Market Failure Quiz

Question 1

An externality is defined as

a. a marginal social cost.

b. an additional cost imposed by the government on producers.

c. an additional gain received by consumers from decisions made by the government.

d. a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.

e. the additional amount consumers have to pay to consume an additional amount of a good or service.

Answer 1

c. a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.

Question 2

An economy’s marginal social benefit curve for a private good is obtained by summing the individual marginal

a. benefit curves diagonally.
b. benefit curves vertically.
c. cost curves horizontally.
d. benefit curves horizontally.
e. cost curves vertically.

Answer 2

d. benefit curves horizontally.

Question 3

A public good is

a. produced by monopolies.
b. rival and nonexcludable.
c. rival and excludable.
d. nonrival and excludable.
e. nonrival and nonexcludable.

Answer 3

e. nonrival and nonexcludable.

Question 4

If positive externalities exist and production is left to the private market, then at the quantity produced

Answer 4

MSC < MSB

Question 5

In the absence of government intervention, a profit-maximizing firm producing a good with an external cost will produce a quantity at which

price is greater than marginal private cost.
price equals marginal private cost.
price is less than marginal private cost.
price is less than marginal revenue.
marginal revenue equals marginal social cost.

Answer 5

price equals marginal private cost.

Question 6

A well-maintained water-front property that is enjoyed by other property owners is an example of

a positive production externality.
a negative consumption externality.
an inefficient allocation of resources.
a positive consumption externality.
a negative production externality.

Answer 6

a positive consumption externality.

Question 7

When a good is rival and excludable, it is a

Answer 7

private good

Question 8

An example of an activity that creates a positive consumption externality is

logging, which pollutes rivers.
smoking, which harms the health of a bystander.
a flu vaccination.
a noisy party.
locating beehives next to an orange orchard.

Answer 8

a flu vaccination.

Question 9

Which of the following quotations describes a rival good?

Answer 9

Mom, Morgan won’t let me watch the Backyardigans because she is watching Dora the Explorer.”

Question 10

When an additional unit of output is produced, the extra cost to society is the

average total cost.
marginal damage.
marginal external cost.
marginal social cost.
marginal private cost.

Answer 10

marginal social cost.

Question 11

A system of marketable permits is used to reduce acid rain caused by emissions from electric power utilities. Which of the following statements is true?

Public choice determines both the demand for marketable permits and their supply.
Property rights determine the demand for marketable permits, and the government determines their supply.
Market forces determine both the demand for marketable permits and their supply.
Market forces determine the demand for marketable permits, and property rights determine their supply.
Market forces determine the demand for marketable permits, and the government determines their supply.

Answer 11

Market forces determine the demand for marketable permits, and the government determines their supply.

Question 12

When the production of a good has an external cost, the

marginal social cost curve lies below the marginal private cost curve.
equilibrium quantity in an unregulated, competitive market has a marginal social cost less than the marginal social benefit.
marginal social benefit curve lies above the marginal private benefit curve.
equilibrium quantity in an unregulated, competitive market has a marginal social cost greater than the marginal social benefit.
none of the above.

Answer 12

equilibrium quantity in an unregulated, competitive market has a marginal social cost greater than the marginal social benefit.

Question 13

According to the Coase theorem, if transactions costs are low and property rights exist,

private transactions are efficient.
positive externalities cause deadweight losses.
the efficient level of pollution will be zero.
negative externalities cause deadweight losses.
public transactions are efficient.

Answer 13

private transactions are efficient.

Question 14

Refer to Figure 1 The figure shows the market for good B. How many units of good B are produced and consumed in an unregulated market?
9 units
3 units
5 units
6 units
0 units

Answer 14

3 units

Question 15

A market economy tends to ________ goods with negative externalities and ________ goods with positive externalities.

overproduce; overproduce
underproduce; underproduce
overproduce; underproduce
underproduce; overproduce
produce; consume

Answer 15

overproduce; underproduce

Question 16

Public goods are provided by government because

people value national defence very highly.
free-rider problems result in underproduction by private markets.
private firms will make an economic profit.
private firms do not take into account the impact of external costs.
governments are more efficient than private firms at producing public goods.

Answer 16

free-rider problems result in underproduction by private markets.

Question 17

The efficient scale of provision of a public good occurs where

marginal social benefit is at a maximum.
marginal social benefit minus marginal social cost equals zero.
marginal social cost is at a minimum.
total benefit is at a maximum.
total benefit is at a minimum.

Answer 17

marginal social benefit minus marginal social cost equals zero.

Question 18

Although both cable television and air-traffic control are both nonrival, they differ from each other because

cable television is excludable and air-traffic control is nonexcludable.
cable television is a public good and air-traffic control is a private good.
cable television is nonexcludable and air-traffic control is a public good.
cable television is nonexcludable and air-traffic control is excludable.
cable television is a private good and air-traffic control is a public good.

Answer 18

cable television is excludable and air-traffic control is nonexcludable.

Question 19

For a private good, the economy’s marginal social benefit curve is the ________ sum of the individual marginal benefit curves and for a public good, the economy’s marginal social benefit curve is the ________ sum of the individual marginal benefit curves.

Answer 19

horizontal;vertical

Question 20

Private provision of public goods

succeeds if consumers expect to obtain a benefit from the consumption of the public good.
succeeds because public provision is often more costly.
fails because the private firm will always go broke.
fails because of the free-rider problem.
fails because private firms generally charge higher prices than public firms, and therefore lose customers.

Answer 20

fails because of the free-rider problem.

Question 21

Rational ignorance

combined with special-interest groups can yield inefficient provision of public goods.
allows special interest groups to exert political influence.
results when the cost of acquiring information exceeds the benefit of acquiring the information.
results in all of the above.
results in none of the above.

Answer 21

results in all of the above

Question 22

Which of the following achieves the efficient use of a common resource?

property rights, individual transferable quotas, and subsidies
property rights, quotas, and subsidies
property rights, quotas, and individual transferable quotas
individual transferable quotas and copyrights
quotas, individual transferable quotas, and copyrights

Answer 22

property rights, quotas, and individual transferable quotas

Question 23

Rational ignorance suggests that a voter should stop acquiring more information about an issue when

the marginal cost of acquiring the information is greater than zero.
the marginal benefit from acquiring the information equals zero.
the marginal cost of acquiring the information is equal to the marginal benefit derived from the information.
the total cost of acquiring the information is minimized.
the total benefit from acquiring the information is maximized.

Answer 23

the marginal cost of acquiring the information is equal to the marginal benefit derived from the information.

Question 24

The tragedy of the commons is the absence of incentives to

prevent overuse of common resources.
export wool in sixteenth-century England.
discover new common resources.
prevent underuse of common resources.
reduce marginal cost of common resources.

Answer 24

prevent overuse of common resources.

Question 25

In the equilibrium for a common resource with no government regulation,

marginal social benefit is greater than marginal private benefit.
marginal social benefit is greater than marginal cost.
marginal private benefit equals marginal cost.
marginal social benefit equals marginal private benefit.
marginal social benefit equals marginal cost.

Answer 25

marginal private benefit equals marginal cost.

Question 26

Refer to Figure 2 The figure shows the marginal private benefit curve, the marginal social benefit curve, and the market supply curve. If production is left to the private market, then the price is

P2.
P1.
greater than P4.
P3.
P4.

Question 27

According to public choice theory, a voter will tend to be well informed if the issue in question

is of special interest to a small group to which the voter does not belong.
affects everyone a little.
has a large direct effect on the voter.
is important even if it does not directly affect the voter.
is complicated and difficult to understand.

Answer 27

has a large direct effect on the voter.

Question 28

Choose the incorrect statement.

A patent encourages invention.
A patent encourages innovation.
A patent creates a negative externality.
A patent has an economic cost.
A patent produces a monopoly.

Answer 28

A patent creates a negative externality.

Question 29

A private cost of production is a cost that is borne by the ________ of a good or service.
A social cost of production is a cost that is ________.
consumer; not borne by the producer but borne by other people
producer; borne by the producer and by everyone else on whom the cost falls
producer; not borne by the producer but borne by other people
producer; borne by the consumer
consumer; borne by the producer and by everyone else on whom the cost falls

Answer 29

producer; borne by the producer and by everyone else on whom the cost falls

Question 30

Refer to Figure 3. The figure shows the private marginal cost curve, the social marginal cost curve and the market demand curve. If the market is unregulated, then the quantity produced is
Q2.
zero.
Q3.
Q1.
too low.

Answer 30

Q3.