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Exam 4: Market Failures: Public Goods and Externalities

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Question 1

True/False

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Whenever there are supply-side market failures in the form of costs that suppliers do not have to face, then there will be overproduction of the output.

A) True
B) False

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Question 2

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Rivalry means that when one person buys and consumes a product, it is not available for purchase and consumption by another person.

A) True
B) False

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Question 3

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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:

Where there are spillover (or external) benefits from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the following except:

Consumer surplus arises in a market because:

If the lumber companies are required to internalize the negative externalities of deforestation, then we should expect the equilibrium price of wooden furniture to decrease.

If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.

Answer the question based on the following information. Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected annual costs and benefits of these alternatives. Refer to the above information. If Normal University undertakes program Level Three:

Refer to the above supply and demand graph. 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:

By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. This will lead to the equilibrium price of cars:

Among the following examples, the one that best illustrates a public good is:

A government is considering undertaking one or more construction projects. The estimated marginal costs and benefits of each project are given in the table. Refer to the above table and information. What is the net benefit of project 2?

If the unit price of a product is P, then the amount of spending that the buyers would need to pay for a given quantity Q is equal to:

The amount of revenues that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called:

What are the two characteristics that differentiate private goods from public goods?

Asymmetric information in a market transaction occurs when there is unequal knowledge possessed by the:

The difference between the actual price that a producer receives and the minimum acceptable price the producer is willing to accept is called the producer:

The 2010 Health Care Reform Law, also known as "Obamacare", includes a part known as universal coverage which requires everyone to have health insurance. One reason for this is to address the problem of:

Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.

An effective antipollution policy from the economic perspective requires that all pollution be eliminated and banned.