Chapter 5 (MC)

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Market Failures: public Goods and Externalities

Private markets do not allocate resources in the most economically desirable way

Market failure is said to occur whenever:

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

Demand-side market failures occur when:

demand-side market failure

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:

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

Supply-side market failures occur when:

costs more to produce than it provides in benefits

From soceity's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically:

supply-side market failure

the trains of the transcontinental railway company, when shipping goods, sometimes emit sparks that start fies along the tracks and damage the property of others. If transcontinental does not pay for the damage it causes, what has occurred?

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

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

the benefit surpluses shared between consumers and producers will be maximized

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

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

Consumer surplus:

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

Producer surplus:

under the demand curve and above the actual price

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

above the supply curve and below the actual price

Graphically, producer surplus is measured as the area:

equals the marginal cost of producing that particular unit

A producer's minimum acceptable price for a particular unit fo a good:

the combined amounts of consumer surplus and produceer surplus are maximized

allocative efficiency occurs only at that output where:

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

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

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

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

An efficiency loss (or deadweight loss):

maximum willingness to pay exceeds minimum acceptable price

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

nonrivalry and nonexcludability

The two main characteristics of a public good are:

public goods

Nonrivalry and nonexcludability are the main characteristics of:

has benefits available to all, including nonpayers

Unlike a private good, a public good:

is available to all and cannot be denied to anyone

A public good:

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

The market system does not produce public because:

is nonrivalry and nonexcludability

Public goods are those for which there:

nonrival in consumption

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

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

Nonexcludability describes a condition where:

the market demand for a public good is nonexistent or understated

Because of the free-rider problem:

marginal benefit equals marginal cost

At the optimal quantity of a public good:

summing vertically the individual demand curves for the public good

A demand curve for a public good is determined by:

the 3rd unit should be produced

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:

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

Cost-benefit analysis attempts to:

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

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

whenever they over-or underallocate resources to a project

Economists consider governments to be "wasteful:"

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

A positive externality or spillover benefit occurs when:

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

A negaitve externality or spilloveer cost occurs when:

price and output would increase

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

resources and currently underallocated to the provision of holiday lighting in Anytown

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:

benefit of abatemnt equals its marginal cost of abatement

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

diminishing marginal utility

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

diminishing returns

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

diminishing returns

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

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

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

people will understate their enjoyment of the art in order to "free ride"

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:

private individuals can often negotiate their own resolution of externality problems

According to the Coase Theorem:

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

Darcy and Rachel live down the hal from each other in the same dorm. Darcy like to play her music loudly down the hall, and Rachel finds the music annoying. A coase theorem solution for this problem would be for:

the coase theorem

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:

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

In a cap-and-trade program:

assigns a property right to polluting the atmosphere

A cap-and-trade program:

prefer a carbon tax to cap-and-trade for reducing carbon dioxide emissions

Because there are so many sources of carbon dioxide, making monitoring difficult and costly, many economists:

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