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Exam 4: Market Failures Caused by Externalities Asymmetric Information

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Question 51

True/False

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When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem in banking.

A) True
B) False

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Question 52

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It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. If the government intervenes and corrects the externality in the situation described above, we Would expect

A) the output of the paper mills to increase.
B) the price of paper from the mills to decrease.
C) production of the hydroelectric power plants to decrease.
D) production in the paper mills to decrease.

E) All of the above
F) A) and B)

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Question 53

Multiple Choice

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Sellers will opt out of markets in which

Allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum.

The MB curves in the diagram slope downward because of the law of

Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting Display, the request for donations suggests that

Refer to the diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these External costs is large. Without government interference, this market will reach

Refer to the provided graph. Suppose that it shows the market for an insurance product. If something happens to worsen the adverse selection problem faced by sellers in this market, then

The marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of

In response to the 2008 financial crisis, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and Encourage banks to be fiscally irresponsible in the future. This illustrates

Refer to the diagram of the market for product X. Curve St embodies all costs (including externalities) , and Dt embodies all benefits (including externalities) associated with the production And consumption of X. Assuming the equilibrium output is Q2, we can conclude that the existence Of external

The Coase theorem suggests that the government does not have to be involved at all in resolving a market failure due to externalities.

$\begin{array} { | c | c | c | } \hline \text { Producer } & \begin{array} { c } \text { Minimum } \\\text { Acceptable Price }\end{array} & \begin{array} { c } \text { Actual Price } \\\text { (Equilibrium Price) }\end{array} \\\hline A & \$ 6 & \$ 13 \\\hline B & 7 & 13 \\\hline C & 9 & 13 \\\hline D & 11 & 13 \\\hline\end{array}$ Refer to the provided table. What is the producer surplus for all producers A, B, C, and D?

In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the minimum acceptable total revenue that sellers would have been willing to receive is Represented by the area

(Consider This) All of these are solutions for traffic congestion except to

Which of the following would be an example of government intervention to correct a market failure caused by buyers having inadequate information about sellers?

Define the term consumer surplus.

Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. If Government corrects this externality problem and shifts production to the socially optimal level, then The product price will be equal to

Refer to the diagram. Which of the following areas best represents the efficiency loss from underproduction?

Along a supply curve, product price and producer surplus are inversely related.