Question 1

A market failure

Accepted Answer

A) refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. 
B) refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost. 
C) refers to a situation where an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event. 
D) refers to a breakdown in a market economy because of widespread corruption in government. 
A) refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. 
B) refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost. 
C) refers to a situation where an entire sector of the economy (for example, the airline industry)collapses because of some unforeseen event. 
D) refers to a breakdown in a market economy because of widespread corruption in government.

Question 2

An external cost is created when you

Accepted Answer

A) graduate from university. 
B) buy flowers for your mother on Mother's Day. 
C) litter on the side of the road. 
D) buy a sandwich for lunch. 
A) graduate from university. 
B) buy flowers for your mother on Mother's Day. 
C) litter on the side of the road. 
D) buy a sandwich for lunch.

Question 3

What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?

Accepted Answer

Private benefit from consumption is the

Question 4

Figure 15.2   Figure 15.2 shows a market with a negative externality.
-Refer to Figure 15.2.What is the private profit-maximising quantity for the firm?

Accepted Answer

A) Qa 
B) Qb 
C) Qb - Qd. 
D) Qd 
A) Qa 
B) Qb 
C) Qb - Qd. 
D) Qd

Question 5

An externality refers to economic events outside a market.

Accepted Answer

A) True 
 B)False

Question 6

Figure 15.9   Companies producing toilet paper bleach the paper to make it white.The bleach is discharged into rivers and lakes and causes substantial environmental damage.Figure 15.9 illustrates the situation in the toilet paper market.
-Refer to Figure 15.9.An efficient way to get the firm to produce the socially optimal output level is

Accepted Answer

A) for government to set a quota on the quantity of toilet paper that the toilet paper industry can produce. 
B) to impose a tax to make the industry bear the external costs it creates. 
C) to grant a subsidy to enable the industry to internalise the external costs of production. 
D) to assign property rights to the firms in the industry. 
A) for government to set a quota on the quantity of toilet paper that the toilet paper industry can produce. 
B) to impose a tax to make the industry bear the external costs it creates. 
C) to grant a subsidy to enable the industry to internalise the external costs of production. 
D) to assign property rights to the firms in the industry.

Question 7

Property rights are

Accepted Answer

A) the title to ownership of any physical asset. 
B) a legal document verifying ownership of intangible assets. 
C) the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. 
D) the right of the government to appropriate private assets for the good of society. 
A) the title to ownership of any physical asset. 
B) a legal document verifying ownership of intangible assets. 
C) the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. 
D) the right of the government to appropriate private assets for the good of society.

Question 8

Parents who do not have their children immunised and attempt to benefit from other parents who did have their own children immunised are exhibiting an economic behaviour known as

Accepted Answer

A) excludability. 
B) public rivalry. 
C) free riding. 
D) internalising an external cost. 
A) excludability. 
B) public rivalry. 
C) free riding. 
D) internalising an external cost.

Question 9

If there are no externalities, a competitive market achieves economic efficiency.If there is a negative externality, economic efficiency will not be achieved because

Accepted Answer

A) too little of the good will be produced. 
B) too much of the good will be produced. 
C) a deadweight loss will occur that is equal to the area under the demand curve for the good. 
D) economic surplus is maximised. 
A) too little of the good will be produced. 
B) too much of the good will be produced. 
C) a deadweight loss will occur that is equal to the area under the demand curve for the good. 
D) economic surplus is maximised.

Question 10

Which of the following describes how a positive externality affects a competitive market?

Accepted Answer

A) The externality causes a difference between the private benefit from consumption and the social benefit. 
B) The externality causes a difference between the private benefit from production and the social cost of production. 
C) The externality causes quantity demanded to exceed quantity supplied. 
D) The externality causes a difference between the social cost of production and the social cost of consumption. 
A) The externality causes a difference between the private benefit from consumption and the social benefit. 
B) The externality causes a difference between the private benefit from production and the social cost of production. 
C) The externality causes quantity demanded to exceed quantity supplied. 
D) The externality causes a difference between the social cost of production and the social cost of consumption.

Question 11

Figure 15.9   Companies producing toilet paper bleach the paper to make it white.The bleach is discharged into rivers and lakes and causes substantial environmental damage.Figure 15.9 illustrates the situation in the toilet paper market.
-Refer to Figure 15.9.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

Accepted Answer

A) (P2- P1)per ton of output 
B) (P2- P0)per ton of output 
C) (P1- P0)per ton of output 
D) P1 per ton of output 
A) (P2- P1)per ton of output 
B) (P2- P0)per ton of output 
C) (P1- P0)per ton of output 
D) P1 per ton of output

Question 12

Economists argue that the level of pollution should be

Accepted Answer

A) reduced completely to zero because by definition, it is a negative external effect. 
B) ignored because it has always been present since the beginning of history. 
C) reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. 
D) best determined by elected officials who can speak on behalf of the public. 
A) reduced completely to zero because by definition, it is a negative external effect. 
B) ignored because it has always been present since the beginning of history. 
C) reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. 
D) best determined by elected officials who can speak on behalf of the public.

Question 13

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

Accepted Answer

A) True 
 B)False

Question 14

How does a public good differ from a quasi-public good? In your answer give an example of each type of good.

Accepted Answer

A pubic good is: (a)non-rival-one person

Question 15

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

Accepted Answer

A) 
A) C.Pigou 
B) Adam Smith 
C) Ronald Coase 
D) John Maynard Keynes 
A) 
A) C.Pigou 
B) Adam Smith 
C) Ronald Coase 
D) John Maynard Keynes

Question 16

What does it mean if a good is classified as excludable?

Accepted Answer

A) That anyone who does not pay for the good cannot consume it 
B) That someone can be barred from consuming the good based on race, creed or some other irrelevant characteristic 
C) That consumption of the good causes no externalities 
D) That a producer with patent or copyright protection can exclude any other producer from selling his product 
A) That anyone who does not pay for the good cannot consume it 
B) That someone can be barred from consuming the good based on race, creed or some other irrelevant characteristic 
C) That consumption of the good causes no externalities 
D) That a producer with patent or copyright protection can exclude any other producer from selling his product

Question 17

When does a free market fail?

Accepted Answer

A) When there is an external effect in either production, consumption, or both 
B) When there is government intervention 
C) When firms that produce goods which create positive externalities go bankrupt 
D) When firms that produce goods which create negative externalities earn high profits 
A) When there is an external effect in either production, consumption, or both 
B) When there is government intervention 
C) When firms that produce goods which create positive externalities go bankrupt 
D) When firms that produce goods which create negative externalities earn high profits

Question 18

Figure 15.14   Figure 15.14 shows the market for Atlantic tuna, a common resource.The current market equilibrium output of QS1U1B11S1U1B0 is not the economically efficient output.The economically efficient output is QS1U1B12S1U1B0.
-Refer to Figure 15.14.Identify the area that shows the deadweight loss from overfishing.

Accepted Answer

A) egh 
B) ekh 
C) efh 
D) eghk 
A) egh 
B) ekh 
C) efh 
D) eghk

Question 19

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

Accepted Answer

A) enforcement costs. 
B) implicit costs. 
C) explicit costs. 
D) transactions costs. 
A) enforcement costs. 
B) implicit costs. 
C) explicit costs. 
D) transactions costs.

Question 20

Figure 15.10   Chicken pox vaccinations for toddlers benefit society by protecting young children and by preventing an epidemic of the disease.Thus, the social benefits of chicken pox vaccinations exceed the private benefit for any quantity of vaccinations as illustrated in Figure 15.10.
-Refer to Figure 15.10.What is the value of the net gain to society as a result of subsidising chicken pox vaccinations?

Accepted Answer

A) (PE × Q
E)  
B) (PF × QF) 
C) Value equal to the area of FEG 
D) Value equal to the area of QFFGQE 
A) (PE × Q
E)  
B) (PF × QF) 
C) Value equal to the area of FEG 
D) Value equal to the area of QFFGQE

A market failure

An external cost is created when you

What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?

Figure 15.2 Figure 15.2 shows a market with a negative externality. -Refer to Figure 15.2.What is the private profit-maximising quantity for the firm?

An externality refers to economic events outside a market.

Property rights are

Parents who do not have their children immunised and attempt to benefit from other parents who did have their own children immunised are exhibiting an economic behaviour known as

If there are no externalities, a competitive market achieves economic efficiency.If there is a negative externality, economic efficiency will not be achieved because

Which of the following describes how a positive externality affects a competitive market?

Economists argue that the level of pollution should be

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

How does a public good differ from a quasi-public good? In your answer give an example of each type of good.

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

What does it mean if a good is classified as excludable?

When does a free market fail?

Figure 15.14 Figure 15.14 shows the market for Atlantic tuna, a common resource.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂. -Refer to Figure 15.14.Identify the area that shows the deadweight loss from overfishing.

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: The Interaction of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Consumer Choice and Behavioural Economics

Technology Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition: The Competitive Model in a More Realistic

Oligopoly: Markets With Few Competitors

The Markets for Labour and Other Factors of Production

Comparative Advantage and the Gains From International Trade

Government Intervention in the Market

The Distribution of Income and Social Policy

Filters

Exam 15: Externalities, Environmental Policy and Public Goods

A market failure

An external cost is created when you

What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?

Figure 15.2 Figure 15.2 shows a market with a negative externality. -Refer to Figure 15.2.What is the private profit-maximising quantity for the firm?

An externality refers to economic events outside a market.

Property rights are

Parents who do not have their children immunised and attempt to benefit from other parents who did have their own children immunised are exhibiting an economic behaviour known as

If there are no externalities, a competitive market achieves economic efficiency.If there is a negative externality, economic efficiency will not be achieved because

Which of the following describes how a positive externality affects a competitive market?

Economists argue that the level of pollution should be

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

How does a public good differ from a quasi-public good? In your answer give an example of each type of good.

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

What does it mean if a good is classified as excludable?

When does a free market fail?

Figure 15.14 Figure 15.14 shows the market for Atlantic tuna, a common resource.The current market equilibrium output of Q1 is not the economically efficient output.The economically efficient output is Q2. -Refer to Figure 15.14.Identify the area that shows the deadweight loss from overfishing.

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

Economics: Foundations and Models

Choices and Trade-Offs in the Market

Where Prices Come From: The Interaction of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply

Economic Efficiency, Government Price Setting and Taxes

Consumer Choice and Behavioural Economics

Technology Production and Costs

Firms in Perfectly Competitive Markets

Monopoly Markets

Monopolistic Competition: The Competitive Model in a More Realistic

Oligopoly: Markets With Few Competitors

The Markets for Labour and Other Factors of Production

Comparative Advantage and the Gains From International Trade

Government Intervention in the Market

The Distribution of Income and Social Policy

Filters

Figure 15.14 Figure 15.14 shows the market for Atlantic tuna, a common resource.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂. -Refer to Figure 15.14.Identify the area that shows the deadweight loss from overfishing.