Economics Chapter on Supply and Demand
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Questions and Answers

What is one public policy approach to manage externalities mentioned?

  • Issuing pollution permits (correct)
  • Enhancing consumer protection laws
  • Implementing price ceilings
  • Subsidizing affected businesses

    • What can businesses do when one imposes an externality on another?

  • Ignore the externality
  • Increase their production without changes
  • Rely on government intervention
  • Internalize the externality by merging (correct)

    • According to the Coase theorem, what is necessary for private parties to effectively bargain?

  • Free access to legal resources
  • Government oversight
  • No transaction costs (correct)
  • Financial incentives

    • What outcome does the Coase theorem suggest can be achieved through bargaining among parties?

    <p>Efficient resource allocation</p> Signup and view all the answers

    What limitation exists when using the Coase theorem in practice?

    <p>High transaction costs may hinder bargaining</p> Signup and view all the answers

    Which option best describes the role of corrective taxes in managing externalities?

    <p>To internalize external costs</p> Signup and view all the answers

    How can issuing a limited number of pollution permits impact polluters?

    <p>It creates a legal market for trading permits</p> Signup and view all the answers

    What is a common misconception about the Coase theorem?

    <p>It assumes all parties act in perfect rationality</p> Signup and view all the answers

    What is a price ceiling?

    <p>A legal maximum price for a good or service</p> Signup and view all the answers

    What happens when a price ceiling is binding?

    <p>It causes a shortage of the good</p> Signup and view all the answers

    Which of the following is an example of a price floor?

    <p>Minimum wage laws</p> Signup and view all the answers

    What is a common outcome of a price floor that is binding?

    <p>Surplus of the good</p> Signup and view all the answers

    In the context of tax incidence, what does it refer to?

    <p>The way tax burden is distributed among market participants</p> Signup and view all the answers

    Which of the following is not a characteristic of a price ceiling?

    <p>It always benefits sellers in a market</p> Signup and view all the answers

    Which situation illustrates the effect of a price ceiling?

    <p>A controlled rent market leading to long waiting lists</p> Signup and view all the answers

    If a price floor is not binding, what is the likely result?

    <p>Market prices remain stable</p> Signup and view all the answers

    What is primarily seen as a benefit of education for the individual?

    <p>Higher wages as a productive worker</p> Signup and view all the answers

    What characteristic distinguishes public goods from private goods?

    <p>Public goods are neither excludable nor rival in consumption.</p> Signup and view all the answers

    What type of taxes are enacted to address negative externalities?

    <p>Corrective taxes</p> Signup and view all the answers

    Which of the following is an example of a public good?

    <p>National defense.</p> Signup and view all the answers

    What happens in markets due to negative externalities?

    <p>Overproduction of goods</p> Signup and view all the answers

    Which statement accurately defines 'excludability'?

    <p>When individuals can be prevented from using a good.</p> Signup and view all the answers

    What is an ideal corrective subsidy meant to achieve?

    <p>Equal the external benefit of an activity</p> Signup and view all the answers

    What does 'rivalry in consumption' mean?

    <p>One person's use of a good reduces its availability to others.</p> Signup and view all the answers

    Why do economists generally prefer corrective taxes over regulations for pollution control?

    <p>Corrective taxes can reduce pollution more cheaply</p> Signup and view all the answers

    Which of the following statements is true regarding common resources?

    <p>Common resources are available free of charge to everyone.</p> Signup and view all the answers

    How can the government address positive externalities?

    <p>Subsidizing goods that provide positive externalities</p> Signup and view all the answers

    What is a common method used by the government to support education?

    <p>Public schools and government scholarships</p> Signup and view all the answers

    How does basic research knowledge differ from specific technological knowledge?

    <p>Basic research knowledge is general, while specific technological knowledge is tailored.</p> Signup and view all the answers

    What type of analysis is used to evaluate the provision of public goods?

    <p>Cost-benefit analysis.</p> Signup and view all the answers

    What is the term for a tax designed to encourage private decision makers to consider social costs?

    <p>Pigovian tax</p> Signup and view all the answers

    Which of the following is NOT a characteristic of public goods?

    <p>They are rival in consumption.</p> Signup and view all the answers

    What does producer surplus measure?

    <p>The benefit sellers get from participating in a market</p> Signup and view all the answers

    How is producer surplus computed?

    <p>By finding the area below the price and above the supply curve</p> Signup and view all the answers

    What characterizes an efficient allocation of resources?

    <p>When total surplus is maximized including both consumer and producer surplus</p> Signup and view all the answers

    What type of externality occurs when an activity negatively affects bystanders?

    <p>Negative externality</p> Signup and view all the answers

    What is the effect of market failures on resource allocation?

    <p>They prevent efficient resource allocation</p> Signup and view all the answers

    What does internalizing an externality aim to accomplish?

    <p>To incentivize participants to consider external effects in decision-making</p> Signup and view all the answers

    Which of the following instruments can the government use to address externalities?

    <p>Regulations or taxes</p> Signup and view all the answers

    What is an example of a positive externality?

    <p>Education leading to a more informed society</p> Signup and view all the answers

    Study Notes

    Supply, Demand, and Government Policies

    • Price Ceiling: A legal maximum on the price at which a good can be sold.
    • Price Floor: A legal minimum on the price at which a good can be sold.
    • A Binding Price Ceiling: Leads to a shortage
    • A Binding Price Floor: Leads to a surplus
    • Rent Control: One common example of a price ceiling
    • Minimum Wage: An important example of a price floor
    • Tax Incidence: The distribution of a tax burden between buyers and sellers

    Public Goods

    • Public goods are neither excludable nor rival in consumption
    • Excludability: Preventing individuals from consuming a good
    • Rivalry in Consumption: One person's use of the good decreasing the ability of others to use it
    • National Defense: A classic example of a public good

    Common Resources

    • Common resources are not excludable but are rival in consumption
    • Example: Fisheries

    Externalities

    • Externality: An action that influences the well-being of a bystander without payment or compensation.
    • Negative Externality: Adverse impact on the bystander
    • Positive Externality: Beneficial impact on the bystander
    • Market Failure: Externalities cause markets to be inefficient
    • Internalizing the Externality: Altering incentives to account for external effects
    • Corrective Taxes: A tax designed to internalize the external cost of a negative externality
    • Corrective Subsidies: A subsidy designed to internalize the external benefit of a positive externality
    • Tradable Pollution Permits: A market-based approach to pollution control
    • Coase Theorem: Private parties can potentially solve the problem of externalities amongst themselves, assuming costless bargaining.

    Basic Research Knowledge

    • Created through research
    • Public goods are often involved in funding basic research as it can be difficult to exclude individuals from benefiting from research

    Fighting Poverty

    • Cost-benefit analysis can be used to evaluate public policies when addressing poverty.

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    Description

    Test your understanding of various economic concepts such as supply, demand, price controls, public goods, and externalities. This quiz will cover key definitions and examples, including price ceilings and floors, along with the implications of government policies on economic factors. Challenge yourself to apply these concepts to real-world scenarios.

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