Chapter 4: Market Failure: Public Goods and Externalities

Question 1

What two categories do market failures in competitive markets fall into?

Answer 1

demand side and supply side market failures

Question 2

When does a demand-side market failure happen?

Answer 2

when demand curves do not reflect consumer’s full willingness to pay for a good or service

Question 3

When do supply-side market failures occur?

Answer 3

when supply curves do not reflect the full cost of producing a good or service

Question 4

Why do demand-side market failures arise?

Answer 4

because it is impossible in certain cases to charge consumers what they are willing to pay for a product

Question 5

Why do supply-side market failures arise?

Answer 5

they arise in situations in which a firm does not have to pay the full cost of producing its ouput

Question 6

What is consumer surplus?

Answer 6

the benefit surplus received by a consumer or consumers in a market

Question 7

When does allocative efficiency occur?

Answer 7

at the market equilibrium quantity where three conditions exist simultaneously: MB = MC, maximum willingness to pay = minimum

Question 8

What is efficiency loss (or deadweight loss)

Answer 8

reductions of combined consumer and producer surplus

Question 9

Why may markets fail to produce any public goods?

Answer 9

because its demand curve may reflect more of its consumers willingness to pay

Question 10

What are private goods distinguished by?

Answer 10

rivalry and excludability

Question 11

What is rivalry?

Answer 11

when one person buys and consumes a product it is not available for another person to buy and consumer

Question 12

What does excludability mean?

Answer 12

that sellers can keep people who do not pay for a product from obtaining its benefits

Question 13

What characteristics do public goods have?

Answer 13

those opposite of private goods

Question 14

What does non rivalry mean?

Answer 14

that one person’s consumption of a good does not preclude consumption of the good by others

Question 15

What does non excludability mean?

Answer 15

there Is no effective way of excluding individuals from the benefit of the good once it comes into existence

Question 16

What is the free-rider problem?

Answer 16

Once a producer has provided a public good, everyone, including non payers, can obtain the benefit

Question 17

How does the government estimate the demand of a public good?

Answer 17

through surveys or public votes

Question 18

What does the marginal-cost-marginal-benefit rule tell us?

Answer 18

which plan provides the maximum excess of total benefits over total costs or, in other words, the plan that provides society with the maximum net benefit

Question 19

What are quasi-public goods?

Answer 19

goods that can be produced and delivered in such a way that exclusion would be possible

Question 20

What are examples of quasi-public goods?

Answer 20

education, streets and highways, police and fire protection, libraries and museums, preventive medicine, and sewage disposal

Question 21

Why does government often provide quasi-public goods?

Answer 21

to avoid the underallocation of resources that would otherwise occur

Question 22

What do taxes do?

Answer 22

remove resources from private use

Question 23

When does an externality occur?

Answer 23

when some of the costs or benefits of a good or service are passed onto or “spill over to” someone other than the immediate buyer or seller

Question 24

What type of market failure does negative externalities cause?

Answer 24

supply-side market failures

Question 25

What does the failure to account for all production costs cause?

Answer 25

a firm’s supply curves to shift to the right (or below) where they would be if firms properly accounted for all costs

Question 26

What type of market failure does a positive externality cause?

Answer 26

demand-side market failiures

Question 27

What does the failure to account for all the benefits shift?

Answer 27

the market demand curves to the left

Question 28

Are products featuring positive externalities over or under produced?

Answer 28

underproduced

Question 29

How can government counter negative externalities?

Answer 29

use direct controls and taxes: it may provide subsidies or public goods to deal with positive externalities

Question 30

What are direct controls?

Answer 30

the direct way to reduce negative externalities from a certain activity is to pass leglislation limiting that activity (hence raising the cost of production)

Question 31

What are subsidies to buyers?

Answer 31

government could correct the under allocation of resources by subsidizing consumers of the product

Question 32

What are subsidies to producers?

Answer 32

payments from the government that decrease producer’s costs

Question 33

What is government provisions?

Answer 33

providing a product for free for everyone

Question 34

when does the optimal reduction of an externality occur?

Answer 34

when society’s marginal cost and marginal benefit of reducing that externality are equal

Question 35

What is governmental failure?

Answer 35

economically inefficient outcomes caused by shortcomings in the public sector