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Chapter 5 (T/F)
Market Failures: Public Goods and Externalities
Supply-side market failures occur because it is impossible in certain cases for sellers to charge consumers what they are willing to pay for a product
When a supply-side market failure occurs, the costs are greater than the benefits for the last unit(s) of output produced
Along a demand curve, product price and consumer surplus are inversely related
Along a supply curve, product price and producer surplus are inversely related
Allocative effieciency occurs where (for the last unit) maximum willingess to pay exceeds minimum acceptable price by the greatest amount
Allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum
That government that has the smallest budget is the most efficient in the economic sense
A demand curve for a public good is determined by summing horizontally the individual demand curves for the public good
The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost
Cost-benefit analysis is frequently difficult to apply because it difficult to quantify the full benefits of a public good or service
Society's optimal amount of pollution abatement is where society's marginal benefit of abatement is zero
An improvement in the technology of pollution control is likely to increase society's optimal amount of pollution abatement
Society's marginal cost of pollution abatement curve slope upward because of the law of diminishing marginal utility
The principle that private negotiation can resolve potential externalitites without resort to government intervention is known as the coase theorem