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Microeconomics chapter 10
Terms in this set (45)
Market failure can be caused by
The difference between social cost and private cost is a measure of the
cost of an externality
Internalizing a positive externality will cause the demand curve to
shift to the right
The term market failure refers to
a market that fails to allocate resources efficiently.
result in smaller than efficient equilibrium quantity.
An externality arises when a person engages in an activity that influences the well-being of
bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect.
An externality is an example of
a market failure.
Which of the following represents a way that a government can help the private market to internalize an externality?
taxing goods that have negative externalities & subsidizing goods that have positive externalities
A negative externality arises when a person engages in an activity that has
an adverse effect on a bystander who is not compensated by the person who causes the effect
Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the
social value exceeds the private value at the private market solution.
When the government intervenes in markets with externalities, it does so in order to
protect the interests of bystanders
If education produces positive externalities, we would expect
the government to subsidize education.
If a sawmill creates too much noise for local residents,
the government can raise economic well-being through noise-control regulations.
Which of the following is an example of a positive externality?
The mayor of a small town plants flowers in the city park.
When externalities exist, buyers and sellers
neglect the external effects of their actions, and the market equilibrium is not efficient.
If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million, the policy would be considered a
A corrective tax is also known as:
a Pigovian tax.
give factory owners an economic incentive to reduce pollution.
If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the policy would be considered
a corrective tax.
A command-and-control policy is another term for a
Corrective taxes are unlike most other taxes because they
move the allocation of resources closer to the social optimum.
The best remedy for market failure is often
a market-based solution.
With a corrective tax, the supply curve for pollution is
Which of the following suggests that private markets can be effective in dealing with externalities?
the Coase theorem
The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called
the Coase theorem.
Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action
is needed when private solutions fail to arise.
The Golden Rule is an example of a private solution for
If only a few people are affected by an externality, then it is likely that
a private solution to the inefficiency will occur.
Private contracts between parties with mutual interests
can solve some inefficiencies associated with positive externalities.
Two types of private solutions to the problem of externalities are
charities and the Golden Rule
Which of the following statements about a well-maintained yard best conveys the general nature of the externality?
a well-maintained yard conveys a positive externality because it increases the value of the adjacent properties in the neighborhood
Dioxin emission that results from the production of paper is a good example of a negative externality because
self-interested paper producers will not consider the full cost of the dioxin pollution they create
Which of the following policies is the government most inclined to use when faced with a positive externality?
A positive externality arises when a person engages in an activity that has
a beneficial effect on a bystander who does not pay the person who causes the effect
cause markets to fail to allocate resources efficiently
The supply curve for a product reflects the
cost to sellers of producing the product
If an externality is present in the market, economic efficiency may be enhanced by
When externalities are present in the market, the well-being of market participants
is DIRECTLY affected, and market bystanders are INDIRECTLY affected
When a market is characterized by an externality, the government
can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality
Research into new technologies provides a
positive externality, and too few resources are devoted to research as a result
If a market is characterized by a positive externality that is not the result of a technology spillover,
the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is greater than the equilibrium price
Which of the following is NOT an advantage of corrective taxes?
they subsidize the production of goods with positive externalities
Corrective taxes are typically advocated to correct for the effects of
Emission controls on automobiles are an example of a
command-and-control policy to increase social efficiency
When the government uses a command and control policy to solve an externality, it
creates policies that directly regulate behavior
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