Macroeconomics Unit 1 Chapter 4 Flashcards

Questions and Answers

Market failure is said to occur whenever:

Prices rise.

Private markets do not allocate resources in the most economically desirable way. (correct)

Government intervenes in the functioning of private markets.

Some consumers who want a good do not obtain it because the price is higher than they are willing to pay.

The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called:

Consumer Demand

Consumer Surplus (correct)

Utility

Market failure

Supply-side market failures occur when:

The demand and supply curves don't reflect consumers' full willingness to pay for a good or service.

A good or service is not supplied because no one wants it.

Government regulates production of a good or service.

The demand and supply curves don't reflect the full cost of producing a good or service. (correct)

Consumer surplus:

Is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. Signup and view all the answers

Producer surplus:

Is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. Signup and view all the answers

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:

Under the demand curve and above the actual price. Signup and view all the answers

Graphically, producer surplus is measured as the area:

Above the supply curve and below the actual price. Signup and view all the answers

Allocative efficiency occurs only at that output where:

The combined amounts of consumer surplus and producer surplus are maximized. Signup and view all the answers

Public goods are those for which there:

Are nonrivalry and nonexcludability. Signup and view all the answers

A public good:

Can't be provided to one person without making it available to others as well. Signup and view all the answers

Cost-benefit analysis attempts to:

Compare the benefits and costs associated with any economic project or activity. Signup and view all the answers

In a free-market economy, a product which entails a positive externality will be:

Underproduced. Signup and view all the answers

External benefits in consumption refer to benefits accruing to:

Those other than the ones who consumed the product. Signup and view all the answers

If a good that generates positive externalities were produced and priced to take into account these spillover benefits, then its:

Price and output would increase. Signup and view all the answers

The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of:

Diminishing returns. Signup and view all the answers

According to the Coase Theorem, externality problems:

Can be solved through private negotiations without the need for government intervention. Signup and view all the answers

(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes:

The Coase theorem. Signup and view all the answers

Study Notes

Market Failure

Market failure occurs when private markets do not allocate resources economically, leading to inefficiencies.
Causes include rising prices that prevent consumers from obtaining goods and government intervention.

Consumer and Producer Surplus

Consumer surplus is the difference between the maximum price consumers are willing to pay and the market price.
Producer surplus is the difference between the market price and the minimum price producers are willing to accept.
Graphically, consumer surplus is represented as a triangle under the demand curve and above the market price.
Producer surplus is represented as the area above the supply curve and below the market price.

Supply-Side Market Failures

Supply-side market failures arise when demand and supply curves fail to reflect the true costs and benefits related to production and consumption.

Allocative Efficiency

Achieved when the combined consumer and producer surplus is maximized.
Occurs at an output level where marginal benefit equals marginal cost.

Public Goods

Public goods have characteristics of nonrivalry and nonexcludability, leading to free-rider problems where individuals benefit without paying.
A public good cannot be restricted to just one person without being available to others.

Cost-Benefit Analysis

A method for comparing the relative benefits and costs of economic projects to determine their feasibility and efficiency.

Externalities

Positive externalities lead to underproduction of goods that provide benefits to society beyond those enjoyed by consumers.
External benefits accrue to individuals not directly involved in the transaction.
If a good generating positive externalities is produced effectively, both the price and output should increase.

Pollution and Marginal Costs

The marginal cost of reducing pollution increases with higher levels of pollution abatement, following the law of diminishing returns.

Coase Theorem

Proposes that externalities can be resolved through private negotiation without government intervention, assuming property rights are well-defined.

Practical Application of the Coase Theorem

Example scenario where a property owner (Betty) negotiates with a neighbor (Chuck) to cut down a tree blocking a view illustrates the Coase theorem in action.

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Description

Test your understanding of key concepts in Macroeconomics, Unit 1 Chapter 4, with these flashcards. Each card provides essential definitions and explanations, focusing on market failure and consumer behavior. Perfect for students preparing for exams or wanting to reinforce their knowledge.