Question 1

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

Accepted Answer

A) output will occur at the socially optimal level. 
B) the price of the product will be higher than if all costs are not taken into account. 
C) more output will be produced than if all costs are not taken into account. 
D) a and b 
E) a, b, and c 
A) output will occur at the socially optimal level. 
B) the price of the product will be higher than if all costs are not taken into account. 
C) more output will be produced than if all costs are not taken into account. 
D) a and b 
E) a, b, and c

Question 2

When a positive externality exists, the market is said to fail because it overproduces the good associated with the positive externality.

Accepted Answer

A) True 
 B)False

Question 3

The free rider problem is the main source of market failure in the provision of nonexcludable public goods.

Accepted Answer

A) True 
 B)False

Question 4

Market failure is a situation in which

Accepted Answer

A) the market does not provide the ideal or optimal amount of a particular good. 
B) there are too many buyers but not enough sellers. 
C) prices are too high for "average" people to buy necessities. 
D) there is a question over the quality of a product for sale. 
A) the market does not provide the ideal or optimal amount of a particular good. 
B) there are too many buyers but not enough sellers. 
C) prices are too high for "average" people to buy necessities. 
D) there is a question over the quality of a product for sale.

Question 5

When a positive externality exists,

Accepted Answer

A) external benefits are necessarily greater than private benefits. 
B) social benefits are greater than private benefits. 
C) social benefits are less than private benefits. 
D) social benefits equal private benefits. 
E) none of the above 
A) external benefits are necessarily greater than private benefits. 
B) social benefits are greater than private benefits. 
C) social benefits are less than private benefits. 
D) social benefits equal private benefits. 
E) none of the above

Question 6

When an insurance company specifies certain precautions that an insured person must take it is trying to control for moral hazard.

Accepted Answer

A) True 
 B)False

Question 7

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

Accepted Answer

A) output will be at a lower level than if all costs are not taken into account. 
B) output will be at a lower level than the socially optimal level. 
C) the marginal private cost curve will lie above and to the left of the marginal social cost curve. 
D) a and b 
E) a, b, and c 
A) output will be at a lower level than if all costs are not taken into account. 
B) output will be at a lower level than the socially optimal level. 
C) the marginal private cost curve will lie above and to the left of the marginal social cost curve. 
D) a and b 
E) a, b, and c

Question 8

Which of these goods may be considered rivalrous in consumption and nonexcludable?

Accepted Answer

A) wilderness areas 
B) national defense 
C) broadcast television reception 
D) fire insurance 
A) wilderness areas 
B) national defense 
C) broadcast television reception 
D) fire insurance

Question 9

Which of the following situations probably would not yield a negative externality?

Accepted Answer

A) a rock concert in the quad next to the library 
B) one person who is smoking cigarettes in a closed room where several other people are present 
C) a tutor quietly instructs a student in economics as a bystander willingly listens in without the tutor knowing it 
D) mowing your lawn early on a Saturday morning when you live in a densely populated neighborhood 
E) All of the above situations would yield negative externalities. 
A) a rock concert in the quad next to the library 
B) one person who is smoking cigarettes in a closed room where several other people are present 
C) a tutor quietly instructs a student in economics as a bystander willingly listens in without the tutor knowing it 
D) mowing your lawn early on a Saturday morning when you live in a densely populated neighborhood 
E) All of the above situations would yield negative externalities.

Question 10

Exhibit 30-4
​
  
-Refer to Exhibit 30-4. If a negative externality exists, then curve __________ represents the marginal social cost curve and the area __________ represents the market failure.

Accepted Answer

A) 1; ACB 
B) 3; BCD 
C) 2; BCD 
D) 3; ACB 
E) 2; ACB 
A) 1; ACB 
B) 3; BCD 
C) 2; BCD 
D) 3; ACB 
E) 2; ACB

Question 11

Exhibit 30-3
  
-Refer to Exhibit 30-3. What is the cost to Firm B of eliminating 2 tons of pollution?

Accepted Answer

A) $350 
B) $250 
C) $300 
D) $140 
E) $540 
A) $350 
B) $250 
C) $300 
D) $140 
E) $540

Question 12

Exhibit 30-2
​
  
-Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q1 to Q2 is the area of

Accepted Answer

A) Q1ABQ2. 
B) Q1AEQ2. 
C) Q1CBQ2. 
D) ABE. 
A) Q1ABQ2. 
B) Q1AEQ2. 
C) Q1CBQ2. 
D) ABE.

Question 13

If fewer cigarettes are consumed with symmetric information than asymmetric information, it follows that

Accepted Answer

A) with asymmetric information the demand for cigarettes is lower than with symmetric information. 
B) with symmetric information the demand for cigarettes is lower than with asymmetric information. 
C) the demand for cigarettes is the same with or without asymmetric information. 
D) there are more free riders with asymmetric information than symmetric information. 
E) There is not enough information to answer the question. 
A) with asymmetric information the demand for cigarettes is lower than with symmetric information. 
B) with symmetric information the demand for cigarettes is lower than with asymmetric information. 
C) the demand for cigarettes is the same with or without asymmetric information. 
D) there are more free riders with asymmetric information than symmetric information. 
E) There is not enough information to answer the question.

Question 14

Which of the following situations is clearly and unambiguously descriptive of a positive externality?

Accepted Answer

A) Jack feels better after his daily walk. 
B) Joriel studies harder than anyone in his class. 
C) Professor Gomez gave an unannounced quiz to her history class yesterday. 
D) The President of the United States yesterday signed a legislative act that is very popular in the country. 
E) none of the above 
A) Jack feels better after his daily walk. 
B) Joriel studies harder than anyone in his class. 
C) Professor Gomez gave an unannounced quiz to her history class yesterday. 
D) The President of the United States yesterday signed a legislative act that is very popular in the country. 
E) none of the above

Question 15

When negative externalities are involved, the market is said to

Accepted Answer

A) fail, because it underproduces the good connected with the negative externality. 
B) fail, because it overproduces the good connected with the negative externality. 
C) succeed, because it produces the socially optimal quantity of the good connected with the negative externality. 
D) be "in optimum," because the equilibrium fully adjusts for the negative externality. 
A) fail, because it underproduces the good connected with the negative externality. 
B) fail, because it overproduces the good connected with the negative externality. 
C) succeed, because it produces the socially optimal quantity of the good connected with the negative externality. 
D) be "in optimum," because the equilibrium fully adjusts for the negative externality.

Question 16

The Coase theorem is significant because it

Accepted Answer

A) implies that no transaction costs are associated with solving externalities. 
B) shows that property rights can be assigned. 
C) shows that under certain conditions externalities can be corrected in the market without resorting to nonmarket means. 
D) a and b 
A) implies that no transaction costs are associated with solving externalities. 
B) shows that property rights can be assigned. 
C) shows that under certain conditions externalities can be corrected in the market without resorting to nonmarket means. 
D) a and b

Question 17

Adverse selection exists when

Accepted Answer

A) the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market. 
B) the parties on one side of a market charge more for something than the parties on the other side of the market want to pay. 
C) one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
D) the parties on one side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market. 
E) none of the above 
A) the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market. 
B) the parties on one side of a market charge more for something than the parties on the other side of the market want to pay. 
C) one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
D) the parties on one side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market. 
E) none of the above

Question 18

Some pollution may be preferable to zero pollution because

Accepted Answer

A) attempting to decrease the level of pollution to zero may cause significant losses in society's welfare. 
B) we really do not have that much pollution. 
C) the nation's citizens are against government's involvement in solving the pollution problem. 
D) no form of regulation that has been shown to be effective at solving the pollution problem. 
A) attempting to decrease the level of pollution to zero may cause significant losses in society's welfare. 
B) we really do not have that much pollution. 
C) the nation's citizens are against government's involvement in solving the pollution problem. 
D) no form of regulation that has been shown to be effective at solving the pollution problem.

Question 19

In which of the following situations would a negative externality most likely be involved?

Accepted Answer

A) It is night and Kenneth is sitting in his easy chair reading a novel by John Grisham.The lamp he is reading by has only a 40-watt light bulb.He is having a hard time reading. 
B) Alyson lives near an airport.At five o'clock in the morning every day she can hear the airplanes taking off and it awakens her. 
C) Lucy went to a fancy restaurant last night and ordered the most expensive meal on the menu.She hated it. 
D) Richard is taking an economics class from Professor Franklin.Professor Franklin often says things that confuse Richard. 
A) It is night and Kenneth is sitting in his easy chair reading a novel by John Grisham.The lamp he is reading by has only a 40-watt light bulb.He is having a hard time reading. 
B) Alyson lives near an airport.At five o'clock in the morning every day she can hear the airplanes taking off and it awakens her. 
C) Lucy went to a fancy restaurant last night and ordered the most expensive meal on the menu.She hated it. 
D) Richard is taking an economics class from Professor Franklin.Professor Franklin often says things that confuse Richard.

Question 20

Exhibit 30-4
​
  
-Refer to Exhibit 30-4. If a negative externality exists, then the socially optimal output is

Accepted Answer

A) Q1. 
B) Q2. 
C) Q1 - Q2. 
D) Q2 - Q1. 
A) Q1. 
B) Q2. 
C) Q1 - Q2. 
D) Q2 - Q1.

Exam 30: Market Failure Externalities Public Goods and Asymmetric Information

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

When a positive externality exists, the market is said to fail because it overproduces the good associated with the positive externality.

The free rider problem is the main source of market failure in the provision of nonexcludable public goods.

Market failure is a situation in which

When a positive externality exists,

When an insurance company specifies certain precautions that an insured person must take it is trying to control for moral hazard.

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

Which of these goods may be considered rivalrous in consumption and nonexcludable?

Which of the following situations probably would not yield a negative externality?

Exhibit 30-4 ​ -Refer to Exhibit 30-4. If a negative externality exists, then curve __________ represents the marginal social cost curve and the area __________ represents the market failure.

Exhibit 30-3 -Refer to Exhibit 30-3. What is the cost to Firm B of eliminating 2 tons of pollution?

Exhibit 30-2 ​ -Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q1 to Q2 is the area of

If fewer cigarettes are consumed with symmetric information than asymmetric information, it follows that

Which of the following situations is clearly and unambiguously descriptive of a positive externality?

When negative externalities are involved, the market is said to

The Coase theorem is significant because it

Adverse selection exists when

Some pollution may be preferable to zero pollution because

In which of the following situations would a negative externality most likely be involved?

Exhibit 30-4 ​ -Refer to Exhibit 30-4. If a negative externality exists, then the socially optimal output is

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Exhibit 30-4 -Refer to Exhibit 30-4. If a negative externality exists, then curve represents the marginal social cost curve and the area represents the market failure.

Exhibit 30-2 -Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q₁ to Q₂ is the area of

Exhibit 30-4 -Refer to Exhibit 30-4. If a negative externality exists, then the socially optimal output is