Homework 4 (Chapters 5, 6)

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 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 of leads to an underallocation of resources to a specific economic activity?

external benefit

Government can correct for negative externalities by

increasing taxes or regulation

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

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

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 affects parties other than its buyers and sellers

Markets tend to underallocate 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