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ABE-204 Ch 10
Terms in this set (26)
T/F: Markets sometimes fail to allocate resources efficiently.
T/F: When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.
T/F: In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.
T/F: In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.
T/F: The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.
T/F: Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.
T/F: Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.
T/F: The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.
T/F: Even if possible, it would be inefficient to prohibit all polluting activity.
T/F: Economists believe that the optimal level of pollution is zero.
T/F: Government can be used to solve externality problems that are too costly for private parties to solve.
T/F: According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.
T/F: Private parties may choose not to solve an externality problem if the transaction costs are large enough.
In a market economy, government intervention
a. will always improve market outcomes.
b. reduces efficiency in the presence of externalities.
c. may improve market outcomes in the presence of externalities.
d. is necessary to control individual greed.
The term market failure refers to
a. a market that fails to allocate resources efficiently.
b.an unsuccessful advertising campaign which reduces demand.
c. ruthless competition among firms.
d. a firm that is forced out of business because of losses.
Market failure can be caused by
a. too much competition.
c. low consumer demand.
An externality is an example of
a. a corrective tax.
b. a tradable pollution permit.
c. a market failure.
d. Both a and b are correct.
An externality is the impact of
a. society's decisions on the well-being of society.
b. a person's actions on that person's well-being.
c. one person's actions on the well-being of a bystander.
d. society's decisions on the poorest person in the society.
a. results in an equilibrium that does not maximize the total benefits to society.
d. causes demand to exceed supply.
c. strengthens the role of the "invisible hand" in the marketplace.
d. affects buyers but not sellers.
an externality exists whenever
a. the economy cannot benefit from government intervention.
b. markets are not able to reach equilibrium.
c. a firm sells its product in a foreign market.
d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.
Which of the following represents a way that a government can help the private market to internalize an externality?
a. taxing goods that have negative externalities
b. subsidizing goods that have positive externalities
c. The government cannot improve upon the outcomes of private markets.
d. Both a and b are correct
When an externality is present, the market equilibrium is
a. efficient, and the equilibrium maximizes the total benefit to society as a whole.
b. efficient, but the equilibrium does not maximize the total benefit to society as a whole.
c. inefficient, but the equilibrium maximizes the total benefit to society as a whole.
d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.
Externalities tend to cause markets to be
Private markets fail to account for externalities because
a. externalities don't occur in private markets.
b. sellers include costs associated with externalities in the price of their product.
c. decision makers in the market fail to include the costs of their behavior to third parties.
d. the government cannot easily estimate the optimal quantity of pollution.
Which of the following policies is the government most inclined to use when faced with a positive externality?
d. usage fees
When externalities cause markets to be inefficient,
a. government action is always needed to solve the problem.
b. private solutions can be developed to solve the problem.
c. given enough time, externalities can be solved through normal market adjustments.
d. there is no way to eliminate the problem of externalities in a market.
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