ECON 130 Chapter 5 || Already Graded A+.
Market failure occurs when correct answers the unrestrained market economy leads to too few or
too many resources going to a specific economic activity.
Market failure occurs because correct answers the market system does not make individuals
responsible for the social costs/benefits of their actions.
A cost or benefit of an economic activity that has an impact on an individual's well-being, even
though the individual was not directly involved in the activity, is known as a(n) correct answers
externality.
In the figure, P and Q locate the socially optimal price and quantity of a good. In the case of a
good that generates positive externalities, the market price would be _____ P and the market
quantity would be ______ Q, while in the case of a good that generates negative externalities, the
market price would be ________ P and the market quantity would be ____________ Q. correct
answers lower than; lower than; lower than; higher than
Pollution produced by a factory is being dumped into a local river. The community uses local
funds to clean the river. This is an example of correct answers an external cost as the community,
not the factory, is paying for the clean up.
Consumer sovereignty means that consumers have the individual freedom to decide what they
wish to purchase. correct answers True
Market failure refers to a situation where a market economy collapses. correct answers False
If producers have to pay external costs, the supply curve will shift to the ______, and if
consumers take external benefits into account, the demand curve will shift to the ________.
correct answers left; right
An effluent fee refers to a government regulation which specifies a maximum allowable rate of
pollution. correct answers False
All of the following are ways the government can correct positive externalities except correct
answers imposing positive taxes.
External ________ lead to an overallocation of resources to the specific economic activity. Two
possible ways of correcting these spillovers are ________ and ________. correct answers costs;
taxation; regulation
External ________ result in an underallocation of resources to the specific activity. Three
possible government corrections are ________ the production of the activity, ________ private
firms or consumers to engage in the activity, and ________. correct answers benefits; financing;
subsidizing; regulation
, Consider a nation with a government that does not provide people with property rights for a
number of items and that fails to enforce the property rights it does assign for remaining items.
Externalities would be ________ common in this nation than in a country such as the United
States. correct answers more
Suppose that the figure to the right applies to Pennsylvania's steel market. The demand curve for
steel is D. The supply curve, S1, includes only the costs that the firms in the market have to pay.
Market equilibrium occurs at point E, with a price of $800 per ton and a quantity of 110 million
tons per year.
Producing steel, however, also involves externalities. If producers had to pay these external
costs, the supply curve would shift to S2 Subscript , the equilibrium quantity would fall to 90
million tons per year, and the price would rise to $990 per ton. Equilibrium would shift from E to
E1. Now suppose that steel manufacturers in this state adopt a new technique for producing steel
that entails a smaller external cost. If Pennsylvania's government aims to correct the steel
market's negative externality via an effluent fee, is the appropriate fee higher or lower now that
steel producers have adopted correct answers 1.) Draw a line, S3, parallel and in between S1 and
S2.
2.) Draw a point, E2, at the intersection between S3 and D.
3.) be smaller
4.) lower; a smaller
Inoculations against communicable diseases generate external benefits. As shown in the figure to
the right, if each individual ignores these external benefits, the demand curve for inoculations
would be D1, and together with the supply curve, S, the market clearing quantity would be 150
million. However, if buyers of inoculations took the external benefits into account, the demand
curve would shift to D2. The new equilibrium quantity would be 190 million, and the
equilibrium price of an inoculation would rise from $10 to $14.
Now assume that a careful study of the likely transmission of influenza in light of a changed
population distribution has revealed that the external benefits from inoculations are greater than
those currently displayed in the graph. In light of this information, is the underallocation of
resources to the provision of flu-vaccine inoculations larger or smaller than indicated in the f
correct answers 1.) Draw a line, D3, parallel to D2, shifted to the upper right.
2.) Draw a point, E3, at the intersection between S and D3.
3.) larger than
4.) higher than; higher
Correcting positive externalities will result in a new, corrected, market demand curve that is to
the correct answers right of the initial curve. This will increase the output level.
a) In a small town, a paper mill produces water pollution. If the government does not intervene,
the equilibrium price of paper will be __________, and the equilibrium quantity of paper will be
__________.
b) The government could best correct this externality by ________. correct answers a) less than
the socially optimal price, greater than the socially optimal quantity
b) taxing the production of paper
