UNIT 6 MARKET FAILURES AND THE ROLE OF THE GOVERNMENT

Refer to Figure C, which depicts the market for Sun-LessTM, a popular spray tanning product. Sun-LessTM currently yields costs to individuals who are neither consumers nor producers in the form of a peculiar odor that lingers for days after the product has been applied. The letters in the graph represent the enclosed areas. Assume that the government takes action in the form of a per-unit tax on producers of Sun-LessTM. Which of the following correctly states the amount of the tax, the price, quantity, and deadweight loss, if any exists?

B

respectivelySuppose that Sonny and Cher are the only two members of society and are willing to pay $10 and $8, respectfully, for the 3rd unit of a public good. Also assume the marginal cost of the 3rd unit is $17. We can conclude that:

the 3rd unit should be produced.

Because unregulated polluters do not include all of their costs of production in their output decisions,

resources are over-allocated to this industry and prices are set too low.

According to the Lorenz curve, which of the following must be true?

Income is more equally distributed in Country A than in Country B.

The city council must pay $2,250 to build each playground. Which of the following is a characteristic of the playgrounds and what is the optimal number of playgrounds for the township to build?

Playgrounds are nonrival in consumption, and the optimal number of playgrounds is three.

Dunder Mifflin Paper Company, Inc. ignores the external costs it generates in its production. Which of the following will be true at the competitive market equilibrium output?

Price will be less than the marginal social cost.

A spillover cost passed on to a third party is

an externality.

Antitrust laws are intended to

control monopolies and maintain a competitive market environment.

Which of the following is an example of a positive externality?

Immunizations that prevent the spread of diseases.

Consumer surplus is the difference between

the price consumers were willing to pay and the equilibrium price.

The Lorenz curve illustrates

the distribution of income among households.

If the market economy provides less of a needed good or service than is economically justifiable, then

positive externalities exist, market failure has occurred, and the government should intervene with corrective subsidies.

If the government regulates the monopolist to produce the allocatively efficient quantity and provides a subsidy sufficient to maintain zero economic profit for the firm, what price would the government set and what level of output would the firm produce?

$2.00 and 80

Which of the following Gini coefficients indicates that a country had an equal distribution of income?

0

What would the socially optimal price and quantity be for a regulated monopoly?

P4, Q3

The closer income distribution moves toward complete equality, the closer the Lorenz curve moves to

a diagonal line.

An example of a good that is nonrival and nonexcludable is

a lighthouse.

Graph 1 is a diagram for a product market. Assume that society’s optimal level of output is Q0 and that government purposely shifts the market supply curve from S to S1. We can conclude all the following except:

at Qe, the Marginal Social Benefit is greater than the Marginal Social Cost.

In the absence of externalities, the perfectly competitive market maximizes economic surplus when

the market is at equilibrium.

All of the following are pure public goods or services EXCEPT

movie theaters.

Monopolies are considered inefficient because they

produce less than society wants and set a price above marginal cost.

Properly functioning competitive free markets achieve

I, II, III, and IV.

The higher wages college graduates receive are primarily due to

differences in human capital.

When the competitive market fails to employ the scarce resources of a society in the most efficient manner, then…

I, II, and III.

In the absence of externalities, which market structure produces the socially optimal quantity?

Perfect competition.

The private market will not provide enough of a pure public good because of

the free rider problem.

The graph shows a market with a negative externality. Assuming the government takes no action, what is the consumer surplus and deadweight loss associated with this market?

D

Assume that this firm is an unregulated monopoly. At what price and quantity would this firm produce to maximize profit?

P1, Q1

If the government wants the firm to internalize the externality the government can do so by

imposing a per-unit tax of $1.00.

When marginal social cost and marginal private cost are equal:

there is no marginal external cost.

If the Gini ratio for the distribution of household income with a nation were to change from 0.4 to 0.6, this indicates that

income inequality had increased.

Assume the government implements a policy that causes a market to produce the socially optimal level of output. Which of the following must be true?

Equating marginal private benefit and marginal private cost must have results in inefficiencies in the market.

A free-rider problem exists when

a good is nonexcludable in consumption.

Sun-LessTM currently yields costs to individuals who are neither consumers nor producers in the form of a peculiar odor that lingers for days after the product has been applied. The letters in the graph represent the enclosed areas. Prior to any government action, which of the following correctly states the price, quantity, and deadweight loss, if any exists?

D

The Gini Coefficient is the most commonly used measure of income inequality. In comparing Country A, with a Gini Coefficient of 0.50, to Country B, with a Gini Coefficient of 0.75, one could reasonably conclude that

Country B has greater income inequality than Country A.

The following graph shows the marginal social cost (MSC), the marginal private cost (MPC), and the marginal social benefit (MSB) of a good. Which of the following indicate the marginal external cost and the socially optimal quantity?

$2.50 and 20 units.

The diagram describes conditions for a natural monopoly. In order to regulate the monopoly to produce the largest possible output without a loss, government regulators would establish a price of

$2.50.

Which of the following is most likely to make a country’s income distribution more equal?

Establishing a progressive tax income tax system.

What would the fair return price and quantity be for a regulated monopoly?

P3, Q2

Assume the production of scurvy vaccinations results in positive externalities within a society composed primarily of pirates. The government could improve economic efficiency in this society by

Granting a per-unit subsidy to producers of scurvy vaccinations.