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when economically desirable goods are not produced at all. They are overproduced or under-produced.

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Market Failures

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When demand curves do not reflect consumers' full willingness to pay for good service

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Demand-Side Market Failure

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when supply curves do not reflect the full cost of producing a good or service

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Supply-side Market Failure

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the difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay

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Consumer surplus

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Inversely (negatively)

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How are consumer surplus and price related?

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Higher prices reduce consumer surplus, lower prices increase consumer surplus.

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How are consumer surplus and prices inversely related?

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The difference between the actual price a producer receives and the minimum acceptable price that a consumer would have to pay.

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Producer Surplus

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Directly (positively)

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How are producer surplus and equilibrium price related?

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Lower prices reduce producer surplus and higher prices increase producer surplus

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How are producer surplus and equilibrium price directly related?

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Achieved when competition forces producers to use the best technologies and combinations of resources available.

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Productive Efficiency

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minimizes the per-unit cost of the output produced.

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What does productive efficiency do

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Achieved when the correct of product is produced relative to other goods and services

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Allocative Efficiency

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1) MB = MC 2) Maximum willingness to pay = Minimum acceptable price 3) Total surplus is at maximum

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When does Allocative efficiency occur at the market equilibrium quantity?

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Reductions of combined consumer and producer surplus

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Efficiency Losses

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from both underproduction and overproduction

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When does efficiency loss occur?

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deadweight loss

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What is another name for efficiency loss?

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Goods offered for sale in stores, shops, internet.

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Private Goods

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when a person buys and consume a product, it is not available for another person to buy and consume

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Rivalry

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Sellers can keep people who do not pay for a product from obtaining its benefits

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Excludability

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the horizontal summation of the individual demand schedules.

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The market demand for a private good is

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Distinguished by nonrialry and nonexcludability.

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Public Goods

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One person's consumption of a good does not preclude consumption of the good by others

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Nonrivalry

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There is no effective way of excluding individuals from the benefit of the good once it comes into existence.

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Nonexcludability

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Consumer Surplus

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

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- Subsidies to producers - Government provision of public goods - Subsidies to buyers

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The three options available to government in order to correct spillover benefits or the underallocation of resources are:

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Negative Externality

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A __________ ______________, also known as a spillover cost, is a market failure that occurs when a third party to a transaction experiences uncompensated costs.

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cost

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the supply curve for any good, private or public, is it's marginal __________ curve.

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A cost-benefit analysis

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A comparison of marginal changes is known as:

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Rivalry and Excludability

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Characteristic of a private good include:

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Economic efficiency when externalities affect large numbers of people or when community interests are at stake

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Government intervention may be needed to achieve:

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excludability

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The ______ characteristic of a private good is the ability of a seller to prevent people who did not pay for a product from obtaining its benefits

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Spillover benefit

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A positive externality is an uncompensated:

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Subsidies

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A ___________ to a producer is a payment from the government to decrease the producer's cost in order to encourage more output of a product beneficial to society

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once a producer has provided a public good, everyone, including nonpayers, can obtain the benefit

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Free-rider problem

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

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When does consumer surplus happen?

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a firm does not have to pay the full cost of producing it's output

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A supply-side market failure arises in situations in which:

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not possible for the market to correctly weigh cost and benefits

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A market failure arises because it is:

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Externality

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An _______ causes some of the benefits or costs of a market transaction to be passed on to a third party.

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market demand

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the ________ curve of positive externalities reflects only the direct private benefit to the individuals who consume the product.

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reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product

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Deadweight loss

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A cost or benefit accruing to an individual or group, a third party, that is external to a market transaction

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Externality

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rises

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The marginal cost to firms and hence to society _______ as pollution is reduced more and more

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Government should restrict its involvement to remedying external costs or benefits

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Coase Theorem

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The cost of pollution abatement to fall The optimal quantity level of abatement to rise Society's marginal cost curve to shift rightward

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Supposed that technology of pollution control equipment improves noticeably. One would expect:

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few; under

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The result of positive externalities is that the market produces too ___________ units of a product that could benefit society because producers ________-allocate resources to that product because some individuals do not consume the product but accrue benefits from others.

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Government

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Cost benefit analysis can help the __________ decide on the extent to which a public project should be pursued.

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- Subsidies to consumers - government provision - Subsidies to producers

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Identify policies for coping with the underallocation of resources associated with positive externalities

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- the optimal quantity level of pollution control to increase - the marginal benefit curve to shift rightward

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Supposed that society were to decide that it wanted cleaner air and water because of new information about the adverse health effects of pollution. Then one could expect:

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Marginal benefit

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What do points on the demand curve represent?

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Below; Above

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Consumer surplus is the area _______ the demand curve and _____________ the market price.

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- Liability rules and lawsuits - Direct controls - Specific taxes - Markets for externality rights - Private bargaining

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Identify policies for coping with the overallocation of resources caused by negative externalities

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- The subsidy reduces the price of purchasing the good - The quantity of the product purchased would rise to the economically optimal output eliminating the under-allocation of resources - the demand curve would shift out to the right because of an increase in demand.

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The effects of subsidies on consumers in correcting for positive externalities are:

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It compares the marginal benefit of an added unit of the good against the government's marginal cost of providing it.

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how does the government provide the optimal quantity of a public good?

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Cost; Present

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Because the _________ of public goods typically are immediate while the benefits are often accrued over longer time periods, economist convert both costs and benefits to _____________ values of comparison

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Supply would decrease

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1.- Refer to the above supply and demand graph of Product X. What would happen if the government taxed the producers of this product because it has negative externalities in production?

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Owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars

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There is an adverse selection problem in the market for used cars because:

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Marginal cost of the product increases while its marginal benefit decreases

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Refer to the above graph. If the output level increases from Q2 to Q3, then the:

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Levy a tax on the producers of paper products and use the tax revenues to clean up the river

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4.- It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river. As a result, operators of hydroelectric power-generating plants downstream along the river find that they must clean up the river's water before it flows through their equipment. -Refer to the above information. Which of the following policies would be most appropriate for dealing with this problem?

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Produce the product

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Refer to the above supply and demand graph. S1 and D1 represent the current market supply and demand, respectively. S2 and D2 represent the socially optimal supply and demand. One way that the government could shift supply to its socially optimal level is to:

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Total cost is $9 billion and total benefit is $12 billion

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Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table. Refer to the above table and information. What is the total cost and total benefit of doing projects A, B, and C?

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Four

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Answer the question based on the following information. Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected annual costs and benefits of these alternatives.

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Adverse selection

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E-bay, Amazon and other Internet shopping sites provide "seller ratings" done by previous buyers, in order to help deal with the problem of:

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Overcomes market information problems

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The franchising of fast-food restaurants would be an example of how a private business:

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C

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Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table. Picture Refer to the above table and information. What project should the government select to achieve the maximum net benefit?

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There would be an under-allocation of resources to crime control

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Answer the question based on the following information. Normal University has found it necessary to institute a crime-control program on its campus to deal with the high costs of theft and vandalism. The university is now considering several alternative levels of crime control. This table shows the expected annual costs and benefits of these alternatives. Picture Refer to the above information. If Normal University undertakes program Level Three:

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Adverse selection

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The 2010 Health Care Reform Law, also known as "Obamacare", includes a part known as universal coverage which requires everyone to have health insurance. One reason for this is to address the problem of:

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$4 billion

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Assume that a government is considering a new social program and may choose to include in this program any number of four progressively larger projects. The marginal cost and the marginal benefits of each of the four projects are given in the table. Picture Refer to the above table and information. What is the net benefit of project D?

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Marginal benefit equals the marginal cost of the public good

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Refer to the above supply and demand graph for a public good. Point c on the graph shows where the:

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0abe

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Refer to the above graph. If the output level is Q1, then the sum of the consumer and producer surplus is:

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Enacting legislation that bans pollution

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Which of the following antipollution policies is least likely to make use of cost-benefit analysis?

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Price would decrease

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Picture Refer to the above supply and demand graph of Product X. What would happen if the government decided to also start providing Product X in the market?

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Adverse selection

answer

Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of:

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Nonexcludability characteristic

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Street entertainers face the free-rider problem when they perform because of the:

Chapter 4 Market Failures: Public Goods and Externalities – Flashcards

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