Question 1

Why does network externality arise?

Accepted Answer

A)  Each additional unit of a good sold reduces the value of the previously sold units.
B)  As more and more units of a good are produced, the average cost declines.
C)  Consumption of a good by one user does not affect the consumption of subsequent users.
D)  The firms enjoy economies of scale in the long run.
E)  Each additional unit of the good sold increases the value of the previously sold units.

Question 2

When a divergence between social costs and private costs exists, then:

Accepted Answer

A)  markets will always provide an efficient allocation of resources.
B)  there will be too much or too little production and consumption in the market.
C)  there will be an acute shortage of goods and services in the market.
D)  there will be an excess demand for goods and services in the market.
E)  private costs must be greater than social costs.

Question 3

If education has positive externalities:

Accepted Answer

A)  the private market will provide an efficient allocation of resources.
B)  the private costs of production will exceed the social costs.
C)  the government can help to bring about a more efficient allocation through subsidies.
D)  the only benefits of consumption accrue to the consumers themselves.
E)  the government can help to bring about a more efficient allocation by levying education cess.

Question 4

If a gas station selling gasoline is asked to incorporate the pollution costs, its supply curve will shift to the right.

Accepted Answer

A) True 
 B)False

Question 5

A market failure occurs when the market outcome is not the socially efficient outcome.

Accepted Answer

A) True 
 B)False  True

Question 6

The government should subsidize the production of goods which generate a positive externality.

Accepted Answer

A) True 
 B)False  True

Question 7

The Clean Air Act of 1972 required some companies to install the "best available" pollution control technologies.This was an example of:

Accepted Answer

A)  the government using a subsidy to encourage a negative externality.
B)  the government using the command approach to discourage a negative externality.
C)  the government using the command approach to encourage a positive externality.
D)  a marketable pollution permit.
E)  a pollution tax.

Question 8

The free-rider problem occurs because:

Accepted Answer

A)  it is easy to exclude others from consuming the good.
B)  consumption is rivalrous, so that the consumption of a product by one individual diminishes that available for others.
C)  exclusion is costly or impossible, so that a consumer or producer can use the good without having to pay for it.
D)  costs are imposed on others not directly involved in the transaction.
E)  individuals are not required to pay for those goods which do not yield any utility to them.

Question 9

Why do externalities arise?

Accepted Answer

A)  The costs of production are not borne by the producer
B)  An economic activity imposes a burden on them who are not directly involved in it
C)  An economic activity imposes a cost on them who are directly involved in it
D)  The government produces such goods and services which are consumed by only a particular class of people
E)  Goods of mass consumption are not produced as they do not yield profit for the producers

Question 10

When the government imposes a tax on production of a commodity:

Accepted Answer

A)  production will invariably increase.
B)  the cost of production increases, so the supply curve shifts to the left.
C)  the benefits of consumption increases, so the demand curve shifts to the right.
D)  there is no change in demand or supply.
E)  both the demand and supply curves shift to the right.

Question 11

A person who takes less care of his health after obtaining a health insurance is creating a negative externality.

Accepted Answer

A) True 
 B)False

Question 12

A good that is both excludable and rivalrous is a(n) :

Accepted Answer

A)  public good.
B)  club good.
C)  private good.
D)  inferior good.
E)  necessary good.

Question 13

When negative externalities exist in production:

Accepted Answer

A)  the social supply curve lies to the left of the private supply curve.
B)  the social supply curve lies to the right of the private supply curve.
C)  the social supply curve is identical to the private supply curve.
D)  the private demand curve lies to the right of the social demand curve.
E)  the private demand curve lies to the left of the social demand curve.

Question 14

The following table shows the costs and benefit of producing a commodity. Table 13.1
 According to Table 13.1, at the social equilibrium:

Accepted Answer

A)  4 units of output is produced.
B)  5 units of output is produced.
C)  2 units of output is produced.
D)  3 units of output is produced.
E)  1 unit of output is produced.

Question 15

When each additional resource adds increasing amounts of additional output, it refers to a situation of:

Accepted Answer

A)  constant returns.
B)  economies of scale.
C)  diseconomies of scale.
D)  diminishing returns.
E)  increasing returns.

Question 16

Suppose the wheat industry is in long-run equilibrium, so that farmers are earning a normal rate of return.Suppose the farmers are able to convince the Congress to provide a minimum price for wheat that is above the equilibrium price.The result would be:

Accepted Answer

A)  deadweight losses in the long run -higher costs to consumers and no more profits to farmers.
B)  deadweight losses in the short run -higher costs to consumers and no more profits to farmers.
C)  increase in economic efficiency in the long run.
D)  increase in economic efficiency in the short run.
E)  an increase in economic rents in the long run.

Question 17

In the case of automobile and medical insurance, adverse selection might mean that, as the cost of insurance rises, the good drivers and healthy people reduce their coverage while the poor drivers and unhealthy people maintain their coverage.

Accepted Answer

A) True 
 B)False

Question 18

Private costs exceed social cost when external benefits are created.

Accepted Answer

A) True 
 B)False

Question 19

When a particular resource is commonly used, it tends to get underutilized.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is not a problem with a public good?

Accepted Answer

A)  An incentive to free-ride
B)  A public good is often underconsumed
C)  An absence of private property rights
D)  An inability to limit consumption to those who purchase the good
E)  A public good is usually underproduced B

Exam 48: Market Failures, Government Failures, and Rent Seeking

Why does network externality arise?

Correct AnswerverifiedShow Answer

When a divergence between social costs and private costs exists, then:

Correct AnswerverifiedShow Answer

If education has positive externalities:

Correct AnswerverifiedShow Answer

If a gas station selling gasoline is asked to incorporate the pollution costs, its supply curve will shift to the right.

Correct AnswerverifiedShow Answer

A market failure occurs when the market outcome is not the socially efficient outcome.

Correct AnswerverifiedTrue

The government should subsidize the production of goods which generate a positive externality.

Correct AnswerverifiedTrue

The Clean Air Act of 1972 required some companies to install the "best available" pollution control technologies.This was an example of:

Correct AnswerverifiedShow Answer

The free-rider problem occurs because:

Correct AnswerverifiedShow Answer

Why do externalities arise?

Correct AnswerverifiedShow Answer

When the government imposes a tax on production of a commodity:

Correct AnswerverifiedShow Answer

A person who takes less care of his health after obtaining a health insurance is creating a negative externality.

Correct AnswerverifiedShow Answer

A good that is both excludable and rivalrous is a(n) :

Correct AnswerverifiedShow Answer

When negative externalities exist in production:

Correct AnswerverifiedShow Answer

The following table shows the costs and benefit of producing a commodity. Table 13.1 According to Table 13.1, at the social equilibrium:

Correct AnswerverifiedShow Answer

When each additional resource adds increasing amounts of additional output, it refers to a situation of:

Correct AnswerverifiedShow Answer

Suppose the wheat industry is in long-run equilibrium, so that farmers are earning a normal rate of return.Suppose the farmers are able to convince the Congress to provide a minimum price for wheat that is above the equilibrium price.The result would be:

Correct AnswerverifiedShow Answer

In the case of automobile and medical insurance, adverse selection might mean that, as the cost of insurance rises, the good drivers and healthy people reduce their coverage while the poor drivers and unhealthy people maintain their coverage.

Correct AnswerverifiedShow Answer

Private costs exceed social cost when external benefits are created.

Correct AnswerverifiedShow Answer

When a particular resource is commonly used, it tends to get underutilized.

Correct AnswerverifiedShow Answer

Which of the following is not a problem with a public good?

Correct AnswerverifiedB

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True

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B