to negotiations. D. everyone has different preferences.

D. nonrival and excludable. Digitized music is nonrival because it can be transferred quickly to numerous parties; more than one person can use it as the same time. However, copyright laws mandate that a person must pay to acquire digitized music that is copyrighted. The requirement to purchase makes digitized music excludable.

Copyright laws make the digital music you buy A. rival and excludable. B. nonrival and nonexcludable. C. rival and nonexcludable. D. nonrival and excludable.

C. public good Cost-benefit analysis is a process that is often used to determine whether the benefits of providing a public good outweigh the costs. It is relatedly easy to determine the cost of providing a public good but the benefit of providing a public good is hard to measure.

Cost-benefit analysis is used to determine whether the benefit of providing a _________ outweigh the costs. A. negative externality B. positive externality C. public good D. price signal

C. sometimes negative and sometimes positive. Externalities are the costs or benefits of a market activity that affect a third party. Externalities can be positive or negative.

Externalities are A. always positive. B. always negative. C. sometimes negative and sometimes positive. D. neutral

A. greater than Social costs are the sum of the internal costs and the external costs of an activity. If there is a negative externality from an activity, it means, by definition, that external costs exist. Adding these external costs to the internal costs of the activity results in social costs that are greater than the internal costs alone.

In the case of negative externalities, social costs are ________ internal costs. A. greater than B. less than C. equal to D. sometimes greater than and sometimes less than

B. underproduced Public goods can be jointly consumed by more than one person, and nonpayers are difficult to exclude. Since consumers cannot be excluded if they do not pay, there is an incentive to "free-ride" off of others' contribution to the public good. This leads a market economy to underproduce public goods.

Public goods are ________ in the market. A. overproduced B. underproduced C. produced efficiently D. produced inefficiently

A. higher; higher To account for the social benefits from the positive externality, the demand curve must shift to the right. The social optimum occurs where the new demand curve crosses the supply curve. The social optimum compared to the market equilibrium yields a higher price and a higher output level.

The graph below portrays a market for a good whose consumption causes a positive externality. The curve marked D(Internal) shows the market demand when consumers pay attention to only their internal benefits; the curve D(Social) shows demand when consumers observe social benefits. The socially optimal price is _______ than the market equilibrium price, and the socially optimal output level is ______ than the market equilibrium output level. A. higher; higher B. lower; lower C. lower; higher D. higher; lower

D. higher; lower To account for the social costs from a negative externality, the supply curve shifts left. The new social optimum occurs where the new supply curve crosses the demand curve. The price at the social optimum is higher than the market equilibrium, and the output at the new social optimum is lower.

The graph below portrays a market for a good whose production causes a negative externality The curve marked S(internal) shows the market supply when producers pay only their internal costs; the curve markers S(social) shows supply when producers pay social costs. The social optimal price is ________ than the market equilibrium price, and the social optimal output level is _______ than the market equilibrium output level. A. higher; higher B. lower; lower C. lower; higher D. higher; lower

B. The government provides the good and then pays or its production through taxation. A free-rider problem exists when someone receives a benefit without having to pay for it. Public goods that a society deems essential are normally provided by the government and funded by tax revenues. Since many people pay taxes, this almost eliminates the free-rider problem.

Which of the following is a common solution to the free-rider problem? A. The government subsidizes consumption of the good. B. The government provides the good and then pays for its production through taxation. C. The government provides vouchers to consumers of the good. D. The government encourages payment for the good through advertising campaigns.

A. a market that fails to allocate resources efficiently. Market failure occurs when there is an inefficient allocation of resources in a market. Externalities are a type of market failure. For a market to work as efficiently as possible, two things must happen. First, each participant must be able to evaluate the internal costs of participation. Second, for a market to work efficiently, the external cots of production must be internalized.

The term market failure refers to A. a market that fails to allocate resources efficiently. B. an unsuccessful advertising campaign, which reduces demand. C. ruthless competition among firms. D. firms' failure to provide quality products.

A. taxes Taxes are a solution to negative externalities because, applied correctly, they can help internalize the negative social cost of an action.

Which of the following is a solution to negative externalities? A. taxes B. price ceilings C. tax deductions for charitable contributions D. subsidies

Private goods have two characteristics: they are excludable and rival in consumption. Pizza is an excludable good, because consumers cannot use it without paying the for it. Pizza is also a rival good, since only one person can eat the same piece of pizza.

Which of the following is an example of a private good? A. pizza B. constellations C. radio stations D. uncrowded beaches

A. less prevalent. Private property provides an exclusive right of ownership that allows for the use and especially the exchange of property. Ownership creates incentives to maintain, protect, and conserve property, and to listen to the wishes of others. These factors minimize externalities when private property rights are in place.

Where there are established, well-defined private property rights, externalities will be A. less prevalent. B. more prevalent. C. not dependent on private property rights. D. dependent on private property rights.

C. the overgrazing of common pastures shared by herders in pastoral communities Tragedy of the commons occurs when a good that is rival in consumption but non-excludable becomes depleted. One example is when pastures become devoid of grass because of overgrazing. The other answer choices here are examples of negative externalities but are not examples of the tragedy of the commons.

Which of the following is an example of the tragedy of the commons? A. the collapse of wild fish populations due to pollution from cruise ships B. air quality degradation due to pollution C. the overgrazing of common pastures shared by herders in pastoral communities D. a student plays loud music with the window open all night in a quiet, residential neighborhood

A. property maintenance Maintaining property is incentivized by private property rights.

Which of the following is incentivized by private property rights? A. property maintenance B. positive externalities C. negative externalities D. altruism