Market failures: public goods and externalities
non-rivalry
(in consumption) means that one person's consumption of a good does not preclude consumption of the good by others
supply; firm
A ______ -side market failure arises in situation in which a ______ does not have to pay the full cost of production.
negative externality
A ______ ______, also known as a spillover cost, is a market failure that occurs when a third party to a transaction experiences uncompensated costs.
Subsidy
A ______ to a producer is a payment from the government to decrease the producers' cost in order to encourage more output of a product beneficial to society.
demand; consumers
A _____________ -side market failure arises because it is impossible in certain cases to charge ____________ what they are willing to pay for a product. a) demand; producers b) demand; consumers c) supply; producer d) supply; consumers
positive
A ________________ externality (or spillover benefit) resulting in an under-allocation of resources to the market is a type of market failure.
benefit
A cost-______ analysis involves an assessment of marginal changes.
quasi
A good that could be produced by the market system (since exclusion is possible), but government provides it in order to avoid an under-allocation of resources is called a(n) _______ public good.
c) to levy taxes or fines specifically on the related good.
A policy approach to negative externalities is for government. a) not to levy taxes or fines specifically on the related good. b) to levy a taxes and quotes on the production of a specific good. c) to levy taxes or fines specifically on the related good. d) to levy only a quota on the production of a specific good.
spillover benefit
A positive externality is an uncompensated: a) spillover cost b) quasi-public goods c) free-rider d) spillover benefit
government
According to the Coase Theorem, _________________ should restrict its involvement in remedying external costs or benefits associated with the production and consumption of goods and services.
∙ Adams expects to receive $3 of extra benefit or utility from that unit
Adam's willingness-to-pay $3 for the second unit of the public good can best be explained by which of the following? ∙ Adams expects to receive $2 of extra benefit or utility from that unit. ∙ Adams expects to receive $3 of extra benefit or utility from that unit ∙ Adams expects to receive more than $3 of extra benefit or utility from that unit ∙ Adams expects to receive less than $3 of extra benefit or utility from that unit.
consumer; producer
All markets that have downward sloping demand curves and upward sloping supply curves yield _________________ and ______________ surplus.
third party
An externality causes some of the benefits or costs of a market transaction to be passed on to a: a) market supplier b) third party c) government entity d) market consumer
scarce; private
Because the economy's resources are ______, decisions to use more resources in the public sector will mean fewer resources for the ______ sector.
inversely
Consumer surplus and prices are _________________ related.
maximum
Consumer surplus is the difference between the ____________ price a consumer is willing to pay for a product and the actual price paid.
raise
Direct controls ________________ the marginal cost of production because firms must operate and maintain pollution control equipment.
allocative
Economic, but specifically ______________________ efficiency is achieved when the correct quantity of output is produced
equal to
Equilibrium quantity is efficient because the maximum willingness to pay is ____________ the minimum acceptable price. a) equal to b) greater than c) less than
national defence; street lighting
Examples of public goods include: a) apples b) concert tickets c) national defence d) street lighting
b) fire departments c) police d) libraries
Examples of quasi-public goods include: a) national defense b) fire departments c) police d) libraries
They increase it.
For a given supply curve, how do higher prices affect producer surplus? a) They increase it. b) They decrease it. c) It stays the same.
private
Goods that are provided by competitive markets, on the grounds that they are expected to generate profits, are known as _________ goods. a) public b) political c) private d) social
positive
Government can attempt to correct a market experiencing a ___________ externality by directly producing the good, or by subsidising producers and/or consumers of the good.
d) under-allocation
Government can correct the __________ of resources by subsidizing consumers of the product. a) over-allocation b) over-production c) efficiency d) under-allocation
direct; taxes; subsidies
Government can use _______ controls and specific _______ to counter negative externalities and it may provide _________ or public goods to deal with positive externalities.
d) The government providing a public good in order to correct for positive externalities where the positive externality is extremely large.
Government provision refers to: a) The government providing a public good in order to correct for positive externalities where the positive externality is extremely small. b) The government providing a private good in order to correct for positive externalities is extremely large. c) The government providing a public good in order to correct for negative externalities where the negative externality is extremely large. d) The government providing a public good in order to correct for positive externalities where the positive externality is extremely large.
Decrease; Right; Under
Government subsidies ____ producers' costs, shifting the supply curve to the ___ and correcting the ____-allocation of resources by producers.
public good
If a good is non-rival and non-excludable then it is known as a: a) public good b) private good c) quasi-public good
∙ Quantity point Qe represents the equilibrium output point. ∙ Quantity point Qo represents the optimal output point.
In the figure, which of the following statements is correct concerning positive externalities? ∙ Quantity point Qe represents the equilibrium output point. ∙ Quantity point Qo represents the optimal output point. ∙ Quantity point Qe represents the optimal output point. ∙ Quantity point Qo represents the equilibrium output point.
Demand and Supply
Market failures in competitive markets can be classified into ____-side and ____-side.
Free and competitive markets.
Produce equilibrium prices and quantities that maximize the combined consumer and producer surplus.
mutually
Property rights and economic self-interests enable parties to find a ____________ acceptable solution to externality problems.
b) if the benefit from the extra public goods exceeds the cost that results from having fewer private goods c) if the cost of the foregone private goods is less than the benefit associated with the extra public goods
Resources should be shifted from the private to the public sector: a) if the benefit from the extra public goods does not exceed the cost that results from having fewer private goods b) if the benefit from the extra public goods exceeds the cost that results from having fewer private goods c) if the cost of the foregone private goods is less than the benefit associated with the extra public goods d) if the cost of the foregone private goods is greater than the benefit associated with the extra public goods
under-allocation of resources to the beneficial product
Some individuals do not directly consume a product but accrue indirect benefits from others who do consume said product. As a result, there is a(n): a) under-allocation of resources to the beneficial product. b) over-allocation of resources to the beneficial product c) an urgency to maintain resources at the same level in the production of the beneficial product d) demand for government to mandate use of the beneficial product by society
estimate the demand for public goods
Surveys and public voting enable the government to: a) estimate the demand for public goods. b) estimate the demand for private goods. c) estimate the price elasticity of demand for private goods. d) estimate the price elasticity of demand for public goods.
c) total demand curve
The ______ measures society's marginal benefit of each unit of a particular good. a) optimal amount of a public good b) individual demand curve c) total demand curve d) budget line
excludability
The _____________ characteristic of a private good is the ability of a seller to prevent people who did not pay for a product from obtaining its benefits.
free-rider
The _______________ problem makes it difficult for firms to gather resources and profitably provide a good, as some may benefit from the good without contributing to the cost.
supply
The ________________ curve, also known as the marginal cost curve, shows the seller's minimum acceptable price at each unit of the product.
a) consumer surplus
The area depicted below the demand curve and above the market price is known as: a) consumer surplus b) producer surplus c) a surplus d) economic surplus e) a shortage
legislation
The direct way to reduce negative externalities from a certain activity is to pass ___ limiting that activity.
b) marginal-benefit curves.
The downward-sloping willingness-to-pay curves for public goods are also known as: a) total-cost curves b) marginal-benefit curves c) marginal-revenue curves d) marginal-cost curves e) total-benefit curves
a) An increase in demand illustrated as a shift outward of the demand curve. c) The subsidy reduces the price of purchasing the good. d) The quantity of the product purchased would rise to the economically optimal output eliminating the under-allocation of resources.
The effect of subsidies on consumers in correcting for positive externalities are: a) An increase in demand illustrated as a shift outward of the demand curve. b) The demand curve would shift inward because of an increase in supply. c) The subsidy reduces the price of purchasing the good. d) The quantity of the product purchased would rise to the economically optimal output eliminating the under-allocation of resources. e) The quantity purchased of the product would fall to the equilibrium output quantity eliminating the over-allocation of resources.
using direct controls imposing a specific charge/fine imposing a specific tax
The government can correct for the situation illustrated in the figure by: a) producing a public good b) using direct controls c) granting subsidies d) imposing a specific tax e) imposing a specific charge/fine
a) Marginal benefit equals marginal cost
The government can provide the efficient amount of a public good by adhering to which of the following rules? a) Marginal benefit equals marginal cost b) Total benefit is less than total cost c) Marginal benefit is less than marginal cost d) Total benefit equals total cost
under-allocation
The government has different ways of dealing with the ______ of resources resulting from positive externalities.
positive
The government will provide a public good where there are ________________ externalities and externalities are large.
a) stop the activity at, or as close as possible to, the point at which the marginal benefit equals the marginal cost c) consider increasing an activity, project, or output as long as the marginal benefit exceeds the marginal cost d) do not undertake a project for which the marginal cost exceeds the marginal benefit
The guidelines to follow when comparing different public project plans include: a) stop the activity at, or as close as possible to, the point at which the marginal benefit equals the marginal cost b) decrease an activity, project, or output as long as the marginal benefit exceeds the marginal cost c) consider increasing an activity, project, or output as long as the marginal benefit exceeds the marginal cost. d) do not undertake a project for which the marginal cost exceeds the marginal benefit
b) marginal benefit equals marginal cost
The intersection of the demand and supply curves at the equilibrium output indicates that: a) marginal costs exceed marginal benefits b) marginal benefit equals marginal cost c) the efficient level of output has not been reached d) marginal benefit exceeds marginal cost
c) as is true for private goods, successive units of any good yield less and less added benefit
The law of diminishing marginal utility is important to the provision of public goods because ______, thus explaining the downward slope of the collective demand curve. a) as is true for private goods, successive units of any good yield more and more added costs b) as is true for private goods, successive units of any good yield less and less added benefit c) as is true for private goods, successive units of any good yield less and less added costs d) as is true for private goods, successive units of any good yield more and more added benefit
supply
The marginal cost or _______________ curve measures society's marginal cost of each unit produced.
only the direct, private benefits to those who demand and use the product
The market demand curve for positive externalities reflects: a) only the direct, collective benefits to society b) only the direct, public benefits to society c) only the direct, public benefits to one individual d) only the direct, private benefits to those who demand and use the product
equals
The optimal quantity of a public good will be where marginal benefit ________ marginal cost.
c) comparing marginal costs to marginal benefits
The optimal size and scope of a project is determined by: a) comparing total costs to total benefits b) comparing marginal costs to total benefits c) comparing marginal costs to marginal benefits d) comparing total revenues and total profits
costs, benefits
The optimal size and scope of a project or a government regulation are determined by comparing marginal ______________ and marginal _____________.
free-rider
The situation when people can receive the benefits from a good without having to pay for it is known as ______ problem. a) free-rider b) quasi-public c) allocation d) public good
a) subsidies to producers. b) subsidies to buyers. f) government provision of public goods.
The three options available to government in order to correct spillover benefits or the under-allocation of resources are: a) subsidies to producers. b) subsidies to buyers. c) a tax on the government provisions of public goods. d) a tax on buyers. e) a tax on producers. f) government provision of public goods.
resources
The use of _________________ is only efficient if all benefits and costs are fully reflected in the market demand and supply curves
positive
There is a(n) _____________ relationship between equilibrium price and the amount of producer surplus.
Both children will be enrolled in the school A public school bus picks up each child
Two children are about to start public school. One child comes from a local American family and other comes from a family visiting America. Which of the following statements represent the characteristic of non-rivalry of a public good? ∙ Both children will be enrolled in the school ∙ A public school bus picks up each child ∙ Only the child of working American parents will be enrolled because there are no classroom seats left ∙ The child visiting America will not be permitted to enroll in the school because there are no classroom seats left
a) financial aid b) educational grants
Two examples of government corrections for an under-allocation of resources in a market (a positive externality) are: a) financial aid b) educational grants c) taxing pharmaceutical suppliers d) setting market prices.
Legislation; Specific taxes
Two types of government solutions for negative externalities are: a) legislation b) subsidies c) Credit lines to firms d) specific taxes e) transfer payments
externality
Water and air pollution both result in a market failure known as a(n) negative ______, or a spillover cost.
d) Maximum willingness to pay equals minimum acceptable price. a) Marginal benefit equals marginal cost.
What conditions must exist for allocative efficiency to occur? a) Marginal benefit must equal marginal cost. b) Price must be equal to the lowest average total cost of production c) Combined consumer and producer surplus must be at minimum. d) The maximum willingness to pay must equal the minimum acceptable price.
Allocative efficiency and productive efficiency.
What is achieved at equilibrium quantity? a) a surplus of products b) Allocative efficiency c) productive efficiency d) a price ceiling e) a price floor
a) Efficiency losses or deadweight losses
What is created when production does not provide the equilibrium quantity? a) Efficiency losses or deadweight losses b) No change in efficiency c) Efficiency or deadweight gains
demand side market failure
What is it called when demand fails to account for the buyer's full willingness to pay?
negative externalities
What kind of market situation is present when the optimal output is less than the equilibrium output and resources are over-allocated? a) demand-side market failure b) price ceiling c) negative externalities d) positive externalities
its supply curve does not capture all the costs legitimately associated with the production of its goods.
When a producer's marginal cost or supply curve is to the right of (or below) the full cost marginal cost curve, this represents the fact that: a) its supply curve does not capture all the costs legitimately associated with the production of its good b) its supply curve does not capture all the revenue legitimately associated with the production of its goods c) its supply curve captures all the costs legitimately associated with the production of its good d) its demand curve does not capture all the costs legitimately associated with the production of its good
The demand for the good causing the externality would rise resulting in the demand curve shifting outward. The supply for the good causing the externality would rise resulting in the supply curve shifting outward.
When government acts to correct a market which is experiencing a positive externality, what could happen in the market? a) The demand for the good causing the externality would fall resulting in the demand curve shifting inward. b)The supply for the good causing the externality would rise resulting in the supply curve shifting outward. c) The supply for the good causing the externality would fall resulting in the supply curve shifting inward. d)The demand for the good causing the externality would rise resulting in the demand curve shifting outward.
Producer subsidy.
When government gives money to public colleges and universities in order to correct for an under-allocation of resources or underproduction of education, this is called a: a) Producer subsidy. b) consumer subsidy c) free-rider problem d) quasi-public good
b) left; below
When positive external benefits occur, the market demand curve lies to the _________ of, or ____________ the full-benefits demand curve. a) left; above b) left; below c) right; above d) right; below
b) over-allocated; negative
When producers intentionally or unintentionally pass some of the costs of production onto the community, resources for production are ___________ to the commodity, producing too much output and causing ___________ externalities to occur. a) under-allocated; positive b) over-allocated; negative c) under-allocated;negative d) over-allocated;deadweight e)over-allocated;positive
rivalry
When the purchase and consumption of a good makes the purchase and consumption of that good unavailable to another person, it is known as _____.
a) Education b) Health care e) Immunizations.
Which of the following are examples of markets that are more likely to experience positive externalities? a) Education b) Health care c) Airline travel d) Gas & electric generation e) Immunizations.
a) Post office b) Armed services submarines d) Parks
Which of the following are examples of public and quasi-public goods and services? a) Post office b) Armed services submarines c) Televisions d) Parks e) Clothing
c) Armed services submarines d) Parks e) Post offices
Which of the following are examples of public and quasi-public goods and services? a) Televisions b) Clothing c) Armed services submarines d) Parks e) Post offices
a) Tax credit to vaccine drug makers. b) Cash payment from government to pharmaceutical firms making vaccines.
Which of the following are subsidies to producers to correct for an under-allocation of resources caused by a lack of consumer demand for a product beneficial to society? a) Tax credit to vaccine drug makers. b) Cash payment from government to pharmaceutical firms making vaccines. c) Coupon to parents to lower price of vaccination for child. d) Tax credit to parents for vaccinating a child.
a) A competitive market makes private goods available to consumers. b) A competitive market allocates resources efficiently.
Which of the following are true statements about competitive markets? a) A competitive market makes private goods available to consumers. b) A competitive market allocates resources efficiently. c) A competitive market always results in underproduction of products. d) A competitive market always results in overproduction of products
a) Cost-benefit analysis
Which of the following can help government decide on the size and scope to which a public project should be pursued? a) Cost-benefit analysis b) Demand analysis c) Demand and supply analysis d) Supply analysis e) Present value analysis
a) limits on allowable pollution e) uniform emission standards
Which of the following direct controls have dominated American air pollution policy a) limits on allowable pollution b) no limits on allowable pollution c) flexible emission standards d) heterogeneous emission standards e) uniform emission standards
a) Mary drinks a can of Pepsi. c) John eats an apple for lunch.
Which of the following exemplify a rivalrous good? a) Mary drinks a can of Pepsi. b) The National Guard offers your town help. c) John eats an apple for lunch. d) Jeff uses the public library
Country roads and Environmental Protection Agency
Which of the following goods could be classified as nonexcludable? ∙ Country roads ∙ Environmental Protection Agency ∙ i-Pods ∙ Concert tickets
Tickets to a movie
Which of the following goods would be considered a rivalrous private good? ∙ Tickets to a movie ∙ Police car ∙ Street Lights ∙ An air force fighter plane
a) Demand-side market failure
Which of the following happens when a market does not reflect consumers' full willingness to pay for a good or service? a) Demand-side market failure b) Supply-side market failure c) Consumer surplus d) Productive efficiency failure e) Allocative efficiency failure
a) There is no potential for revenue or profits. d) Non-payers can obtain benefit from the use of a good or service.
Which of the following highlight the free-rider problem associated with a public good? a) There is no potential for revenue or profits. b) The presence of excludability of a good or service. c) The presence of rivalry for a good or service. d) Non-payers can obtain benefit from the use of a good or service.
a) Negative externality
Which of the following occurs due to over-allocation of resources to the production of a good or service? a) Negative externality b) Spillover benefit c) Economic surplus d) Positive externality.
Deadweight loss.
Which of the following refers to reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product? a) Dead-weight loss b) Surplus loss c) Inefficiency loss d) Triangle loss
b) The average industry profit margin is 40% for providing cell phone service. d) The production of vinyl records has not been able to keep up with demand.
Which of the following scenarios represents a reason for firms to "tap the market"? a) Sale of traditional tube TVs has fallen 95% in the last 3 years. b) The average industry profit margin is 40% for providing cell phone service. c) Classical opera ticket sales are not covering the cost of production. d) The production of vinyl records has not been able to keep up with demand.
Clothing and Automobiles
Which of the following would be considered private goods? a) Street lighting b) National defence c) Clothing d) Automobiles
The owner of a large parcel of forestland considering a plan to clear-cut thousands of acres of mature fir tree. The owner of a resort located adjacent to the forestland affected.
Which of the following would benefit from bargaining, as suggested by the Coase Theorem?
Excludability
_______________ means that buyers who are willing and able to pay the market price for the product obtain its benefits, but those unable or unwilling to pay the price do not.
Producer
_________________ surplus is the difference between the actual price a seller receives and the minimum acceptable price
Consumer surplus
_____________________ is the difference between the maximum price a consumer is willing to pay for a product and the actual price paid.
An externality
a cost or a benefit accruing to an individual or group, a third party, that is external to a market transaction is known as:
taxes
government can finance the provision of public goods through ___________.
economic efficiency when externalities affect large numbers of people or when community interests are at stake.
government intervention may be needed to achieve: a) profit maximization when externalities affect small numbers of people or when household interests are at stake. b) economic efficiency when externalities affect small numbers of people or when household interests are at stake. c) economic efficiency when externalities affect large numbers of people or when community interests are at stake.
supply sided market failure
means that a supply curve does not reflect the full cost of producing a good
public
national defense is an example of a ______________ good.
supply
points on the ________________ curve represent marginal cost.
tax
public goods are financed through government _____ revenue
free
the ______________ rider problem occurs when a person benefits from a good for which he or she has not paid.
rivalry
the characteristics of a private good include _______________ and excludability.
free
the situation when people can receive the benefits from a good without having to pay for it is called the ____________ -rider problem.
the maximum willingness to pay exceeds acceptable prices
the size of the deadweight loss will get smaller when output is increased and: a) the producer's surplus exceeds consumer surplus. b) the maximum willingness to pay exceeds acceptable prices c) marginal cost exceeds marginal benefit for the consumer.
cost
the supply curve for any good private or public is its marginal ___________ curve
consumer subsidy
when government gives money to students in the form of grants or low-interest loans in order to correct for an under-allocation of resources, this is called a: a) transfer payment b) public good c) producer subsidy d) consumer subsidy
Non-excludability and Non-rivalry
which of the following characteristics distinguish public goods from private goods? a) Excludability b) Non-rivalry c) Non-excludability d) Rivalry
