Exercise Set 16
MARKET FAILURE

  1. Describe the two characteristics of public goods. Explain why private firms are unwilling to produce and sell public goods.

  2. A steel mill produces steel and generates pollution in the process. Will a tax on steel encourage the firm to produce less pollution? Explain, along with a sketch.

  3. Externalities and public goods are examples of market failure.

  4. Market failure occurs when

    (a) The price of a good equals the marginal cost of producing it
    (b) Private cost is different from social cost
    (c) All the firms in the economy attempt to maximize profits
    (d) A firm in perfect competition makes losses
    (e) Both (a) and (d)

  5. For a firm that generates a negative externality,

    (a) The marginal private cost is less than the marginal social cost
    (b) An appropriate policy to reduce the externality is a tax on the firm's output
    (c) The socially optimal level of output is less than the private optimal output level
    (d) All of the above
    (e) Both (a) and (b)

  6. Public goods have the following characteristics:

    (a) Private firms are able to charge each consumer a high price for the good
    (b) It is impossible to exclude people from consuming the good
    (c) Consumption by an individual reduces the amount available for consumption by others
    (d) Both (a) and (b)
    (e) Both (b) and (c)

  7. Market failure occurs when

    (a) Private cost is different from social cost
    (b) The government raises taxes
    (c) The price of a good is equal to the marginal cost
    (d) Both (b) and (c)
    (e) None of the above

  8. For a firm that generates a negative externality.

    (a) The socially optimal level of output is greater than the private optimal output level
    (b) A policy that will correct for the market failure is a tax on output
    (c) The marginal private cost is less than the marginal social cost
    (d) Both (a) and (b)
    (e) Both (b) and (c)

  9. Public goods have the following characteristics:

    (a) Consumption by an individual does not decrease the amount left for consumption by others
    (b) It is impossible to exclude people from consuming the good
    (c) In a free market, firms will not produce the good
    (d) All of the above
    (e) Both (b) and (c)

  10. Moral hazard implies that

    (a) There is monopolistic competition in the insurance industry
    (b) Insurance encourages the insured to take risks
    (c) It is dangerous for insurance companies to preach about morality
    (d) Both (a) and (b)
    (e) None of the above

  11. The practice of allowing mining companies to operate freely (i.e., without paying user fees) on public lands

    (a) Creates a negative externality
    (b) Results in a socially optimal level of "mining" output
    (c) Ensures that marginal private cost is equal to marginal social cost
    (d) Both (a) and (b)
    (e) Both (a) and (c)

  12. The following are examples of public goods:

    (a) National defense
    (b) Street lights
    (c) Tylenol capsules
    (d) All of the above
    (e) Both (a) and (b)

  13. When the production of a good generates an externality, perfect competition is

    (a) Efficient, if the externality is a negative one
    (b) Efficient, if the externality is a positive one
    (c) Inefficient, because in equilibrium price does not equal marginal private cost
    (d) Inefficient, because in equilibrium price does not equal marginal social cost

  14. Which of the following is not a public good?

    (a) Blood donated to the Red Cross blood bank
    (b) A fountain in a public square
    (c) A broadcast by a radio station
    (d) A traffic light at an intersection

  15. Which of the following is an example of market failure?

    (a) The price of a good is greater than the marginal cost of producing it.
    (b) The price of a good is less than the marginal cost of producing it.
    (c) The price of a good is greater than the marginal revenue earned by the firm on the last unit of the good.
    (d) All of the above
    (e) None of the above

  16. A steel-producing firm generates pollution. We may conclude that

    (a) The marginal private cost of producing steel is greater than the marginal social cost of producing steel.
    (b) An appropriate policy to reduce pollution is a tax on steel.
    (c) The socially optimal level of steel is greater than the private optimal.
    (d) All of the above are true.
    (e) Both (a) and (b) are true.

  17. Public goods have the following characteristics:

    (a) Private firms charge each consumer a price equal to the marginal cost of producing the good.
    (b) Public goods are produced by firms in perfect competition.
    (c) Consumption of a public good by an individual reduces the amount available for consumption by others.
    (d) Both (a) and (b)
    (e) None of the above

  18. The following are examples of public goods:

    (a) Television broadcast of a basketball game by NBC
    (b) Onions sold in the supermarket
    (c) Drugs produced by Glaxo for the treatment of ulcer
    (d) All of the above
    (e) Both (b) and (c)

  19. Digging for coal generally leaves the land in a bad state. If the government allows coal companies to excavate coal freely on public lands, it will ensure that

    (a) The firms will "produce" the socially optimal amount of coal.
    (b) The marginal private cost of producing coal is less than the marginal social cost of producing coal.
    (c) The marginal private cost of producing coal is greater than the marginal social cost of producing coal.
    (d) Both (a) and (b) will occur.
    (e) None of the above will occur.

  20. When the production of a good generates an externality, perfect competition is

    (a) Efficient, if the externality is a negative one
    (b) Efficient, if the externality is a positive one
    (c) Inefficient, because in equilibrium price does not equal marginal private cost
    (d) Inefficient, because in equilibrium price does not equal marginal social cost

Answers to selected questions: 
	4b 	5d	6b	7a	8e	9d	
	10b	11a	12e	13d	14a	15d	
	16b	17e	18a	19b	20d