Chapter 4: Market Failures: Public Goods and Externalities Flashcards
Use the following diagram to answer the next question; assume the demand and supply curves capture all relevant benefits and costs.Refer to the diagram. In this competitive market, total surplus (combined consumer and producer surplus) is maximized at:
A)price M
B)price B
C)output G
D)output H
D) output H
Suppose two goods, X and Y, are economically desirable in that there is some positive output at which total benefits exceed total costs. If good X is characterized by nonrivalry and non-excludability but good Y is characterized by both rivalry and excludability, then:
A)both can be efficiently provided by private firms
B)X can be efficiently provided by private firms but Y must be financed through taxes
C)Y can be efficiently provided by private firms but X must be financed through taxes
D)both goods must be financed through taxes
C) Y can be efficiently provided by private firms but X must be financed through taxes
Answer the next question on the basis of the following diagram:Refer to the diagram. At the equilibrium price and quantity, consumer surplus in this market is:
A)$3
B)$7
C)$150
D)$350
C) $150
Positive externalities are most likely to be found in the production of:
A)illegal drugs
B)DVD recording devices
C)milk and dairy products
D)secondary education
D) secondary education
Bees from a keeper’s hive can pollinate fruit trees for many surrounding orchards. Therefore, the production of honey:
A)generates a positive externality and should be encouraged through subsidies
B)generates a positive externality, however resources are correctly allocated in this market
C)generates a negative externality and should be discouraged through taxes
D)needs no government intervention. Beekeepers reap all private benefits
A) generates a positive externality and should be encouraged through subsidies
Government has imposed a tax on the producers of good X and has subsidized the consumers of good Y. If these policies result in the production of the efficient amounts of both goods, it is likely the government is correcting for:
A)external costs in producing X and external benefits in consuming Y
B)external benefits in producing X and external costs in consuming Y
C)external benefits in producing X and consuming Y
D)external costs in producing X and consuming Y
A) external costs in producing X and external benefits in consuming Y
Answer the next question on the basis of the following information for a public good. PR and PS are the prices that Rafael and Sarki, respectively, are willing to pay for the marginal unit of a public good, rather than do without it. Rafael and Sarki are the only members of society.Refer to the table. Suppose the public good can be provided by the government at a constant marginal cost of $7. The optimal quantity of the public good is:
A)1 unit
B)2 units
C)3 units
D)4 units
D) 4 units
Compared to the efficient amount, suppose too many resources are allocated to the production of some good. The most likely explanation is that:
A)production of this good creates external costs
B)production of this good creates external benefits
C)this good is characterized by non-rivalry and non-excludability
D)this is a “public good”
A) production of this good creates external costs
Answer the next question on the basis of the following information for four city beautification programs of increasing scope. All figures are in millions of dollars.Refer to the table. On economic grounds, the most efficient program is:
A)A
B)B
C)C
D)D
B) B
After his car broke down on a hot day, Jack walked more than a mile to the nearest convenience store and paid $1 for a bottle of water. Considering his thirst, he would willingly have paid $3. Jack’s consumer surplus is:
A)$1
B)$2
C)$3
D)$4
B) $2
