Externalities

Which of the following is the best example of a market failure (when there is an imbalance between consumers and producers)?

• The market for strawberries

• The market for flu shots

• The market for high heels

• The market for haircuts

Which of the following is the best definition of a positive externality?

• benefits enjoyed by both consumers and producers in the market for a good.

• benefits enjoyed by only consumers in the market for a good.

• benefits enjoyed by only producers in the market for a good.

• benefits enjoyed by bystanders outside the market transactions of a good

Which of the following is the best definition of a negative externality?

• Negative effects on both consumers and producers in the market of a good.

• Negative effects on bystanders outside of a market from consumer and producer transactions.

• Negative effects on just consumers in the market for a good.

• Negative effects on just producers in the market for a good.

Which of the following is the best example of a pure free market currently in the US?

• Market for health care

• Market for almonds

• Market for oil

• Market for education

Which of the following is the best definition of a bystander:

• A consumer

• A producer

• Both producers and consumers

• Someone not involved in the market but affected by market activity

Which of the following is the best solution to fix a positive externality?

• Tax the market

• Legislate to make the market produce more of the good

• Subsidize the production of the good

• The government provides it for free

Which of the following is the best option for fixing a negative externality?

• Tax the production of the good.

• The government can set a limit/quota on the number of units of a good that is produced

• Subsidize the production of the good.

• The government can provide the good for free.

True or False: In order to fix market failures, the government should eliminate the markets altogether.

• True

• False

True or False: A positive externality has a market equilibrium that is equal to the socially optimal (efficient) level of production.

• True

• False

True or False: A principle of economics is that sometimes governments can improve market outcomes.

• True

• False