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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:
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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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