Chapter 4: Market Failures: Public Goods and Externalities

Market failures in competitive markets can be classified into:

Demand-side

Supply-side

What happens when a market does not reflect consumers' full willingness to pay for a good or service?

Demand-side market failure

What happens when a market does not reflect the full cost of producing a good or service?

Supply-side market failure

A ____-side market failure arises because it is impossible in certain cases to charge ___ what they are willing to pay for a product.

Demand; Consumers

A ____-side market failure arises in situations in which a ____ does not have to pay the full cost of production.

Supply; Firm

Consumer surplus is the difference between the ___ price a consumer is willing to pay for a product and the price paid.

Highest

____ is calculated as the difference between the maximum price a consumer is willing to pay for a product and the actual price paid.

Consumer surplus

_____ surplus is the difference between the actual price a seller receives and the minimum acceptable price.

Producer

Consumer surplus can be illustrated as the area ____ the demand curve and ____ the market price.

Below;Above

Consumer surplus and price are _____ related.

Inversely

What kind of relationship exists between equilibrium price and the amount of producer surplus?

Positive

For a given supply curve, how do higher prices affect producer surplus?

They increase it

The ____ Curve shows the seller's minimum acceptable price at each unit of the production.

Supply

Economic ____ is achieved at equilibrium quantity.

Efficiency

The intersection of the demand and supply curves at the equilibrium output indicate that:

Marginal benefit equals marginal cost

What do points on the demand curve represent?

Marginal benefit

A ___-side market failure occurs when a market does not reflect consumers' full willingness to pay for a good or service.

Demand

What is the difference between the maximum price a consumer is willing to pay for a product and the actual price?

Consumer surplus

Characteristics of a pure private good include:

Rivalry

Excludability

Which goods could be classified as non-excludable?

County roads

Environmental Protection Agency

Public goods are distinguished by:

Non-rivalry

Non-excludability

Efficiency or deadweight losses are reduction of combined consumer and producer surplus associated with underproduction or overproduction of a product.

TRUE

Free and____ markets produce equilibrium prices and quantities that maximize the combined consumer and producer surplus.

Competitive

A deadweight loss declines in size when a unit of output is produced, so that

The maximum willingness to pay exceeds acceptable prices

What is created when production does not provide the equilibrium quantity?

Efficiency losses or deadweight losses

Demand-side failures arise in competitive markets when demand curves fail to reflect consumers' full willingness to pay for a good or service.

TRUE

Which would be considered a private good?

Automobiles

Clothing

A private good that displays _____ characteristics means that when someone buys and consumes that good, it is not available for someone else to buy and consume.

Rival

A private good is ____ when a seller can prevent people who did not pay for a product from obtaining its benefits.

Excludable

If a good is non-rival and non-excludable, then it is known as a:

Public good

____ in consumption means that one person's consumption of a good does not preclude consumption of the good by others.

Non-rivalry

The situation when people can receive the benefits from a good without having to pay for it is known at the ____ problem.

Free-rider

When the purchase and consumption of a good makes the purchase and consumption of that good unavailable to another person, it is known as

Rival

Which exemplify a rivalrous good?

John eats an apple for lunch

Mary drinks a can of Pepsi

_____ means that buyers who are willing and able to pay the market price for the product obtain its benefits, but those unable or unwilling to pay that price do not.

Excludability

Goods that are provided by competitive markets because they incur profits are known as:

Private goods