Quiz 7

Suppose the actions of producers of a good generate negative externalities, in order to generate the ideal efficient equilibrium, government should

Institute a Pigouvian tax for exactly the amount of the externality

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and a market output of 1.000 units. How does this outcome compare to the efficient, ideal equilibrium?

The efficient price would be higher than $25 while the efficient output would be less than 1,000 units

Which of the following accurately 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

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 of others to catch the flu

Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will 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 would be too high

Which of the following would be true in this normal market economy if the firms in he industry were instead able to get government licensing restrictions to limit competition in the market?

The restricted market supply b=would be s2(shifted to the left), resulting in a higher price and a less than efficient level of output. Limiting the competition limits supply (so with less suppliers the supply curve shifts in) which makes prices more expensive and quantity produced less.

Economic efficiency requires that

all economic activity equally generating more benefits than costs be undertaken

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

pollution is an externality in this market, since producers of steel do not bear the costs of pollution

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

too much of a polluting good.If the cost is external it means that the cost is not taken into account by the market participants (buyers and sellers), if those costs are not taken into account the producers will produce as if those costs did not exist, if their private costs reflected the actual costs they would produce less (because it would be more expensive). -Each quantity produced, more pollution created