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Questions and Answers
Market failure is said to occur whenever:
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:
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:
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:
Consumer surplus:
Producer surplus:
Producer surplus:
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:
Graphically, producer surplus is measured as the area:
Graphically, producer surplus is measured as the area:
Allocative efficiency occurs only at that output where:
Allocative efficiency occurs only at that output where:
Public goods are those for which there:
Public goods are those for which there:
A public good:
A public good:
Cost-benefit analysis attempts to:
Cost-benefit analysis attempts to:
In a free-market economy, a product which entails a positive externality will be:
In a free-market economy, a product which entails a positive externality will be:
External benefits in consumption refer to benefits accruing to:
External benefits in consumption refer to benefits accruing to:
If a good that generates positive externalities were produced and priced to take into account these spillover benefits, then its:
If a good that generates positive externalities were produced and priced to take into account these spillover benefits, then its:
The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of:
The marginal cost to society of reducing pollution rises with increases in pollution abatement because of the law of:
According to the Coase Theorem, externality problems:
According to the Coase Theorem, externality problems:
(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:
(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:
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.
