ch8: market failure

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externality
the benefit or cost from consumption or production that spills over onto those who are not consuming or producing the good
positive externality
when benefit spill over to an outside party who is not involved in producing or consuming the good
negative externality
when costs spill over to an outside party who is not involved in producing or consuming the good
internalizing externalities
changing incentives so people will take into account the effects of the external costs or benefits imposed on, or enjoyed by, others
the presence of negative externalities leads to a misallocation of societal resources because
a. whenever external costs are imposed on outside parties, the good should not be produced at all
b. less of the good than is ideal for society is produced
c. some costs are associated with production that the producer fails to take into consideration
d. the government always intervenes in markets when negative externalities are present, and the government is inherently inefficient
c. some costs are associated with production that the producer fails to take into consideration
a tax equal to the external cost on firms that emit pollutants would
a. provide firms with the incentive to increase the level of activity creating the pollution
b. provide firms with the incentive to decrease the level of activity creating the pollution
c. provide firms with little incentive to search for less environmentally damaging production methods
d. not reduce pollution levels at all
b. provide firms with the incentive to decrease the level of activity creating the pollution
in the case of a good whose production generates negative externalities,
a. those not directly involved in the market transactions are harmed
b. internalizing the externality would tend to result in a greater output of the good
c. too little of the good tends to be produced
d. a subsidy would be appropriate government corrective action
e. all the above
a. those not directly involved in the market transactions are harmed
if firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be a
a. increase in production
b. decrease in production
c. greater misallocation of resources
d. decrease in the market price of the product
b. decrease in production
which of the following will most likely generate positive externalities of consumption?
a. a hot dog vendor
b. public education
c. an automobile
d. a city bus
e. a polluting factory
b. public education
assume that production of a good imposes external costs on others. the market equilibrium price will be ________ and the equilibrium quantity ________ for efficient resource allocation.
a. too high; too high
b. too high; too low
c. too low; too high
d. too low; too low
c. too low; too high
assume that production of a good generates external benefits of consumption. the market equilibrium price of the good will be _____ and the equilibrium quantity ________ for efficient resource allocation.
a. too high; too high
b. too high; too low
c. too low; too high
d. too low; too low
d. too low; too low
in the case of externalities, appropriate government corrective policy would be
a. taxes in the case of external benefits and subsidies in the case of external costs
b. subsidies in the case of external benefits and taxes in the case of external costs
c. taxes in both the case of external benefits and the case of external costs
d. subsidies in both the case of external benefits and the case of external costs
e. none of the above; appropriate action would be to do nothing
b. subsidies in the case of external benefits and taxes in the case of external costs
transferable pollution rights
a right given to a firm to discharge a specified amount of pollution; its transferable nature creates incentive to lower pollution levels
taxes on the emissions of polluting firms are primarily intended to
a. encourage firms to reduce product prices
b. encourage firms to increase production of output
c. raise revenue for general spending needs
d. encourage firms to pollute less
d. encourage firms to pollute less
an ideal pollution tax
a. does not affect the quantity of the good produced
b. forces a firm to internalize the externality
c. causes a polluting firm to increase production to the socially efficient level of output
d. leads to a reduction in price to the consumer of the polluting firm's output
b. forces a firm to internalize the externality
if compliance standards are too stringent,
a. the marginal social benefit of pollution reduction may outweigh the marginal social cost of pollution reduction
b. the marginal social cost of pollution reduction may outweigh the marginal social benefit of pollution reduction
c. the marginal social cost of pollution reduction will just equal the marginal social benefit from pollution reduction
d. none of the above
b. the marginal social cost of pollution reduction may outweigh the marginal social benefit of pollution reduction
an advantage that emission taxes and tradable emissions permits have over compliance standards is that
a. work well even if pollution output cannot be accurately measured
b. result in equal levels of pollution abatement across all firms
c. make it in the interests of firms to reduce pollution in the most efficient manner possible
d. reduce pollution to zero
c. make it in the interests of firms to reduce pollution in the most efficient manner possible
which of the following is not an advantage of transferable pollution rights?
a. they create incentives for polluters to develop cheaper ways to reduce pollution
b. they allow the greatest value of output to be produced with a given amount of pollution
c. they require polluters to reduce emissions, regardless of the cost
d. the rights are private property and may be bought or sold freely
c. they require polluters to reduce emissions, regardless of the cost
Coase theorem
where property rights are defined in clear-cut fashion, and externalities are internalized if transaction costs are low
according to the coase theorem, one way to deal with an externality problem when transaction costs are low is
a. for the government to impose pollution taxes
b. for the government to make certain that property rights are well defined
c. for the government to issue transferable pollution permits
d. for the government to impose compliance standards
b. for the government to make certain that property rights are well defined
the coase theorem suggest that private solutions to externality problems
a. can lead to an optimal allocation of resources if private parties can bargain at relatively low costs
b. result in the efficient outcome under all conditions
c. will result in the same distribution of wealth no matter how property rights are assigned
d. will result in different efficiency levels of production, depending crucially on how property rights are assigned
a. can lead to an optimal allocation of resources if private parties can bargain at relatively low costs
in the case of a private solution to the externality problem, the distribution of rights
a. restricts the ability of private parties to properly price the externalities
b. enhances the market incentive to reach an efficient solution
c. determines who bears the cost of the solution but does not affect the efficient result
d. affects the efficiency of the outcome, but does not determine who bears the cost
c. determines who bears the cost of the solution but does not affect the efficient result
pollution reduction will be achieved for the least cost when
a. large polluters are required to reduce pollution by a greater extent than small polluters
b. small polluters are required to reduce pollution by a greater extent than large polluters
c. all firms are required to reduce pollution by proportionate amount
d. all firms are required to reduce pollution by an equal absolute amount
e. the cost of reducing pollution by an additional unit is the same for all polluting firms
e. the cost of reducing pollution by an additional unit is the same for all polluting firms
public good
a good that is nonrivalrous in consumption and non excludable
private good
a good with rivalrous consumption and excludability
free rider
deriving benefits from something not paid for
common resource
a good that is rival in consumption and nonexcludable
tragedy of commons
incentive to protect private goods but not publicly owned goods
the market system fails to provide the efficient output of public goods because
a. people place no value on public goods
b. private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them
c. public enterprises can produce those goods at lower cost than private firms
d. public goods create widespread spillover costs
b. private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them
public goods, like national defense, are usually funded through government because
a. no one cares about them because they are public
b. it is prohibitively difficult to withhold national defense from someone unwilling to pay for it
c. they cost too much for private firms to produce them
d. they provide benefits only to individuals and not firms
b. it is prohibitively difficult to withhold national defense from someone unwilling to pay for it
a public good is both _______ in consumption and _______.
a. nonrivalrous; exclusive
b. nonrivalrous; nonexclusive
b. rivalrous; exclusive
d. rivalrous; nonexclusive
b. nonrivalrous; nonexclusive
public goods
a. do not need to be produced by government
b. are subject to free-rider problems
c. tend to be underproduced in the marketplace
d. all of the above
d. all of the above
a common resource
a. is rivalrous in consumption
b. is non excludable
c. can lead to tragedy of commons
d. all of the above
d. all of the above
asymmetric information
one party has more information than the other
to increase reliability of seller: reputation and standardization
signaling: warranties are signals, signals are stronger in higher productivity individuals
adverse selection
where an informed party benefits in an exchange by taking advantage of knowing more than the other party
moral hazard
taking additional risks because you are insured, thus lowering the cost to you of taking those risks
adverse selection refers to
a. the phenomenon of one party taking advantage of knowing more than the other party
b. tendency for indviduals to alter their behavior once insured
c. tendency to engage in insurance fraud
d. b and c
a. the phenomenon of one party taking advantage of knowing more than the other party
if after you buy a car with air bags you start to drive recklessly, it is an illustration of
a. moral hazard
b. free-rider
c. adverse selection
d. "lemon" problem
a. moral hazard
in the market for insurance, the moral hazard problem leads to
a. those most likely to collect on insurance to buy it
b. this who buy insurance to take fewer precautions to avoid insured risk
c. those with more prior insurance claims to be charged a higher premium
d. none of the above
b. this who buy insurance to take fewer precautions to avoid insured risk
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