Microeconomics Chapter 5—Difficult Cases for the Market and the Role of Government

Refer to Figure 5-4. The efficient price and quantity are

$1.80 and 35 units, respectively

Figure 5-3 illustrates the market for a product that generates an external benefit. D1 is the private market demand curve, while D2 is the demand curve including the external benefit. Which of the following is true?

Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency.

Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the private market supply curve, while S2 is the supply curve including the external cost. Which of the following is true?

Relative to economic efficiency, output of the good will be too large and the price too low.

Supposed the actions of the producers of a good generate an external benefit which results in the actual market price of $15 and market output of 614 units. How does this outcome compare to the efficient, ideal equilibrium?

The efficient price would be higher than $15 while the efficient output would be greater than 614 units

Suppose external benefits are present in a market which results in the actual market price of $62 and market output of 3,000 units. How does this outcome compare to the efficient, ideal equilibrium?

The efficient price would be higher than $62.

Which of the following correctly describes an external benefit resulting from an individual's purchase of a winter flu shot?

The flu shot reduces the likelihood of others catching the flu.

Supposed paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of paper in a competitive market compare with their values under conditions of ideal economic efficiency?

The price will be too low, and the output will be too large.

Which of the following best explains why making automobiles completely safe is not efficient?

after some level of safety is reached, making cars even safer will not be worth the additional cost.

Which of the following provides an example of an externality?

all of the above

The major distinction between private and public goods is that

both b and c are correct.

Which of the following activities is least likely to give rise to external costs or benefits?

buying a hamburger and eating it for lunch

Externalities

cause the price systems to misallocate resources

Markets provide the efficient amount of a good or service when

competition is present and externalities and public goods are absent.

Sellers have a strong incentive to lobby government for legal restrictions that would reduce intensity of competition in their market because

competition tends to result in lower prices and lower profits

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

firms cost of producing electricity will be lower than the community's true opportunity cost

A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should

gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it.

A sound legal system that protects individuals and their property,

is vital to the smooth operation of markets.

It is difficult for the market process to provide public goods because

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.

Compared to ideal economic efficiency, when the production of a good generates external costs, competitive markets will likely result in an output that is too

large and a price that is too low.

Which of the following would be a protective function of government?

legal enforcement of contracts and rules against fraud

From the standpoint of economic efficiency, markets tend to provide

less of a public good than would be efficient.

A good is considered nonrival-in-consumption if

many individuals can share in the consumption of the same unit of the good.

If consumption of education creates an external benefit, the in order to increase efficiency relative to the outcome determined by private decisions,

more education must be produced.

Which of the following "goods" is the best example of a pure public good?

national defense

If it is impossible or very costly to exclude nonpaying customers from receiving a good, the good is considered to be

nonexcludable.

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

nonrival-in-consumption.

A market transaction causes an externality if someone

not directly involved in the transaction receives uncompensated benefits or cost from it.

Externalities are due to which of the following?

poorly defined or enforced private property rights

There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the

protection of the rights of individuals to their person and property and the provision goods that cannot easily be provided through markets.

A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a

public good.

The "free rider problem" occurs in connection with

public goods.

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

raising price and reducing output

In economics, a free rider is the term used for a person who

receives the benefit of a good without contributing to its costs of production.

An item purchased often by the same buyer is known as a

repeat-purchase item.

If the construction of a new hospital would create $6 million worth of benefits for citizens and would costs $8 million to construct, then using the criterion of economic efficiency, the hospital

should not be built

Compared to ideal economic efficiency, when the production of a good generates external benefits, competitive markets will likely result in an output that is too

small and a price that is too low.

Because the benefits derived from an activity decline as it is expanded, it is generally wise to

stop the activity before perfection is reached..

When production of a good generates external cost, the

supply curve for the good will understate the true social cost of producing the good.

The key explanation for the prevalence of waterway pollution is

that waterways are often an open access, commonly owned resource

When economist say that an activity meets the criterion for economic efficiency, they mean a majority of citizens favor the activity.

the benefits that result from the activity exceed the costs.

Which of the following correctly describes the external benefit resulting from an individual's purchase of a winter flu shot?

the flu shot reduces the likelihood other will catch the flu.

When the consumption of a good generates an external benefit,

the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.

When the free-rider problem exists,

the market will devote too few resources to the production of the good.

Sellers will tend to be most concerned with customer satisfaction when

they depend on repeat customers for most of their business.

As a general rule, if pollution costs are external, firms will produce

too much of a polluting good.