Market Failure --- Externalities and Public Goods

The two main characteristics of a public good are:

a. Production at a constant marginal cost and rising demand
b. Nonexcludability and production at rising marginal cost
*c. Nonrivalry and nonexcludability
d. Nonrivalry and large negative externalities

Unlike a private good, a public good:

a. Has no opportunity costs
*b. Has benefits available to all, including nonpayer’s
c. Produces no positive or negative externalities
d. Is characterized by rivalry and excludability

Which of the following is an example of a public good?

*a. A weather warning system
b. A television set
c. A sofa
d. A bottle of soda

An example of a public good is

a. Broadband internet access
*b. Homeland defense
c. A baseball
d. A lawn mower

A public good:
a. Can be profitable produced by private firms
b. Is characterized by rivalry and excludability
c. Produces no negative or positive externalities
*d. Is available to all and cannot be denied to anyone

The market system does not produce public goods because:

a. There is no need or demand for such goods
*b. Private firms cannot stop consumers who are unwilling to pay for such goods from benefitting
from them
c. Public enterprises can produce such goods at lower cost than can private enterprises
d. Their production seriously distorts the distribution of income

Public goods are those for which there:

a. Is no free-rider problem
b. Are no externalities
*c. Is nonrivalry and nonexcludability
d. Is neither an adverse selection nor moral hazard problem
Because of the free-rider problem:
a. A market demand for a public good is overstated
*b. The market demand for a public good is nonexistent or understated
c. Government has increasingly yielded to the private sector in producing public goods
d. Public goods often create moral hazard and adverse selection problems

In a competitive market:
*a. Demand will not always reflect all external benefits
b. Demand will always reflect all external benefits
c. Supply will always reflect all external costs
d. Supply will always reflect all external benefits

If the production of a good or service creates sizable positive externalities, government might correct for
the:
a. Underallocation of resources to its production by imposing an excise tax
b. Overallocation of resources to its production by imposing an excise tax
*c. Underallocation of resources to its production by granting a subsidy
d. Overallocation of resources to its production by granting a subsidy

For which of the following goods or services would a government subsidy be most likely to improve the
allocation of resources?
a. Wheat
b. Newspaper publishing
*c. Cancer research
d. Toys

In a competitive market:
a. External benefits will always exceed external costs
*b. Resources will be misallocated if government does not properly adjust demand and supply for
large external costs and benefits
c. Resources will be allocated efficiently only if external benefits equal external costs
d. An efficient allocation of resources is realized even where there are large external costs and
benefits

Negative externalities arise:

a. When firms pay more than the opportunity cost of resources
b. When the demand curve for a product is located too far to the left
*c. When firms “use” resources without being compelled to pay for their full costs
d. Only in capitalistic societies

Positive externalities benefits

*a. Benefits that accrue to parties other than the producer and buyer of the good
b. The benefits that resource suppliers obtain from the production and sale of a good
c. The benefit that a consumer receives from buying a good
d. The combined benefits that buyer and seller receive from a voluntary market transaction
A pure market economy overallocates resources to the production of goods that:
*a. Involve negative externalities
b. Involve positive externalities
c. Are public goods
d. Are inexpensive to produce

When externalities cause substantial positive benefits for third parties, a competitive market:
*a. Underallocates resources to the production for the good
b. Overallocates resources to the production of the good
c. Is allocatively efficient
d. Compensates people for the value of the benefits that these third parties receive

If there are important external benefits associated with the consumption product:
a. Government should enact legislation to prohibit the production of the commodity
b. Special excise taxes should be levied on producers of the product
*c. The market demand curve understates the relative importance of the product and resources are
therefore underallocated to its production
d. The market supply curve for the product lies too far to the right to provide an efficient allocation
of resources

If negative externalities are not internalized, the:

*a. Equilibrium output will exceed the most efficient output
b. Most efficient output will exceed the equilibrium output
c. Product must be a public good
d. Distribution of income will necessarily become more equal

Suppose the production of a certain good creates substantial positive externalities. If government
adopts a policy that adjusts demand to take these benefits into account, then:
a. Firms in this industry will go out of business.
*b. The output of the product will increase
c. The output of the product will decrease
d. The price of the product will decrease

The Federal government requires automobile manufactures to install pollution control equipment. This
is an illustration of the:
a. Intrusion problem
b. Production of public goods
c. Internalization of external benefits
*d. Internalization of external costs

A negative externality or spillover cost occurs when:

a. Firms fail to achieve allocative efficiency
b. Firms fail to achieve productive efficiency
c. Price exceeds marginal cost.
*d. The total cost of producing a good exceeds the costs borne by the producer
Use the following to answer the next three questions:

Refer to the above diagrams for two separate product markets. Assume that society’s optimal level of
output in each market is Q₀ and that government purposely shifts the market supply curve form S to S₁
in diagram (a) and from S to S₂ in diagram (b). We can conclude that the government for correcting for:
*a. Negative externalities in diagram (a) and positive externalities in diagram (b).
b. Positive externalities in diagram (a) and negative externalities in diagram (a).
c. Negative externalities in both diagrams
d. Positive externalities in both diagrams

Refer to the above diagrams for two separate product markets. Assume that society’s optimal level of
output in each market is Q₀ and that government purposely shifts the market supply curve form S to S₁
in diagram (a) and from S to S₂ in diagram (b). The shift of the supply curve from S to S₁ in diagram (a)
might be caused by per unit:
a. Subsidy paid to the producers of this product.
*b. Tax on the producers of this product
c. Subsidy paid to the buyers of this product
d. Tax on the buyers of this product

Refer to the above diagrams for two separate product markets. Assume that society’s optimal level of
output in each market is Q₀ and that government purposely shifts the market supply curve form S to S₁
in diagram (a) and from S to S₂ in diagram (b). The shift of the supply curve from S to S₁ in diagram (b)
might be caused by per unit:
*a. Subsidy paid to the producers of this product.
b. Tax on the producers of this product
c. Subsidy paid to the buyers of this product
d. Tax on the buyers of this product