Arnold Quiz: Market Failure

Quiz
Market Failure: Externalities, Public Goods, and Asymmetric Information

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1. Sometimes, when goods are produced or consumed, side effects occur that are felt by people who are not directly involved. These (beneficial or adverse) side effects are called any of the following, except: a. externalities.
b. neighborhood effects.
c. public goods or public bads.
d. spillover effects.
e. third-party effects.

2. Ceteris paribus, the presence of negative externalities in the process of production: a. implies marginal social cost exceeding marginal private cost.
b. implies marginal social benefit exceeding marginal private benefit.
c. implies marginal social cost falling short of marginal private cost.
d. implies marginal social benefit falling short of marginal private benefit.
e. leads to the underproduction of goods with respect to the socially optimal output level.

3. Consider Figure 30.1. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The externality arises in the realm of production rather than consumption.
b. The externality is positive, as evidenced by the fact that MSC > MPC.
c. The externality is positive, as evidenced by the fact that MSB = MPB.
d. The socially optimal output level that takes into account and adjusts for all benefits (external as well as private) and all costs (external as well as private) equals 0J.
e. The market output level here falls short of the socially optimal level.

4. Consider Figure 30.1. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. While demand and supply will establish an actual market output level of 0J, the socially optimal level is smaller and equal to 0I.
b. We can tell that increasing production beyond 0I to the actual market level of 0J is socially harmful because the added benefit of such a move equals IEHJ (the relevant area under the MSB line), while the added cost is larger and equals IEGJ (the relevant area under the MSC line).
c. The added cost noted in (b) consists of the producers' private cost IFHJ plus third parties' extra external cost FEGH.
d. The net cost to society of producing 0J rather than 0I equals EGH.
e. All of the preceding statements are correct.

5. Consider Figure 30.1. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The fact that MSC exceeds MPC (represented by supply) might represent the noise inflicted on innocent neighbors by people mowing their lawns on weekends.
b. The fact that MSC exceeds MPC (represented by supply) might represent the noise inflicted on innocent neighbors by people riding their snowmobiles through town.
c. The fact that MSC exceeds MPC (represented by supply) might represent the noise inflicted on innocent neighbors by people playing their radios in open windows during hot summer nights.
d. The fact that MSC exceeds MPC (represented by supply) might represent the noise inflicted on innocent neighbors by a construction crew building new houses.
e. All of the above statements are correct.

6. Consider Figure 30.2. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The externality arises in the realm of production rather than consumption.
b. The externality is negative, as evidenced by the fact that MSC < MPC.
c. The externality is positive, as evidenced by the fact that MSB = MPB.
d. The socially optimal output level that takes into account and adjusts for all benefits (external as well as private) and all costs (external as well as private) equals 0I.
e. The market output level here exceeds the socially optimal level.

7. Consider Figure 30.2. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. While demand and supply will establish an actual market output level of 0I, the socially optimal level is larger and equal to 0J.
b. We can tell that increasing production beyond 0I to the socially optimal level of 0J is socially beneficial because the added benefit of such a move equals IEHJ (the relevant area under the MSB line), while the added cost only equals IFHJ (the relevant area under the MSC line).
c. The added cost noted in (b) consists of the producers' private cost IEGJ minus third parties' external cost reductions of FEGH.
d. The net benefit to society of producing 0J rather than 0I equals EHF.
e. All of the preceding statements are correct.

8. Consider Figure 30.2. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The fact that MSC lies below MPC (represented by supply) might represent the fact that neighbors enjoy beautiful flower gardens that people plant in their front yards.
b. The fact that MSC lies below MPC (represented by supply) might represent the fact that neighbors enjoy people's new telephones and fax machines because they can now better communicate with them.
c. The fact that MSC lies below MPC (represented by supply) might represent the fact that cranberry bogs become more productive as beekeepers set up business nearby.
d. The fact that MSC lies below MPC (represented by supply) might represent the fact that neighbors are happy not to catch your flu once you have spent money on getting vaccinated.
e. All of the above.

9. Consider Figure 30.3. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The externality arises in the realm of consumption rather than production.
b. The externality is positive, as evidenced by the fact that MPB > MSB.
c. The externality is positive, as evidenced by the fact that MPC = MSC.
d. The socially optimal output level that takes into account and adjusts for all benefits (external as well as private) and all costs (external as well as private) equals 0J.
e. The market output level here falls short of the socially optimal level.

10. Consider Figure 30.3. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. While demand and supply will establish an actual market output level of 0J, the socially optimal level is smaller and equal to 0G.
b. We can tell that increasing production beyond 0G to the actual market level of 0J is socially harmful because the added benefit of such a move equals GFIJ (the relevant area under the MSB line), while the added cost is larger and equals GFHJ (the relevant area under the MSC line).
c. The added benefit noted in (b) consists of the consumers' private benefit GEHJ minus third parties' external harm FEHI.
d. The net cost to society of producing 0J rather than 0G equals FHI.
e. All of the preceding statements are correct.

11. Consider Figure 30.3. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The fact that MSB lies below MPB (represented by demand) might represent the case of people enjoying life in their new beachfront homes and thereby polluting their neighbors' artesian wells.
b. The fact that MSB lies below MPB (represented by demand) might represent the case of extra commercial fishing boats crowding onto ocean fisheries and thereby reducing the catch of other fishing companies.
c. The fact that MSB lies below MPB (represented by demand) might represent the case of paper companies dumping wastes into rivers and thereby spoiling the drinking water of nearby towns.
d. The fact that MSB lies below MPB (represented by demand) might represent the case of oil companies placing extra drilling platforms onto oil-bearing land and thereby reducing the daily output of other oil companies.
e. The fact that MSB lies below MPB (represented by demand) might represent the case of ranchers placing extra cattle on grazing lands and thereby reducing the average weight of other people's cattle.

12. Consider Figure 30.4. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The externality arises in the realm of production rather than consumption.
b. The externality is positive, as evidenced by the fact that MSB > MPB.
c. The externality is positive, as evidenced by the fact that MPC = MSC.
d. The socially optimal output level that takes into account and adjusts for all benefits (external as well as private) and all costs (external as well as private) equals 0G.
e. The market output level here exceeds the socially optimal level.

13. Consider Figure 30.4. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. While demand and supply will establish an actual market output level of 0G, the socially optimal level is larger and equal to 0J.
b. We can tell that increasing production beyond 0G to the socially optimal level of 0J is socially beneficial because the added benefit of such a move equals GEHJ (the relevant area under the MSB line), while the added cost only equals GFHJ (the relevant area under the MSC line).
c. The added benefit noted in (b) consists of the consumers' private benefit GFIJ plus third parties' free external benefits of FEHI.
d. The net benefit to society of producing 0J rather than 0G equals FEH.
e. All of the preceding statements are correct.

14. Consider Figure 30.4. It pictures a market in the presence of an externality. Which of the following statements about it is correct?: a. The fact that MSB exceeds MPB (represented by demand) might represent the case of people enjoying their new Internet access, while thereby giving their friends the ability to exchange e-mail with them.
b. The fact that MSB exceeds MPB (represented by demand) might represent the case of lumber companies planting trees and thereby changing the local weather, which raises the productivity of nearby farms.
c. The fact that MSB exceeds MPB (represented by demand) might represent the case of mining companies draining mines and thereby raising the output of other companies' mines.
d. The fact that MSB exceeds MPB (represented by demand) might represent the case of motorcyclists driving their neighbors crazy with all the noise.
e. The fact that MSB exceeds MPB (represented by demand) might represent the case of electric power companies polluting the air, creating acid rain, and killing potato crops hundreds of miles away.

15. Hypothetically, those who generate externalities could completely incorporate them into their private benefit/cost calculations, and socially optimal production and consumption levels would emerge as a result. Such internalization of externalities might be brought about by: a. persuasion.
b. the assignment of property rights in unowned resources.
c. voluntary agreements between affected parties.
d. all of the above.
e. none of the above.

16. One approach to dealing with externalities involves the imposition of taxes or the granting of subsidies. Which of the following statements on the subject is correct?: a. The market-determined output level can be moved to the socially optimal level by imposing an income tax on those who generate negative externalities.
b. The market-determined output level can be moved to the socially optimal level by granting a lump-sum subsidy to those who generate positive externalities.
c. Both (a) and (b).
d. It might be possible to eliminate externalities by imposing per-unit taxes or granting per-unit subsidies.
e. All types of externalities can be made to vanish by subsidizing transaction costs, the costs that are associated with the time and effort needed to search out, negotiate, and consummate exchanges (the Coase theorem).

17. Consider Figure 30.1. The negative externality pictured there could be removed by: a. the imposition of a per-unit tax of IJ.
b. the imposition of a per-unit tax of EF.
c. the imposition of an income tax of EGHF.
d. the granting of a per-unit subsidy of GH.
e. either (b) or (d).

18. Pollution might be reduced or eliminated by a variety of methods, including the setting of governmental uniform pollution standards or the marketing of pollution permits. Which of the following statements about these two methods is correct?: a. Rigid pollution standards (that require, for example, every power company to reduce its sulfur oxide emissions by one third) inevitably reduce pollution more than marketable permits do.
b. Rigid pollution standards (that require, for example, every power company to reduce its sulfur oxide emissions by one third) inevitably reduce pollution less than marketable permits do.
c. Rigid pollution standards tend to achieve a given reduction in pollution at a higher total cost than marketable permits do.
d. Rigid pollution standards tend to achieve a given reduction in pollution at a lower total cost than marketable permits do.
e. None of the above.

19. Which of the following statements correctly characterizes public goods?: a. They are characterized by nonrivalry in consumption as well as nonexcludability.
b. They are not supplied by the market because their suppliers would not be able to extract payment for the goods due to the free rider problem.
c. They must not be confused with government-produced goods.
d. All of the above statements are correct.
e. None of the above.

20. Which of the following statements is false?: a. A good is nonrivalrous in consumption if its consumption by one person does not reduce its consumption by others.
b. Asymmetric information exists when either the buyer or the seller in a market exchange has some information that the other does not have.
c. Moral hazard exists when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market.
d. Adverse selection can lead to missing or incomplete markets.
e. Many states have passed lemon laws to protect consumers from the adverse selection problem.