Chapter 14 Econ

Market failure is said to occur whenever:

private markets do not allocate resources in the most economically desirable way.

Which of the following is an example of market failure?

all of these

Demand-side market failures occur when:

the demand and supply curves don’t reflect consumers’ full willingness to pay for a good or service.

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can’t be made to pay. Because those who put up lights are unable to charge others to view them they don’t put up as many lights as people would like. This is an example of a:

demand-side market failure

Supply-side market failures occur when:

the demand and supply curves don’t reflect the full cost of producing a good or service.

From society’s perspective in the presence of a supply-side market failure the last unit of a good produced typically:

costs more to produce than it provides in benefits.

The trains of the Transcontinental Railway Company when shipping goods sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes what has occurred?

Supply-side market failure

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers’ full willingness to pay.

If the demand curve reflects consumers’ full willingness to pay and the supply curve reflects all costs of production then which of the following is true?

The benefit surpluses shared between consumers and producers will be maximized.

Consumer surplus:

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

Producer surplus:

is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller Nathan was $30. Jennifer experiences:

a consumer surplus of $9 and Nathan experiences a producer surplus of $3.

Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller Tony was $140. Amanda experiences:

a consumer surplus of $10 and Tony experiences a producer surplus of $190.

Graphically if the supply and demand curves are linear consumer surplus is measured as the triangle:

under the demand curve and above the actual price.

Graphically producer surplus is measured as the area:

above the supply curve and below the actual price.

A producer’s minimum acceptable price for a particular unit of a good:

equals the marginal cost of producing that particular unit.

Refer to the above diagram. Assuming equilibrium price P1 consumer surplus is represented by areas:

a + b.

Refer to the above diagram. Assuming equilibrium price P1 producer surplus is represented by areas:

c + d.

Refer to the above diagram. The area that identifies the maximum sum of consumer surplus and producer surplus is:

a + b + c + d.

Refer to the above diagram. If actual production and consumption occur at Q1:

an efficiency loss (or deadweight loss) of b + d occurs.

Refer to the above diagram. If actual production and consumption occur at Q2:

efficiency is achieved.

Refer to the above diagram. If actual production and consumption occur at Q3:

an efficiency loss (or deadweight loss) of e + f occurs.

Allocative efficiency occurs only at that output where:

the combined amounts of consumer surplus and producer surplus are maximized.

At the output level defining allocative efficiency:

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

Which of the following conditions does not need to occur for a market to achieve allocative efficiency?

The total revenue received by producers equals the total cost of production.

At the output where the combined amounts of consumer and producer surplus are largest:

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

An efficiency loss (or deadweight loss):

is measured as the combined loss of consumer surplus and producer surplus.

An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which:

maximum willingness to pay exceeds minimum acceptable price.

The two main characteristics of a public good are:

nonrivalry and nonexcludability.

Nonrivalry and nonexcludability are the main characteristics of:

public goods

Unlike a private good

a public good:,has benefits available to all, including nonpayers.

Which of the following is an example of a public good?

a weather warning system

A public good:

is available to all and cannot be denied to anyone.

The market system does not produce public goods because:

private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.

Public goods are those for which there:

is nonrivalry and nonexcludability.

If one person’s consumption of a good does not preclude another’s consumption the good is said to be:

nonrival in consumption.

Nonexcludability describes a condition where:

there is no effective way to keep people from using a good once it comes into being.

Which of the following statements is not true?

Public goods are only provided by government.

Because of the free-rider problem:

the market demand for a public good is nonexistent or understated.

At the optimal quantity of a public good:

marginal benefit equals marginal cost.

Refer to the above data. The collective willingness of this society to pay for the 2nd unit of this public good is:

$6.

Refer to the above data. If the marginal cost of producing this good at the optimal quantity is $4 the optimal quantity must be:

3 units.

Refer to the above data. Suppose government has already produced 4 units of this public good. The amount individual B is willing voluntarily to pay for the 4th unit is:

$0

Refer to the above data. If this good were a private good instead of a public one the total quantity demanded at a $3 market price would be:

4 units.

A demand curve for a public good is determined by:

summing vertically the individual demand curves for the public good.

Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8 respectively for the 3rd unit of a public good. Also assume that the marginal cost of the 3rd unit is $17. We can conclude that:

the 3rd unit should be produced

Alex Kara and Susie are the only three people in a community and Alex is willing to pay $20 for the 5th unit of a public good Kara $15 and Susie $25. Government should produce the 5th unit of the public good if the marginal cost is less than or equal to:

$60.

For which one of the following goods would we need to sum individual demand curves vertically to obtain the total demand curve?

courts of law

Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good rather than do without it. The collective willingness to pay for the 1st unit of this public good is:

$18.

Refer to the above diagrams in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good rather than do without it. If the marginal cost of the optimal quantity of this public good is $10 the optimal quantity must be:

3 units.

Cost-benefit analysis attempts to:

compare the benefits and costs associated with any economic project or activity.

Refer to the above data. For Plan D marginal costs and marginal benefits are:

$28,000 and $12,000 respectively.

Refer to the above data. On the basis of cost-benefit analysis government should undertake:

Plan B.

Refer to the above data. Plan C entails:

an overallocation of resources to flood control.

The above data indicate that:

the marginal cost and marginal benefit of Program A are $2 and $9 respectively.

On the basis of the above data we can say that:

Program B is the most efficient on economic grounds.

According to the marginal-cost-marginal-benefit rule:

the optimal project size is the one for which MB = MC.

Economists consider governments to be "wasteful:"

whenever they over- or underallocate resources to a project.

A positive externality or spillover benefit occurs when:

the benefits associated with a product exceed those accruing to people who consume it.

A negative externality or spillover cost occurs when:

the total cost of producing a good exceeds the costs borne by the producer.

Refer to the above diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production including external costs. Assume that the number of people affected by these external costs is large. Without government interference this market will reach:

an overallocation of resources to this product.

Refer to the above diagram in which S is the market supply curve and S1 is a supply curve comprising all costs of production including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should:

tax producers so that the market supply curve shifts leftward (upward).

Refer to the above diagrams for two separate product markets. Assume that society’s optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We can conclude that the government is correcting for:

negative externalities in diagram (a) and positive externalities in diagram (b).

Refer to the above diagrams for two separate product markets. Assume that society’s optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The shift of the supply curve from S to S1 in diagram (a) might be caused by a per unit:

tax on the producers of this product.

Refer to the above diagrams for two separate product markets. Assume that society’s optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The shift of the supply curve from S to S2 in diagram (b) might be caused by a per unit:

subsidy paid to the producers of this product.

Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D1 and S1. If there are substantial external benefits associated with the production of Z, then:

government can improve the allocation of resources by subsidizing consumers of Z.

Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2 If there are substantial external benefits associated with the production of Z, then:

an output greater than G would result in a more efficient allocation of resources.

Refer to the above competitive market diagram for product Z. Assume that the current market demand and supply curves for Z are D2 and S2. If there are substantial external costs associated with the production of Z, then:

government should levy a per unit excise tax on Z to shift the supply curve toward S1.

Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the market equilibrium output is Q1, we can conclude that the existence of external:

benefits has resulted in an underallocation of resources to X.

Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the equilibrium output is Q2, we can conclude that the existence of external:

costs has resulted in an overallocation of resources to X.

If a good that generates positive externalities were produced and priced to take into account these spillover benefits then its:

price and output would increase.

Suppose that the Anytown city government asks private citizens to donate money to support the town’s annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display the request for donations suggests that:

resources are currently underallocated to the provision of holiday lighting in Anytown.

The socially optimal amount of pollution abatement occurs where society’s marginal:

benefit of abatement equals its marginal cost of abatement.

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of:

diminishing marginal utility.

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of:

diminishing returns.

Refer to the above diagram. From society’s perspective if MB1 and MC2 are relevant:

Q2 represents too little pollution abatement.

Refer to the above diagram. From society’s perspective if MB2 and MC1 are relevant:

Q1 represents too little pollution abatement.

Refer to the above diagram. With MB1 and MC1 society’s optimal amount of pollution abatement is:

Q1.

Refer to the above diagram. Which one of the following might shift the marginal cost curve from MC1 to MC2?

improved technology for reducing pollution

Refer to the above diagram. Which one of the following might shift the marginal benefit curve from MB1 to MB2?

major new studies strongly linking cancer to pollution

The MC curves in the above diagram slope upward because of the law of:

diminishing returns.

The MB curves in the above diagram slope downward because of the law of:

diminishing marginal utility.

(Consider This) Suppose that Susie creates a work of art and displays it in a public place. Economists would expect:

those enjoying the art to "free ride" since they cannot be made to bear any of the cost.

(Consider This) Brinley puts on an art show in a public space

asking for donations based on how much people enjoy his work. Economists would expect that:, people will understate their enjoyment of the art in order to "free ride."

(Consider This) According to the Coase theorem:

private individuals can often negotiate their own resolution of externality problems, without the need for government intervention.

(Consider This) Darcy and Rachel live down the hall from each other in the same dorm. Darcy likes to play her music loudly down the hall and Rachel finds the music annoying. A Coase theorem solution for this problem would be for:

Darcy and Rachel to negotiate a mutually agreeable level of volume and/or selection of music.

(Consider This) Suppose that a large tree on Betty’s property is blocking Chuck’s view of the lake below. Betty accepts Chuck’s offer to pay Betty $100 for the right to cut down the tree. This situation describes:

the Coase theorem.

(Last Word) In a cap-and-trade program:

government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other.

(Last Word) A cap-and-trade program:

assigns a property right to polluting the atmosphere.

(Last Word) Because there are so many sources of carbon dioxide

making monitoring difficult and costly, many economists:, prefer a carbon tax to cap-and-trade for reducing carbon dioxide emissions.