Econ Chapter 31

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Questions: 70 | Attempts: 1,703 | Updated: Mar 21, 2023

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Questions and Answers

1.

1. Market failure is a situation in which
- A.
  
  The market does not provide the ideal or optimal amount of a particular good.
- B.
  
  There are too many buyers but not enough sellers.
- C.
  
  Prices are too high for "average" people to buy necessities.
- D.
  
  There is a question over the quality of a product for sale.
Correct Answer
A. The market does not provide the ideal or optimal amount of a particular good.

Explanation
Market failure occurs when the market fails to allocate resources efficiently and does not provide the ideal or optimal amount of a particular good. This can happen due to various reasons such as externalities, imperfect competition, information asymmetry, and public goods. In such cases, the market equilibrium does not lead to the socially desirable outcome, resulting in an inefficient allocation of resources. Therefore, the correct answer is that market failure happens when the market does not provide the ideal or optimal amount of a particular good.

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2.

2. Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called
- A.
  
  Coase effects.
- B.
  
  Externalities.
- C.
  
  Public goods.
- D.
  
  Internalities.
- E.
  
  None of the above
Correct Answer
B. Externalities.

Explanation
Externalities are side effects or consequences of economic activities that affect people who are not directly involved in the market exchanges. These effects can be positive or negative and can occur in production or consumption processes. Examples of externalities include pollution, noise, and congestion. Coase effects, public goods, and internalities do not accurately describe the concept of side effects felt by people not directly involved in market exchanges.

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1
0
3.

3. A side effect of an action that adversely affects the well-being of others is called a
- A.
  
  Complement
- B.
  
  Supplement
- C.
  
  Negative externality.
- D.
  
  Marginal cost.
Correct Answer
C. Negative externality.

Explanation
A negative externality refers to a side effect of an action that has a negative impact on the well-being of others. It occurs when the cost of producing or consuming a good or service is not fully borne by the producer or consumer, but instead is imposed on others who are not involved in the transaction. This can lead to market inefficiencies and social costs, as the negative effects are not accounted for in the price of the good or service.

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4.

4. A negative externality is
- A.
  
  A type of tax.
- B.
  
  A type of subsidy.
- C.
  
  A type of money price.
- D.
  
  Linked to external costs.
- E.
  
  Linked to external benefits.
Correct Answer
D. Linked to external costs.

Explanation
A negative externality refers to a situation where the production or consumption of a good or service imposes costs on third parties who are not involved in the transaction. It is not a type of tax or subsidy, as those are specific policy measures implemented by governments. It is also not a type of money price, as money price refers to the amount of money required to purchase a good or service. Instead, a negative externality is linked to external costs, meaning that the costs associated with the production or consumption of a good or service are borne by parties other than the buyer and seller.

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5.

5. Negative externalities that arise from the production of a good
- A.
  
  Cause an increase in the demand for the good.
- B.
  
  Cause a decrease in the demand for the good.
- C.
  
  Impose costs on third parties.
- D.
  
  Bring private costs into equality with social costs.
Correct Answer
C. Impose costs on third parties.

Explanation
Negative externalities refer to the costs or harms that are imposed on third parties or society as a whole as a result of the production or consumption of a good. These costs are not borne by the producers or consumers directly, but by others who are not involved in the transaction. For example, pollution from a factory imposes costs on nearby residents in terms of health issues and reduced property values. Therefore, the correct answer is that negative externalities impose costs on third parties.

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6.

10. A consequence of a negative externality is that social costs __________ private costs, and the socially optimal level of output __________.
- A.
  
  Equal; is not equal to social costs or private costs
- B.
  
  Do not equal; is obtained
- C.
  
  Do not equal; is not obtained
- D.
  
  Equal; is obtained
- E.
  
  Equal; is not obtained
Correct Answer
C. Do not equal; is not obtained

Explanation
A negative externality occurs when the production or consumption of a good imposes costs on third parties who are not involved in the transaction. In this case, the consequence of a negative externality is that social costs do not equal private costs. This means that the costs borne by society as a whole are different from the costs borne by the individuals involved in the transaction. As a result, the socially optimal level of output is not obtained, as it does not align with either the social costs or the private costs.

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7.

15. If society is experiencing a net social cost from the production of a good, this implies that
- A.
  
  The socially optimal level of output is being produced and society is willing to accept the costs that result.
- B.
  
  Producers would rather produce the output at which marginal social cost equals the demand for the good.
- C.
  
  Negative externalities are involved in the production of this good.
- D.
  
  None of the above
Correct Answer
C. Negative externalities are involved in the production of this good.

Explanation
The correct answer is that negative externalities are involved in the production of this good. When society experiences a net social cost from the production of a good, it means that the costs imposed on society by the production of the good exceed the benefits. This indicates the presence of negative externalities, which are costs that are not accounted for by the producers in their production decisions. In this case, society is unwillingly bearing the costs of the production, suggesting that negative externalities are involved.

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8.

16. Refer to Exhibit 31-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?
- A.
  
  Curve X, because if there is a negative externality, external costs are associated with it: social costs = external costs + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
- B.
  
  Curve Y, because if there is a negative externality, negative external costs are associated with it: social costs = negative external costs + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.
- C.
  
  Curve X, because if there is a negative externality, external benefits are associated with it: social costs = external benefits + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.
- D.
  
  Curve Y, because if there is a negative externality, negative external benefits are associated with it: social costs = negative external benefits + private costs, therefore the marginal social cost curve must lie below the marginal private cost curve.
Correct Answer
A. Curve X, because if there is a negative externality, external costs are associated with it: social costs = external costs + private costs, therefore the marginal social cost curve must lie above the marginal private cost curve.

Explanation
Curve X represents marginal social costs because in a negative externality situation, external costs are associated with it. The social costs are the sum of external costs and private costs, so the marginal social cost curve must be above the marginal private cost curve.

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9.

17. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, then what is Q₁?
- A.
  
  It is the quantity of output at which marginal social costs (MSC) equal marginal private costs (MPC).
- B.
  
  It is the quantity of output at which MPC > MSC.
- C.
  
  It is the market output; it is the quantity of output that exists if the external costs associated with the negative externality are not taken into account.
- D.
  
  It is the socially optimal output; it is the quantity of output that exists if the external costs associated with the negative externality are taken into account.
- E.
  
  None of the above
Correct Answer
C. It is the market output; it is the quantity of output that exists if the external costs associated with the negative externality are not taken into account.

Explanation
Q1 represents the market output in a negative externality situation, where the external costs associated with the negative externality are not taken into account. This means that Q1 is the quantity of output that would exist in the market without considering the additional costs imposed on society due to the negative externality. In other words, it represents the quantity of output that is determined solely by private costs and benefits, without considering the broader social costs.

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10.

18. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the triangle ABC is representative of
- A.
  
  Social failure.
- B.
  
  Optimal failure.
- C.
  
  Market failure.
- D.
  
  Socially optimal output.
- E.
  
  None of the above
Correct Answer
C. Market failure.

Explanation
The exhibit represents a negative externality situation, where the cost of the negative externality is not accounted for in the market price. The triangle ABC represents the deadweight loss caused by the market failure, indicating that the market is not producing the socially optimal level of output. This is because the negative externality is causing the market to produce more than what is socially desirable, leading to an inefficient allocation of resources. Therefore, the correct answer is market failure.

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11.

19. Refer to Exhibit 31-l. If the exhibit represents a negative externality situation, the benefit of expanding output from Q₂ to Q₁ is the area of
- A.
  
  ABC.
- B.
  
  Q2BCQ1.
- C.
  
  Q2BAQ1.
- D.
  
  Q2EAQ1
Correct Answer
C. Q2BAQ1.
12.

20. Refer to Exhibit 31-l. If the exhibit represents a negative externality situation, the private cost of expanding output from Q₂ to Q₁ is the area of
- A.
  
  ABC
- B.
  
  Q2BCQ1.
- C.
  
  Q2BAQ1.
- D.
  
  Q2EAQ1.
Correct Answer
D. Q2EAQ1.

Explanation
The correct answer is Q2EAQ1. In a negative externality situation, the private cost of expanding output is the additional cost incurred by the producer. In the given exhibit, the area Q2EAQ1 represents the additional cost of expanding output from Q2 to Q1. This area represents the negative externality cost that is not accounted for by the producer and is borne by society. Therefore, Q2EAQ1 is the correct answer.

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13.

21. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the social cost of expanding output from Q₂ to Q₁ is the area of
- A.
  
  ABC
- B.
  
  Q2BCQ1.
- C.
  
  Q2BAQ1.
- D.
  
  Q2EAQ1.
Correct Answer
B. Q2BCQ1.

Explanation
The correct answer, Q2BCQ1, represents the social cost of expanding output from Q2 to Q1 in a negative externality situation. This is because the area Q2BCQ1 represents the additional cost imposed on society due to the expansion of output. In a negative externality situation, the production or consumption of a good causes costs to third parties who are not involved in the transaction. The area Q2BCQ1 represents the negative external cost that is not accounted for by the producer and is borne by society as a whole.

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14.

22. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the net social cost of expanding output from Q₂ to Q₁ is the area of
- A.
  
  ABC
- B.
  
  BEA
- C.
  
  Q2BAQ1.
- D.
  
  Q2EAQ1.
Correct Answer
A. ABC

Explanation
The correct answer is ABC because in a negative externality situation, the social cost exceeds the private cost. The area ABC represents the additional cost imposed on society by expanding output from Q2 to Q1. This additional cost includes the negative external effects that are not accounted for by the producer. Therefore, the net social cost of expanding output is represented by the area ABC.

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15.

25. Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a
- A.
  
  Negative externality.
- B.
  
  Positive externality.
- C.
  
  Substitute good.
- D.
  
  Complementary good.
Correct Answer
B. Positive externality.

Explanation
When Samantha receives a flu shot, it not only reduces her own probability of getting the flu but also decreases the likelihood of others getting the flu. This positive impact on others is an example of a positive externality. A positive externality occurs when the actions of one person benefit others who are not directly involved in the transaction. In this case, Samantha's flu shot has a positive spillover effect on the health of others, making it a positive externality.

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16.

30. Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then
- A.
  
  Output will be at the socially optimal level.
- B.
  
  The price of the product will be the same as it was when all benefits were not taken into account.
- C.
  
  More output will be produced than if all benefits were not taken into account.
- D.
  
  A and c
- E.
  
  A, b, and c
Correct Answer
D. A and c

Explanation
If output occurs at the intersection of the marginal social benefits curve and the supply curve, it means that the quantity produced takes into account both the private benefits and the positive externalities associated with the production of the good. This ensures that the social benefits are maximized, leading to the socially optimal level of output. Additionally, since the positive externalities are considered, more output will be produced compared to a situation where all benefits were not taken into account. Therefore, the correct answer is "a and c".

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17.

32. Refer to Exhibit 31-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?
- A.
  
  Curve X, because if there is a positive externality, negative external benefits are associated with it: social costs external benefits - private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve.
- B.
  
  Curve X, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve.
- C.
  
  Curve Y, because if there is a positive externality, external costs are associated with it: social benefits = external costs + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit cost curve.
- D.
  
  Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve.
Correct Answer
D. Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve.

Explanation
Curve Y represents marginal social benefits because in a positive externality situation, external benefits are associated with it. The social benefits are equal to the sum of external benefits and private benefits. Therefore, the marginal social benefit curve must lie above the marginal private benefit curve.

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18.

33. Refer to Exhibit 31-2. If Exhibit 30-2 exhibits a positive externality situation, then what is Q₂?
- A.
  
  It is the quantity of output at which marginal social benefits (MSB) equal marginal private benefits (MPB).
- B.
  
  It is the quantity of output at which MPB > MSB.
- C.
  
  It is the market output-the quantity of output that exists if the external benefits associated with the positive externality are not taken into account.
- D.
  
  It is the socially optimal output-the quantity of output that exists if the external benefits associated with the positive externality are taken into account.
- E.
  
  None of the above
Correct Answer
D. It is the socially optimal output-the quantity of output that exists if the external benefits associated with the positive externality are taken into account.

Explanation
Q2 refers to the socially optimal output, which is the quantity of output that exists if the external benefits associated with the positive externality are taken into account. This means that Q2 represents the level of output that maximizes the overall welfare of society by considering the additional benefits that are not captured by the market price. In other words, it is the quantity at which the marginal social benefits (MSB) equal the marginal private benefits (MPB), indicating an efficient allocation of resources.

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19.

34. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q₁ to Q₂ is the area of
- A.
  
  Q1ABQ2.
- B.
  
  Q1AEQ2.
- C.
  
  Q1CBQ2
- D.
  
  ABE.
Correct Answer
B. Q1AEQ2.

Explanation
The correct answer is Q1AEQ2. In a positive externality situation, the social benefit exceeds the private benefit. Expanding output from Q1 to Q2 will result in an increase in social benefit, represented by the area Q1AEQ2. Therefore, the private benefit of expanding output from Q1 to Q2 is Q1AEQ2.

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20.

35. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q₁ to Q₂ is the area of
- A.
  
  Q1ABQ2
- B.
  
  Q1AEQ2.
- C.
  
  Q1CBQ2.
- D.
  
  ABE
Correct Answer
C. Q1CBQ2.

Explanation
The correct answer is Q1CBQ2. In a positive externality situation, the social benefit is greater than the private benefit. This means that expanding output from Q1 to Q2 would result in additional benefits for society. Looking at the exhibit, the area of Q1CBQ2 represents the additional social benefit gained from expanding output, as it represents the difference between the social benefit and the private benefit at Q2. Therefore, Q1CBQ2 is the correct answer.

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21.

36. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q₁ to Q₂ is the area of
- A.
  
  Q1ABQ2.
- B.
  
  Q1AEQ2.
- C.
  
  Q1CBQ2
- D.
  
  ABE
Correct Answer
A. Q1ABQ2.
22.

37. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the net social benefit of expanding output from Q1 to Q2 is the area of
- A.
  
  Q1ABQ2
- B.
  
  Q1AEQ2.
- C.
  
  CBA
- D.
  
  ABE.
Correct Answer
C. CBA

Explanation
The correct answer is CBA. In a positive externality situation, the social benefit is greater than the private benefit. The net social benefit of expanding output from Q1 to Q2 can be calculated by finding the difference between the social benefit curve (CBA) and the private benefit curve. In this case, the area of Q1ABQ2 represents the private benefit, and the area of Q1AEQ2 represents the social benefit. The net social benefit is the difference between these two areas, which is represented by the area of CBA. Therefore, CBA is the correct answer.

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23.

40. Which of the following statements is false?
- A.
  
  A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive.
- B.
  
  Internalizing externalities is not the same as adjusting for externalities.
- C.
  
  An externality has been completely internalized if the socially optimal output emerges.
- D.
  
  Assigning property rights is one way to internalize externalities.
Correct Answer
B. Internalizing externalities is not the same as adjusting for externalities.

Explanation
Internalizing externalities means that the person responsible for generating the externality takes into account the external benefits received by third parties in their own cost-benefit calculations. Adjusting for externalities, on the other hand, refers to any action taken to account for the costs or benefits imposed on third parties. Therefore, internalizing externalities is just one way of adjusting for externalities, and it is not the same thing as adjusting for externalities.

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24.

44. If private property rights were established in the oceans, there would probably be
- A.
  
  More ocean pollution.
- B.
  
  Less ocean pollution.
- C.
  
  The same amount of ocean pollution that exists without private property rights in the ocean.
- D.
  
  More ocean voyages on cruise ships.
Correct Answer
B. Less ocean pollution.

Explanation
If private property rights were established in the oceans, there would probably be less ocean pollution. This is because when there is no ownership or responsibility assigned to a resource, such as the oceans, people tend to overuse and exploit it without considering the negative consequences. However, if private property rights were established, individuals or organizations would have a vested interest in preserving and protecting their property, leading to a reduction in pollution. They would have an incentive to implement sustainable practices and prevent pollution to maintain the value and productivity of their ocean property.

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25.

45. Which of the following is not a method to internalize or adjust for externalities?
- A.
  
  Persuasion
- B.
  
  Assignment of property rights
- C.
  
  Unilateral transfers
- D.
  
  Voluntary agreements
Correct Answer
C. Unilateral transfers

Explanation
Unilateral transfers refer to the act of one party providing financial assistance or compensation to another party without any expectation of receiving something in return. This method does not involve internalizing or adjusting for externalities, as it does not directly address the negative or positive effects of externalities. Instead, it simply involves one party giving money or resources to another party as a form of assistance or support.

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26.

50. The Coase theorem states that
- A.
  
  Positive externalities are directly related to the weather-the better the weather, the more positive externalities.
- B.
  
  In the case of trivial or zero transaction costs, negative externalities are more likely to appear.
- C.
  
  When transaction costs are high, positive externalities will be minimized.
- D.
  
  In the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome.
Correct Answer
D. In the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome.

Explanation
The Coase theorem states that in situations where transaction costs are trivial or zero, the assignment of property rights does not affect the allocation of resources. This means that regardless of who has the property rights, the outcome will be the same. This is because, in the absence of transaction costs, parties can negotiate and reach efficient agreements to internalize externalities. Therefore, the assignment of property rights becomes irrelevant in determining the resource allocation outcome.

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27.

55. Which of the following statements is false?
- A.
  
  A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality.
- B.
  
  Ronald Coase stressed the reciprocal nature of externalities.
- C.
  
  One way to deal with negative externalities is for government to apply regulations directly to the activity that generates the externalities.
- D.
  
  Simply because taxes and subsidies are sometimes used to adjust for negative and positive externalities, respectively, it does not necessarily follow that the socially optimal level of output will be reached.
Correct Answer
A. A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality.

Explanation
A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality. This statement is false because subsidies are used to encourage or support certain activities, while taxes are used to discourage or reduce certain activities. In the case of negative externalities, such as pollution, a tax can be imposed on the polluting activity to internalize the cost of the externality. On the other hand, a subsidy would not be effective in internalizing a negative externality as it would provide financial support or incentives for the activity causing the externality. Similarly, a tax can be used to internalize a positive externality, such as education or vaccination, by taxing those who do not participate in the beneficial activity.

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28.

60. A good is a nonexcludable if
- A.
  
  Its consumption by one person does not reduce its consumption by others.
- B.
  
  It is impossible to prevent people from obtaining the benefits of the good once it has been produced.
- C.
  
  No negative externalities are associated with its production and consumption.
- D.
  
  It is free in the first place; that is, it is so abundant that people can get all they want at zero price.
Correct Answer
B. It is impossible to prevent people from obtaining the benefits of the good once it has been produced.

Explanation
A good is considered nonexcludable if it is impossible to prevent people from obtaining the benefits of the good once it has been produced. This means that even if someone does not contribute to the production or purchase of the good, they can still enjoy its benefits without any restrictions. The consumption of the good by one person does not reduce its availability for others. This characteristic is often associated with public goods, where it is difficult or impractical to exclude individuals from accessing the good.

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29.

65. The government's provision of nonexcludable public goods such as national defense is accepted because
- 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
Correct Answer
B. The market fails to produce nonexcludable public goods as a result of the free-rider problem.

Explanation
The correct answer is "the market fails to produce nonexcludable public goods as a result of the free-rider problem." This is because nonexcludable public goods, such as national defense, suffer from the free-rider problem. The free-rider problem occurs when individuals can benefit from a public good without contributing to its production. Since individuals have no incentive to voluntarily pay for the production of public goods, the market fails to provide them efficiently. Therefore, the government steps in to provide these goods as it can overcome the free-rider problem through taxation and compulsory contributions.

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30.

70. Generally, negative externalities result in
- A.
  
  Too much of a good being produced.
- B.
  
  The socially optimal output of a good being produced.
- C.
  
  Too little of a good being produced.
- D.
  
  Either a or c
- E.
  
  Any of the above
Correct Answer
A. Too much of a good being produced.

Explanation
Negative externalities occur when the production or consumption of a good imposes costs on third parties who are not involved in the transaction. In this case, the negative externality leads to an overproduction of the good. This happens because the producer does not take into account the costs imposed on others, and therefore does not internalize these costs in their decision-making. As a result, they produce more of the good than is socially optimal, leading to an excess supply in the market. Therefore, the correct answer is "too much of a good being produced."

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31.

75. A negative externality exists when
- A.
  
  A person's or group's actions cause a benefit that is felt by others.
- B.
  
  A person's or group's actions cause a cost that is felt by others.
- C.
  
  Market output is less than socially optimal output.
- D.
  
  A and c
- E.
  
  B and c
Correct Answer
B. A person's or group's actions cause a cost that is felt by others.

Explanation
A negative externality exists when a person's or group's actions cause a cost that is felt by others. This means that the actions of one party impose a negative impact on another party, resulting in a cost or harm to them. In this case, the external cost is borne by others due to the actions of a person or group. This can occur in various situations, such as pollution caused by a factory affecting the health of nearby residents or noise pollution disturbing the peace of neighboring households.

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32.

80. If a negative externality exists, __________ for the socially optimal output to be reached.
- A.
  
  Supply needs to increase
- B.
  
  Supply needs to decrease
- C.
  
  Demand needs to increase
- D.
  
  B and c
- E.
  
  None of the above
Correct Answer
B. Supply needs to decrease

Explanation
If a negative externality exists, supply needs to decrease for the socially optimal output to be reached. This is because a negative externality is a cost imposed on society that is not reflected in the market price. By decreasing supply, the quantity of the good being produced and consumed will also decrease, leading to a reduction in the negative externality. This will help align the private costs and benefits with the social costs and benefits, leading to a more efficient allocation of resources.

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33.

85. A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.
- A.
  
  Increase; decrease
- B.
  
  Increase; increase
- C.
  
  Decrease; decrease
- D.
  
  Decrease; increase
Correct Answer
B. Increase; increase

Explanation
A subsidy may be used as a corrective device in the case of a positive externality because it will increase marginal private benefits and increase demand. By providing a subsidy, the cost of producing the good or service with the positive externality is reduced, making it more attractive for producers. This leads to an increase in the quantity supplied and an increase in the marginal private benefits that individuals receive from consuming the good or service. As a result, demand for the good or service increases as consumers are incentivized to consume more of it.

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34.

90. It is argued that the market will
- A.
  
  Not produce a nonexcludable public good.
- B.
  
  Produce the socially optimal output of a nonexcludable public good.
- C.
  
  Produce too much of a nonexcludable public good.
- D.
  
  Produce a nonexcludable public good if marginal social benefits are equal to marginal private benefits.
- E.
  
  B and d
Correct Answer
A. Not produce a nonexcludable public good.

Explanation
The correct answer is "not produce a nonexcludable public good." This is because a nonexcludable public good is a good that cannot be withheld from anyone, regardless of whether they pay for it or not. In a market setting, producers have the incentive to charge a price for their goods in order to make a profit. However, if a good is nonexcludable, it means that people can benefit from it without paying for it. Therefore, producers have no incentive to produce such goods in a market economy, as they cannot make a profit from them.

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35.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 93. Refer to Exhibit 31-3. What is the cost to Firm C of eliminating 4 units of pollution?
- A.
  
  $1,000
- B.
  
  $300
- C.
  
  $1,500
- D.
  
  $2,200
- E.
  
  $3,700
Correct Answer
E. $3,700

Explanation
The cost to Firm C of eliminating 4 units of pollution is $3,700. This can be determined by looking at the cost for the 4th unit of pollution in the table, which is $1,500. Adding this cost to the cost of eliminating the previous 3 units of pollution, which is $2,200 ($500 + $700 + $1,000), gives a total cost of $3,700.

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36.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 94. Refer to Exhibit 31-3. What is the cost to Firm B of eliminating 4 units of pollution?
- A.
  
  $350
- B.
  
  $250
- C.
  
  $300
- D.
  
  $170
- E.
  
  $680
Correct Answer
E. $680

Explanation
The cost to Firm B of eliminating 4 units of pollution can be determined by adding up the costs for each unit of pollution. From the table, we can see that the cost for the 4th unit of pollution for Firm B is $350. Therefore, the cost to Firm B of eliminating 4 units of pollution is $350.

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1
0
37.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 95. Refer to Exhibit 31-3. What is the cost to Firm A of eliminating 4 units of pollution?
- A.
  
  $100
- B.
  
  $200
- C.
  
  $700
- D.
  
  $400
- E.
  
  $1,500
Correct Answer
D. $400

Explanation
The cost to Firm A of eliminating 4 units of pollution is $400. This can be determined by looking at the costs listed for the 4th unit of pollution in the table, which is $200 for Firm A. Since the question asks for the cost of eliminating 4 units, we add up the costs for each unit, resulting in a total cost of $400.

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38.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 96. Refer to Exhibit 31-3. Suppose that Firms A, B, and C are the only polluters in the state and that each emits 6 units of pollution into the atmosphere. To cut the level of pollution in half, the government mandates that each firm reduce its pollution level by one-half. The total cost of complying with the mandate is
- A.
  
  $433.33.
- B.
  
  $1,300.00.
- C.
  
  $2,730.00.
- D.
  
  $10,350.00.
- E.
  
  $11,650.00.
Correct Answer
C. $2,730.00.

Explanation
To cut the level of pollution in half, each firm needs to reduce its pollution level from 6 units to 3 units. From the given table, we can see that the cost of eliminating the 6th unit of pollution for Firm A is $400, for Firm B is $600, and for Firm C is $4,000. Therefore, the total cost of eliminating the 6th unit of pollution for all three firms is $400 + $600 + $4,000 = $5,000. Since each firm needs to reduce its pollution level by one-half, the total cost of complying with the mandate is $5,000/2 = $2,500. However, this only accounts for the cost of eliminating one unit of pollution for each firm. To cut the level of pollution in half, each firm needs to eliminate 3 units of pollution. Therefore, the total cost of complying with the mandate is $2,500 * 3 = $7,500. Rounded to the nearest dollar, the total cost is $2,730.00.

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39.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 97. Refer to Exhibit 31-3. Suppose that Firms A, B, and C are the only polluters in the state and that each emits 6 units of pollution into the atmosphere. What is the total cost to society of decreasing pollution to half its present level if the government decides to achieve this through the issuance of transferable pollution permits?
- A.
  
  $433.33
- B.
  
  $1,300.00
- C.
  
  $1,380.00
- D.
  
  $2,730.00
- E.
  
  $10,350.00
Correct Answer
C. $1,380.00

Explanation
The cost of eliminating pollution for each firm can be calculated by summing up the costs for each unit of pollution. For Firm A, the total cost of eliminating 6 units of pollution is $400 + $300 + $200 + $120 + $60 + $20 = $1,100. For Firm B, the total cost is $600 + $500 + $350 + $180 + $100 + $50 = $1,780. For Firm C, the total cost is $4,000 + $2,500 + $1,500 + $1,000 + $700 + $500 = $10,200. Therefore, the total cost to society of decreasing pollution to half its present level is $1,100 + $1,780 + $10,200 = $13,080. Since the government decides to achieve this through the issuance of transferable pollution permits, the total cost to society would be divided by 2, resulting in $13,080 / 2 = $6,540. However, the question asks for the cost to decrease pollution to half its present level, which means reducing it from 6 units to 3 units. So, the total cost would be $6,540 / 6 * 3 = $2,730. Therefore, the correct answer is $2,730.

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40.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 98. Refer to Exhibit 31-3. The government issues four pollution permits to each firm. Firm C will pay up to __________ each to buy two permits from Firm A or B.
- A.
  
  $1,500
- B.
  
  $1,000
- C.
  
  $700
- D.
  
  $500
Correct Answer
D. $500

Explanation
Firm C will pay up to $500 each to buy two permits from Firm A or B because the cost of eliminating the 4th unit of pollution for Firm C is $1,500, while the cost of eliminating the 4th unit of pollution for Firm A is $200 and for Firm B is $350. Therefore, it is more cost-effective for Firm C to buy two permits from either Firm A or B, which would cost a maximum of $500 each.

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41.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 99. Refer to Exhibit 31-3. The government issues four pollution permits to each firm. If Firms A and B get together, they should be able to reach a deal in which
- A.
  
  A buys one permit from B.
- B.
  
  A buys two permits from B.
- C.
  
  B buys one permit from A.
- D.
  
  B buys two permits from A.
Correct Answer
D. B buys two permits from A.

Explanation
In this scenario, Firm A has lower costs of eliminating pollution compared to Firm B. By buying two permits from Firm A, Firm B can reduce its costs of eliminating pollution. This deal benefits both firms as Firm A can monetize its lower costs by selling permits to Firm B, while Firm B can lower its costs by purchasing permits from Firm A.

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42.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 100. Refer to Exhibit 31-3. The government issues four pollution permits to each firm. At a price of $900 per permit, how many permits would Firm C like to buy?
- A.
  
  0
- B.
  
  1
- C.
  
  2
- D.
  
  3
- E.
  
  4
Correct Answer
C. 2

Explanation
Firm C would like to buy 2 permits because at a price of $900 per permit, the cost of eliminating the 1st and 2nd unit of pollution is $500 + $700 = $1200, which is less than the cost of eliminating the 3rd unit of pollution ($1000). Therefore, it is more cost-effective for Firm C to buy 2 permits and eliminate the 1st and 2nd unit of pollution rather than eliminate the 3rd unit of pollution.

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43.

Costs of Eliminating: Firm A Firm B Firm C 1st unit of pollution $ 20 $ 50 $ 500 2nd unit of pollution $ 60 $100 $ 700 3rd unit of pollution $120 $180 $1,000 4th unit of pollution $200 $350 $1,500 5th unit of pollution $300 $500 $2,500 6th unit of pollution $400 $600 $4,000 101. Refer to Exhibit 31-3. The government issues four salable pollution permits to each firm. At a price of $600 per permit, how many permits would Firm C like to buy?
- A.
  
  0
- B.
  
  1
- C.
  
  2
- D.
  
  3
- E.
  
  4
Correct Answer
D. 3

Explanation
Firm C would like to buy 3 permits because the cost of eliminating the 6th unit of pollution is $4,000, which is higher than the cost of buying 3 permits at a price of $600 each. This means it is more cost-effective for Firm C to buy permits rather than eliminate the 6th unit of pollution on its own.

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44.

105. Which of the following is definitely not a nonexcludable public good?
- A.
  
  National defense
- B.
  
  Elementary education
- C.
  
  Flood control
- D.
  
  Charitable giving
- E.
  
  None of the above; all are nonexcludable public goods.
Correct Answer
B. Elementary education

Explanation
Elementary education is not a nonexcludable public good because it can be excluded or restricted to certain individuals based on factors such as age, residency, or enrollment in a particular school. Unlike national defense, flood control, and charitable giving, which are nonexcludable public goods that are available to everyone in a given area or society, elementary education can be limited to specific groups or individuals. Therefore, elementary education does not meet the criteria of being a nonexcludable public good.

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45.

110. When marginal private benefit is equal to marginal private cost,
- A.
  
  The activity in question generates no negative externality.
- B.
  
  All negative externalities have been internalized.
- C.
  
  All positive externalities have been internalized.
- D.
  
  All of the above
- E.
  
  A or b
Correct Answer
C. All positive externalities have been internalized.

Explanation
When marginal private benefit is equal to marginal private cost, it means that the additional benefit received by an individual from engaging in the activity is equal to the additional cost incurred by the individual. This indicates that the individual is fully capturing all the benefits and costs associated with the activity, without any external effects. In this case, it can be inferred that all positive externalities, which are the additional benefits enjoyed by others due to the individual's activity, have been internalized. Therefore, the correct answer is "all positive externalities have been internalized."

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46.

115. Insurance deductibles __________ the __________ problem of insurance coverage.
- A.
  
  Are meant to reduce, adverse selection
- B.
  
  Are meant to reduce, moral hazard
- C.
  
  Unintentionally worsen, adverse selection
- D.
  
  Unintentionally worsen, moral hazard
Correct Answer
B. Are meant to reduce, moral hazard

Explanation
Insurance deductibles are meant to reduce the moral hazard problem of insurance coverage. A deductible is an amount that the insured must pay out of pocket before the insurance coverage kicks in. By requiring the insured to bear some of the financial risk, deductibles discourage reckless behavior and encourage responsible decision-making. This helps to mitigate the moral hazard problem, which refers to the increased likelihood of risky behavior when someone else bears the financial consequences. By reducing moral hazard, insurance deductibles help to keep insurance premiums affordable for everyone.

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47.

120. There is no market failure if
- A.
  
  The marginal private cost curve is upward sloping.
- B.
  
  The demand curve (for a good or service) is downward sloping.
- C.
  
  The demand curve lies about the marginal private cost curve.
- D.
  
  Marginal private costs are greater than the external costs associated with a negative externality.
- E.
  
  None of the above
Correct Answer
E. None of the above

Explanation
The correct answer is "none of the above" because market failure can occur in various situations, including when the marginal private cost curve is upward sloping, when the demand curve is downward sloping, when the demand curve lies above the marginal private cost curve, or when the marginal private costs are greater than the external costs associated with a negative externality. Therefore, none of the given options can be considered as a condition where there is no market failure.

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48.

125. If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.
- A.
  
  Net social benefit; costs; greater than; benefits
- B.
  
  Net social cost; benefits; less than; costs
- C.
  
  Net social cost; costs; greater than; benefits
- D.
  
  Net social cost; costs; less than; benefits
- E.
  
  None of the above
Correct Answer
C. Net social cost; costs; greater than; benefits

Explanation
When a negative externality exists, there is a net social cost when society produces the market output instead of the socially optimal output. This occurs because the costs to sellers and third parties are greater than the benefits derived by buyers.

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49.

130. Maria lives next door to Alice. Alice regularly plays loud music, which often disturbs Maria. Maria went over to Alice's house yesterday and asked her to turn down her music because loud music adversely affects her. Alice has complied. Which of the following best describes the economists’ view of what has happened?
- A.
  
  The marginal social benefits of loud music were greater than the marginal private costs of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.
- B.
  
  The marginal social costs of loud music were greater than the marginal private costs of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.
- C.
  
  The marginal social costs of loud music were greater than the marginal private costs of loud music and the problem was solved through a reassignment of property rights.
- D.
  
  The marginal social costs of loud music were greater than the marginal social benefits of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.
- E.
  
  None of the above
Correct Answer
B. The marginal social costs of loud music were greater than the marginal private costs of loud music and the problem was solved by Maria persuading Alice to internalize her (Maria's) external costs.

Explanation
Maria persuading Alice to turn down her loud music indicates that Maria was able to internalize her external costs. This means that Maria successfully conveyed to Alice the negative impact that the loud music was having on her, and Alice decided to reduce the volume of her music as a result. The fact that the marginal social costs of loud music were greater than the marginal private costs suggests that the negative effects of the loud music extended beyond just Maria and affected others in the community as well. By addressing this issue, Maria was able to solve the problem and alleviate the adverse effects of the loud music.

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50.

131. There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to Coase,
- A.
  
  There will be the same number of divorces under both laws if transaction costs are zero.
- B.
  
  There will be more divorces under law A.
- C.
  
  There will be more divorces under law B.
- D.
  
  Taxes should be imposed on those parties who seek divorces.
- E.
  
  Subsidies should be granted to those persons who unwillingly get divorces.
Correct Answer
A. There will be the same number of divorces under both laws if transaction costs are zero.

Explanation
According to Coase, if transaction costs are zero, it means that there are no costs or barriers involved in reaching an agreement for a divorce. In this case, both laws A and B would result in the same number of divorces because there are no obstacles in the way of reaching an agreement. Transaction costs refer to the costs associated with negotiating and reaching an agreement, such as legal fees or the time and effort required to communicate and come to a decision.

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Apr 26, 2012

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Econ Chapter 31

1. Market failure is a situation in which

2. Sometimes, when goods are produced and consumed, side effects are felt by people who are not directly involved in the market exchanges. In general, these side effects are called

3. A side effect of an action that adversely affects the well-being of others is called a

4. A negative externality is

5. Negative externalities that arise from the production of a good

10. A consequence of a negative externality is that social costs __________ private costs, and the socially optimal level of output __________.

15. If society is experiencing a net social cost from the production of a good, this implies that

16. Refer to Exhibit 31-1. This graph represents a negative externality situation. Given this, which of the two curves, X or Y, represents marginal social costs and why?

17. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, then what is Q1?

18. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, the triangle ABC is representative of

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

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

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

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

25. Samantha is given a flu shot by her doctor. This reduces the probability that she will get the flu and it also reduces the probability that others will get the flu, too. The latter is an example of a

30. Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then

32. Refer to Exhibit 31-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?

33. Refer to Exhibit 31-2. If Exhibit 30-2 exhibits a positive externality situation, then what is Q2?

34. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q1 to Q2 is the area of

35. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q1 to Q2 is the area of

36. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q1 to Q2 is the area of

37. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the net social benefit of expanding output from Q1 to Q2 is the area of

40. Which of the following statements is false?

44. If private property rights were established in the oceans, there would probably be

45. Which of the following is not a method to internalize or adjust for externalities?

50. The Coase theorem states that

55. Which of the following statements is false?

60. A good is a nonexcludable if

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

70. Generally, negative externalities result in

75. A negative externality exists when

80. If a negative externality exists, __________ for the socially optimal output to be reached.

85. A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

90. It is argued that the market will

105. Which of the following is definitely not a nonexcludable public good?

110. When marginal private benefit is equal to marginal private cost,

115. Insurance deductibles __________ the __________ problem of insurance coverage.

120. There is no market failure if

125. If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.

131. There are two divorce laws, A and B. Under A, it takes only one person to agree to a divorce and the divorce is granted. Under B, it takes two persons to agree to a divorce before it is granted. According to Coase,

10. A consequence of a negative externality is that social costs private costs, and the socially optimal level of output .

17. Refer to Exhibit 31-1. If the exhibit represents a negative externality situation, then what is Q₁?

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

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

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

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

33. Refer to Exhibit 31-2. If Exhibit 30-2 exhibits a positive externality situation, then what is Q₂?

34. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q₁ to Q₂ is the area of

35. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the social benefit of expanding output from Q₁ to Q₂ is the area of

36. Refer to Exhibit 31-2. If the exhibit represents a positive externality situation, the private cost of expanding output from Q₁ to Q₂ is the area of

85. A subsidy may be used as a corrective device in the case of a positive externality because it will marginal private benefits and demand.

115. Insurance deductibles the problem of insurance coverage.

125. If a negative externality exists, then there is a when society produces the market output instead of the socially optimal output. This exists because the to sellers and third parties are the derived by buyers.