Question 1

When negative externalities are connected with the production of a good,

Accepted Answer

A)   market output will be greater than the socially optimal output.
B)   private costs and social costs are equal.
C)   the government should subsidize the production of the good.
D)   there will be a shortage of the good.

Question 2

A negative externality exists when

Accepted Answer

A)   marginal social costs are less than marginal private costs.
B)   marginal social costs are greater than marginal private costs.
C)   marginal social benefits are less than marginal private benefits.
D)   marginal social benefits are greater than marginal private benefits.
E)   b and c

Question 3

A positive externality exists and government wants to apply a per-unit subsidy in order to bring about the socially optimal output.Under what condition will the solution (of the subsidy) be worse than the problem (the market failure) ?

Accepted Answer

A)   Under the condition that the subsidy is greater than the marginal external benefit (associated with the positive externality) .
B)   Under the condition that the post-subsidy output is not farther away from the socially optimal output than the pre-subsidy output is from the socially optimal output.
C)   Under the condition that the post-subsidy output is farther away from the socially optimal output than the pre-subsidy output is from the socially optimal output.
D)   Under the condition that the subsidy is less than the marginal external benefit (associated with the positive externality) .
E)   none of the above

Question 4

Positive externalities can be internalized using persuasion,but persuasion is not effective with negative externalities.

Accepted Answer

A) True 
 B)False

Question 5

A good is nonexcludable if no externalities,either negative or positive,are associated with its production or consumption.

Accepted Answer

A) True 
 B)False

Question 6

The government's provision of nonexcludable public goods such as national defense is accepted because

Accepted Answer

A)   government is more efficient than private firms at producing goods.
B)   the market fails to produce nonexcludable public goods as a result of the free-rider problem.
C)   people do not value public goods such as national defense very highly.
D)   a and c
E)   all of the above

Question 7

In the case of a negative externality,the entire marginal social cost curve lies

Accepted Answer

A)   below the entire marginal private cost curve by the amount of the external costs associated with the negative externality.
B)   below the entire demand curve by the amount of the external costs associated with the negative externality.
C)   above the entire marginal private cost curve by the amount of the external costs associated with the negative externality.
D)   above the entire demand curve by the amount of the external costs associated with the negative externality.
E)   none of the above

Question 8

When negative externalities are involved,the market is said to

Accepted Answer

A)   fail, because it underproduces the good connected with the negative externality.
B)   fail, because it overproduces the good connected with the negative externality.
C)   succeed, because it produces the socially optimal quantity of the good connected with the negative externality.
D)   be "in optimum," because the equilibrium fully adjusts for the negative externality.

Question 9

The disagreement between A.C.Pigou and Ronald Coase arose because

Accepted Answer

A)   Pigou argued that the government should ban all externality-generating activities, while Coase thought that taxes and subsidies should be used instead.
B)   Coase argued that the government should ban all externality-generating activities, while Pigou thought that taxes and subsidies should be used instead.
C)   Pigou argued that the government should use taxes and subsidies to adjust for externalities, while Coase proposed a market solution to the externality problem.
D)   Coase argued that the government should use taxes and subsidies to adjust for externalities, while Pigou proposed a market solution to the externality problem.

Question 10

Ronald Coase stressed the necessity of using taxes to internalize negative externalities.

Accepted Answer

A) True 
 B)False

Question 11

In the early West,many of the open lands were overgrazed.This was largely because

Accepted Answer

A)   landowners charged ranchers a fee to graze their cattle.
B)   the lands were unowned.
C)   a government policy in effect at the time subsidized cattle production.
D)   none of the above

Question 12

Exhibit 31-5
 
-Refer to Exhibit 31-5.If a positive externality exists,then curve __________ represents the marginal social benefit curve and the area __________ represents the market failure.

Accepted Answer

A)   2; BDC
B)   1; ABC
C)   3; ABC
D)   2; ABC
E)   1; BDC

Question 13

Suppose a particular production process results in a large amount of pollution and the government decides to impose a tax to correct for this externality,such that the socially optimal output will be produced.The tax will have the effect of shifting the

Accepted Answer

A)   marginal private benefit curve to the right.
B)   marginal social benefit curve to the right.
C)   marginal private cost curve to the left.
D)   marginal social cost curve to the left.
E)   marginal private cost curve to the right.

Question 14

Exhibit 31-1
 1 to Q2 is the area of A)  ABC. B)  Q2BCQ1. C)  Q2BAQ1. D)  Q2EAQ1." class="answers-bank-image d-inline" rel="preload" >
-Refer to Exhibit 31-l.If the exhibit represents a negative externality situation,the benefit of expanding output from Q1 to Q2 is the area of

Accepted Answer

A)   ABC.
B)   Q2BCQ1.
C)   Q2BAQ1.
D)   Q2EAQ1.

Question 15

Exhibit 31-1
 1 to Q2 is the area of A)  ABC. B)  BEA. C)  Q2BAQ1. D)  Q2EAQ1." class="answers-bank-image d-inline" rel="preload" >
-Refer to Exhibit 31-1.If the exhibit represents a negative externality situation,the net social cost of expanding output from Q1 to Q2 is the area of

Accepted Answer

A)   ABC.
B)   BEA.
C)   Q2BAQ1.
D)   Q2EAQ1.

Question 16

If a person who generates a negative externality incorporates into his or her private cost-benefit calculations the effects that this externality will have on third parties,the externality has been

Accepted Answer

A)   substituted.
B)   accommodated.
C)   compounded.
D)   internalized.

Question 17

If the consumption of a good by one person reduces its consumption by others,then the good is

Accepted Answer

A)   nonrivalrous in consumption.
B)   rivalrous in consumption.
C)   nonexcludable.
D)   excludable.
E)   b and d

Question 18

When marginal private cost is equal to marginal social cost,

Accepted Answer

A)   the activity in question generates no positive externality.
B)   the activity in question generates no negative externality.
C)   all positive externalities have been internalized.
D)   all negative externalities have been internalized.
E)   b or d

Question 19

Hank goes to a Korean restaurant for the first time and he has no prior knowledge of Korean.He orders the Daenjang Chigae prepared medium hot and hopes for the best.Here an information __________ is __________ a market outcome.

Accepted Answer

A)   symmetry; affecting
B)   symmetry; not affecting
C)   asymmetry; affecting
D)   asymmetry; not affecting

Question 20

Exhibit 31-4
 1 B)  underproduces; Q2 C)  overproduces; Q1 - Q2 D)  underproduces; Q2 - Q1" class="answers-bank-image d-inline" rel="preload" >
-Refer to Exhibit 31-4. If a negative externality exists,then the market ____________output by the amount ________________.

Accepted Answer

A)   overproduces; Q1
B)   underproduces; Q2
C)   overproduces; Q1 - Q2
D)   underproduces; Q2 - Q1

Exam 31: Market Failure: Externalities, Public Goods, and Asymmetric Information

Hank goes to a Korean restaurant for the first time and he has no prior knowledge of Korean.He orders the Daenjang Chigae prepared medium hot and hopes for the best.Here an information __________ is __________ a market outcome.

Correct AnswerverifiedShow Answer

The government's provision of nonexcludable public goods such as national defense is accepted because

Correct AnswerverifiedShow Answer

Suppose a particular production process results in a large amount of pollution and the government decides to impose a tax to correct for this externality,such that the socially optimal output will be produced.The tax will have the effect of shifting the

Correct AnswerverifiedShow Answer

A positive externality exists and government wants to apply a per-unit subsidy in order to bring about the socially optimal output.Under what condition will the solution (of the subsidy) be worse than the problem (the market failure) ?

Correct AnswerverifiedShow Answer

Exhibit 31-5 -Refer to Exhibit 31-5.If a positive externality exists,then curve __________ represents the marginal social benefit curve and the area __________ represents the market failure.

Correct AnswerverifiedShow Answer

When negative externalities are involved,the market is said to

Correct AnswerverifiedShow Answer

If the consumption of a good by one person reduces its consumption by others,then the good is

Correct AnswerverifiedShow Answer

When negative externalities are connected with the production of a good,

Correct AnswerverifiedShow Answer

A good is nonexcludable if no externalities,either negative or positive,are associated with its production or consumption.

Correct AnswerverifiedShow Answer

Exhibit 31-1 -Refer to Exhibit 31-l.If the exhibit represents a negative externality situation,the benefit of expanding output from Q1 to Q2 is the area of

Correct AnswerverifiedShow Answer

In the case of a negative externality,the entire marginal social cost curve lies

Correct AnswerverifiedShow Answer

If a person who generates a negative externality incorporates into his or her private cost-benefit calculations the effects that this externality will have on third parties,the externality has been

Correct AnswerverifiedShow Answer

In the early West,many of the open lands were overgrazed.This was largely because

Correct AnswerverifiedShow Answer

Positive externalities can be internalized using persuasion,but persuasion is not effective with negative externalities.

Correct AnswerverifiedShow Answer

When marginal private cost is equal to marginal social cost,

Correct AnswerverifiedShow Answer

Exhibit 31-1 -Refer to Exhibit 31-1.If the exhibit represents a negative externality situation,the net social cost of expanding output from Q1 to Q2 is the area of

Correct AnswerverifiedShow Answer

The disagreement between A.C.Pigou and Ronald Coase arose because

Correct AnswerverifiedShow Answer

Exhibit 31-4 -Refer to Exhibit 31-4. If a negative externality exists,then the market ____________output by the amount ________________.

Correct AnswerverifiedShow Answer

Ronald Coase stressed the necessity of using taxes to internalize negative externalities.

Correct AnswerverifiedShow Answer

A negative externality exists when

Correct AnswerverifiedShow Answer

Hank goes to a Korean restaurant for the first time and he has no prior knowledge of Korean.He orders the Daenjang Chigae prepared medium hot and hopes for the best.Here an information is a market outcome.

Correct Answer
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Exhibit 31-5 -Refer to Exhibit 31-5.If a positive externality exists,then curve represents the marginal social benefit curve and the area represents the market failure.

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Exhibit 31-1 -Refer to Exhibit 31-l.If the exhibit represents a negative externality situation,the benefit of expanding output from Q₁ to Q₂ is the area of

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Exhibit 31-1 -Refer to Exhibit 31-1.If the exhibit represents a negative externality situation,the net social cost of expanding output from Q₁ to Q₂ is the area of

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Exhibit 31-4 -Refer to Exhibit 31-4. If a negative externality exists,then the market output by the amount ____.

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