ENVECON

If Bob is willing to pay $13 for a bag of oranges and the actual price is $8, what is the amount of his consumer surplus?

5

Which of the following could give rise to a negative externality?

A coal generated power plant

Which of the following are subsidies to consumers to correct for an underallocation of resources by producers?

A discount coupon to inoculate children against classic childhood diseases A tax credit for purchasing an electric car

What must the market supply curve reflect for a competitive market to produce efficient outcomes?

All the costs of production, including those that fall to persons not directly involved with production

What causes the shift in the supply curve for a firm targeted by a Pigovian tax?

An increase in marginal cost

Which of the following are subsidies to producers to correct for an underallocation of resources caused by a lack of consumer demand for a product beneficial to society?

Cash payment from government to pharmaceutical firms making vaccines Tax credit to vaccine drug makers

Assuming demand reflects consumers' full willingness to pay and supply reflects all costs, which of the following are scenarios that would result in efficiency losses?

Consumers' maximum willingness to pay exceeds producers' minimum acceptable price. Consumers' maximum willingness to pay is less than producers' minimum acceptable price.

Which of the following refers to reductions of combined consumer and producer surplus associated with the underproduction or overproduction of a good or service?

Deadweight loss

How do positive externalities affect demand curves?

Demand curves shift to the left.

Which type of intervention has the government primarily used to discourage or limit harmful air pollution?

Direct controls

The government can correct for a situation in which negative externalities result in the overallocation of resources by using which of the following types of interventions?

Direct controls Pigovian taxes

Which of the following markets are more likely to experience positive externalities?

Education Immunizations

What is created when output does not meet the equilibrium quantity?

Efficiency (deadweight) losses

Which of the following are direct controls that have been used by the US government to address pollution?

Emission standards Clean-water legislation Toxic-waste laws

When negative externalities are present, the production of which units result in a net loss to society?

Every unit above optimal output

Which of the following is an example of government provision of a good or service?

Free public school for all children

Which of the following is a common remedy when externalities affect large numbers of people or community interests are at stake?

Government intervention

Identify policies for coping with the underallocation of resources associated with positive externalities.

Government provision Subsidies to producers Subsidies to consumers

Which of the following is a policy approach to negative externalities?

Levying taxes or charges on the related good

Which of the following statements is true regarding the marginal costs and benefits to society for every unit of production between optimal output and equilibrium output?

Marginal costs exceed marginal benefits.

Which term describes the inability of a market to bring about the allocation of resources that best satisfies the wants of society?

Market Failures

Legislation limiting specific activities is the most direct method of addressing which market situation?

Negative externalities

What kind of market situation results in equilibrium output being larger than optimal output, leading to an overallocation of resources?

Negative externalities

Which of the following results in an overallocation of resources to the production of a good or service?

Negative externality

Which of the following are signs of a market failure?

Overallocation of resources Underallocation of resources

Total surplus, or social surplus, is shared between which groups?

Producers and consumers

Solar panels provide a benefit those who buy them by reducing their electricity bill, but they also benefit society as a whole by reducing pollution and resource consumption. Because producers calculate demand based on actual purchases rather than total benefit, solar panels are underproduced. Which types of government intervention could be used to counter this situation?

Subsidies Government provision

Which government interventions can be used to counter underproduction caused by positive externalities?

Subsidies Government provision

To encourage consumers to buy more energy-efficient appliances, the government offers cash rebates to consumers who purchase products that have received Energy Star certification. This is an example of which type of government intervention?

Subsidies to buyers

Which type of government intervention is likely to result in the demand curve shifting to the right (outward)?

Subsidies to buyers

To encourage the development of beneficial technologies, the government provides direct payments to independent research laboratories. This is an example of which type of government intervention?

Subsidies to producers

Which type of government intervention seeks to increase the supply of a beneficial good?

Subsidies to producers

A specific tax applied to the producer of a good in order to correct a negative externality will cause what change to the market for that good?

Supply curve shifts left

Identify policies for coping with the overallocation of resources caused by negative externalities.

Taxes on producers Direct controls

Which of the following are likely to occur if the technology for pollution-control equipment improves noticeably?

The cost of pollution abatement would fall. The optimal quantity level of abatement would rise. The marginal cost curve of abatement would shift rightward.

What can be expected to occur in the market when the government makes use of buyer subsidies to correct a positive externality?

The demand for the good causing the externality will rise, resulting in the demand curve shifting outward.

Why does a firm's supply curve shift to the right when negative externalities are present?

The firm is not paying the full cost of production

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

The government

Which of the following are the effects of a subsidy to producers?

The quantity of the product increases to the economically optimal quantity, eliminating the underallocation of resources. The supply curve shifts to the right because of an increase in supply. The subsidy reduces the marginal cost of producing the good.

Why does allocative efficiency occur at the equilibrium quantity, where maximum willingness to pay is exactly equal to the minimum acceptable price?

The quantity produced maximizes the sum of consumer and producer surplus.

What is the purpose of a Pigovian tax?

To discourage the production of a good that causes negative externalities

Which of the following are situations in which governments likely to intervene in markets?

When community interests are at stake When externalities affect large numbers of people

Which of the following are situations in which governments likely to intervene in markets?

When externalities affect large numbers of people When community interests are at stake

In which situation are governments likely to use subsidies or government provision to achieve economic efficiency?

When positive externalities cause underproduction

When is allocative efficiency of a product achieved?

When the correct quantity of the product is produced relative to other goods and services

The U.S. government largely eradicated the crippling disease polio by ______.

administering free vaccines to all children

What is achieved when output is produced at the point at which maximum willingness to pay exactly equals the minimum acceptable price?

allocative efficiency

A deadweight loss is also known as ______.

an efficiency loss

___ is defined as the difference between the maximum price a consumer is willing to pay for a product and the actual price.

consumer surplus

According to the law of ______, completely eliminating a negative externality may not be desirable due to marginal costs eventually exceeding marginal benefits.

diminishing returns

Equilibrium quantity is efficient because the maximum willingness to pay is ______ the minimum acceptable price.

equal to

Government provision refers to the government's providing a good or service for free in order to correct for ______.

extremely large positive externalities

A government provision is a good or service provided _______ in order to correct for very large _______ externalities.

for free to everyone; positive

People who receive the benefits from a good without having to pay for it are known as ______.

free riders

When positive externalities occur, the market demand curve lies to the ______ the total-benefits demand curve.

left of (below)

A less-direct action than passing legislation to correct a negative externality is for the government to ______.

levy a specific tax on the producers of the related good

As a result of negative externalities that are imposed by producers, costs are transferred to society and therefore firms incur ______ production costs and have supply curves that are ______ the full cost associated with producing their goods.

lower; below

What do points on the demand curve represent?

marginal benefit

The intersection of the demand and supply curves at the equilibrium output indicates that ______.

marginal benefit equals marginal cost

The ______ curve for positive externalities reflects the benefit to the individuals who pay for the product

market demand

Allocative efficiency occurs at quantity levels where the combined consumer and producer surplus is ______.

maximized

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

maximum

If a market transaction imposes an uncompensated cost on a third party not directly involved in the transaction, the transaction results in a market failure known as a ______.

negative externality

The market demand curve for positive externalities reflects ______.

only the benefits to those who pay for and use the product

Negative externalities (or spillover costs) result in a(n) ______ of resources to the production of the good.

overallocation

A negative externality results when there is an ______ of resources to the production of a good and too ______ units are produced.

overallocation; many

The direct way to reduce negative externalities from a certain activity is to ______.

pass legislation limiting that activity

Vaccinations against common diseases are an example of a ______ externality.

positive

What is the difference between the actual price a seller receives and the minimum acceptable price?

producer surplus

What is achieved when competition forces producers to minimize the per-unit cost of the output they produce?

productive efficiency

Negative externalities, such as pollution, ______ the utility of those affected.

reduce

Government subsidies decrease producers' costs, shifting the supply curve to the ______ and correcting the ______ of resources by producers.

right; underallocation

When government subsidizes producers, it is attempting to ______.

shift supply to the right

When a producer's supply curve is to the right of (or below) the total-cost supply curve, this represents the fact that its ______.

supply curve does not capture all the costs legitimately associated with the production of its goods

Direct controls on pollution raise the marginal cost of production because ______.

the firms must purchase, operate, and maintain pollution-control equipment

The size of the deadweight loss will get smaller when output is increased and ______.

the maximum willingness to pay exceeds acceptable prices

Private bargaining, markets for externality rights, specific taxes, liability rules and lawsuits, and direct controls are all examples of methods for correcting ______.

the overallocation of resources caused by negative externalities

In competitive markets where demand curves reflect buyers' full willingness to pay and supply curves reflect all the costs facing sellers, what is maximized when output equals the equilibrium quantity?

the sum of consumer and producer surplus

An externality causes some of the benefits or costs of a market transaction to be passed on to a ______.

third party

Which term refers to the net benefits to society from the conversion of scarce resource inputs into various forms of output?

total surplus

Government can correct the ______ of resources by subsidizing consumers of the product.

underallocation

Private bargaining, subsidies to producers, subsidies to consumers, and government provisions are all ways for correcting the ______ of resources associated with ______ externalities.

underallocation; positive

When positive externalities exist, demand curves fail to reflect the willingness to pay of the people who receive the positive externality, resulting in products being ______.

underproduced