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Exam 4: Market Failures: Public Goods and Externalities

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Question 21

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An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which:

A) marginal cost exceeds marginal benefit.
B) maximum willingness to pay exceeds minimum acceptable price.
C) consumer surplus exceeds producer surplus.
D) producer surplus exceeds consumer surplus.

E) A) and B)
F) None of the above

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Question 22

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Upon learning that his auto transmission is about to fail,Ray Roma sells his car to an unsuspecting buyer.This circumstance illustrates the:

A) adverse selection problem.
B) free-rider problem.
C) moral hazard problem.
D) principal-agent problem.

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

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Question 23

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Sellers will opt out of markets in which:

Cost-benefit analysis is frequently difficult to apply because it is difficult to quantify the full benefits of a public good or service.

A public good:

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42.The minimum acceptable price to the seller,Nathan,was $30.Jennifer experiences:

Professor Gullible agreed to cancel the final examination if students promised to study for it anyway.The concept of moral hazard would predict that it is unlikely that students will study for the exam.

Answer the question on the basis of the following information for a public good.P_a and P_b are the prices that individuals A and B are willing to pay for the last unit of a public good,rather than do without it.These people are the only two members of society. $\begin{array}{c}\begin{array}{c}\underline{\text {Q }}\\1 \\2 \\3 \\4 \\5\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{a}} }\\\$ \\2\\1\\0\\0\end{array}\begin{array}{c}\underline{\mathrm{Pa}_{\mathrm{b}} }\\\$ 5 \\4 \\3 \\2 \\1\end{array}\end{array}$ Refer to the data.If this good were a private good instead of a public one,the total quantity demanded at a $3 market price would be:

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of:

The trains of the Transcontinental Railway Company,when shipping goods,sometimes emit sparks that start fires along the tracks and damage the property of others.If Transcontinental does not pay for the damage it causes,what has occurred?

An efficiency loss (or deadweight loss) :

As it applies to insurance,the adverse selection problem is the tendency for:

The optimal quantity of a public good occurs where the marginal benefit of the citizen who has the highest preference for the good just equals the good's marginal cost.

In response to the financial crisis that began in 2007,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:

(Consider This) Brinley is the hottest new pop singer,but his agent discovers that Internet sales of Brinley's music have been poor due to Internet piracy,but concerts are regularly sold out and merchandise (such as T-shirts) sells well.If Brinley wants to enhance profits,economists would most likely recommend that he:

Nonrivalry and nonexcludability are the main characteristics of:

Suppose a firm offers its workers a cafeteria plan in which it allows workers to allocate a set amount of fringe benefit money toward specific insurance.Mary,who has five kids needing braces,selects the family dental coverage.This is an example of the:

(Consider This)The principle that private negotiation can resolve potential externalities without resort to government intervention is known as the Coase theorem.

The market system does not produce public goods because:

Which of the following is an example of market failure?