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Exam 12: Market Failure and Government Failure

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Question 31

Multiple Choice

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The use of modern insecticides in farms also leads to the destruction of the habitats for honey bees and other pollinators. Therefore, heavy insecticide use is a source of:

A) the tragedy of the commons.
B) menu costs.
C) positive externalities.
D) negative externalities.

E) None of the above
F) B) and D)

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Question 32

Multiple Choice

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Which of the following statements is NOT true?

A) If the production of a good involves a negative externality, then the marginal external cost is greater than zero.
B) If the production of a good involves a negative externality, then the marginal social cost is greater than the marginal private cost.
C) If the production of a good involves a negative externality, then the equilibrium quantity with free markets is less than the socially optimal level.
D) If the production of a good involves a negative externality, then the free-market equilibrium creates a deadweight loss.

E) A) and B)
F) A) and C)

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Question 33

Multiple Choice

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Karim wants to invest $100 in the stock market and does eight hours of research to decide which stock to buy. In this case, the value of Karim's time spent on doing the research will be an example of a:

The antitrust laws enacted by the federal government are aimed at preventing market failure arising from:

Use Figure: Externalities and Deadweight Loss I. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The free-market equilibrium price of the good is _____, and the equilibrium quantity is _____ units. ​ Figure: Externalities and Deadweight Loss I

Suppose that the consumption of a good involves a positive externality. In this case, at the free-market equilibrium quantity, the marginal _____ will exceed the marginal:

The undesirable side effects that are felt by people who were not involved in the decision that created those effects are called:

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The free-market equilibrium price of the good is _____, and the equilibrium quantity is _____ units. ​ Figure: Positive Externalities and Deadweight Loss

Plastic manufacturing is one of the most environmentally polluting production processes. Suppose that plastic is produced in a perfectly competitive market and that each unit of plastic produced creates a negative externality of $2. a. Draw a supply and demand graph clearly marking the following: 1) marginal private benefit curve (assume that marginal social benefit and marginal private benefit are the same) 2) marginal private cost curve 3) marginal social cost curve b) On the graph, mark the points that show the free-market equilibrium and the socially optimal level of price and quantity. c) Mark the area of deadweight loss, and explain why the free-market equilibrium leads to a deadweight loss. d) Provide one remedy for the negative externality associated with the production of plastic.

Use Figure: Negative Externality and Deadweight Loss II. The figure shows the marginal benefit, marginal private cost, and marginal social cost that are associated with producing a good. The socially optimal price of the good is _____, and the socially optimal quantity is _____ units. ​ Figure: Negative Externality and Deadweight Loss II

Suppose that the purchase of a good involves a marginal external benefit of $2 per unit. In this case, the purchase of the good involves a _____ externality, and it will be purchased in an amount that is _____ than socially optimal.

_____ markets are essential for achieving an efficient allocation of resources.

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The marginal external benefit from purchasing the good is _____ per unit. ​ Figure: Positive Externalities and Deadweight Loss

Which one of the following is NOT a remedy for moral hazard?

If the marginal private benefit from consuming a good is $5 and the marginal social benefit from the consuming the good is $7, then the marginal external benefit from consuming the good is _____, and the government must _____ the consumption of the good to ensure that the socially optimal amount of the good is purchased.

Use Figure: Positive Externalities and Deadweight Loss. The figure shows the marginal private benefit, marginal social benefit, and marginal private cost for a good. The deadweight loss because of the externality is equal to: ​ Figure: Positive Externalities and Deadweight Loss

The reason that a good is underpurchased in cases with positive externalities is that the marginal _____benefits are greater than the marginal _____ benefits.

A fixed amount of money that someone with insurance must pay each time the individual incurs a cost that is covered by insurance is called:

If the production of a good involves a negative externality, then the free-market equilibrium price is _____ than socially optimal, and the equilibrium quantity is _____ than socially optimal.

The U.S Federal Reserve (Fed) acts as a lender of last resort to commercial banks, meaning that that the Fed will bail out the banks when they encounter financial problems. It is often argued that this leads the banks to take on additional risks and therefore creates the problem of: