Exam 4: Market Failures: Public Goods and Externalities

The Coase Theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

When the marginal benefit of an output exceeds the marginal cost:

Answer the question on the basis of the following information is for public good. P_a and P_b represent the prices that citizens (a) and (b), the only two people in this nation, are willing to pay for additional units of a quantity (Q_c) of the public good. Q_s represents the quantity of the public good supplied by government at each of the collective prices. Refer to the above information. The collective willingness of this nation to pay for the fourth unit of the public good is:

There is an adverse selection problem in the market for used cars because:

When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting, there is no moral hazard problem.

Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table. Refer to the above table and information. What project should the government select to achieve the maximum net benefit?

When the production of a good generates external costs, the firm's supply curve will be:

The equilibrium point in the market is where S and D curve intersect. Refer to the graph above. At equilibrium, the total revenues received by sellers would be represented by the area:

It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. In the situation described above, we would expect an:

Refer to the above supply and demand graph. In the graph, line S is the current supply of this product, while line S₁ is the optimal supply from the society's perspective. This figure suggests that there is (are):

Oftentimes, the socially optimal quantity for a product that imposes external costs on the society is not zero, but something greater than zero. This is because completely eliminating the externality would involve:

Consumer surplus is the reason why sometimes a shopper regrets having bought a particular item.

The equilibrium point in the market is where S and D curve intersect. Refer to the graph above. At equilibrium, the minimum acceptable revenue that sellers would have been willing to receive is represented by the area:

Sometimes, public goods whose benefits are less than their costs still get produced because:

When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem.

Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings:

Refer to the above graph. If the output level increases from Q₂ to Q₃, then the:

When producers (say, of roads) are not able to make all consumers pay for enjoying their product (i.e., the roads), they tend to see a:

Asymmetric information occurs when the two parties in a market transaction do not have the same amount of information regarding the product or process involved in the transaction.

The moral hazard problem arises primarily because of: