Market Failure and Externalities

Which price and quantity combination represents the social optimum?

• P₀ and Q₁.

• P₂ and Q₁.

• P₁ and Q₀.

• P₂ and Q₀.

Refer to Figure 10-1. Which of the following statements is correct?

• The marginal benefit of the positive externality is measured by P₃ - P₁.

• The marginal cost of the negative externality is measured by P₃ - P₂.

• The marginal cost of the negative externality is measured by P₃ - P₁.

• The marginal cost of the negative externality is measured by P₃ - P₀.

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

• The groundwater pollution reduces the cost of large-scale pork production.

• The economic impact of a large-scale pork production facility is localized in a small geographic area.

• The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.

• Consumers will not reap the benefits of lower production cost from large-scale pork production.

            Private markets fail to reach a socially optimal equilibrium when negative externalities are present because...

• social costs equal private costs at the private market solution.

• private costs exceed social costs at the private market solution.

• social costs exceed private costs at the private market solution.

• they internalize externalities.

When a beekeeper places his hives of bees in an orchard so that the bees can gather nectar to produce honey, the bees pollinate the orchard, which increases the yield of fruit. This benefits...

• only the beekeeper.

• the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner.

• only the owner of the orchard.

• both the beekeeper and the orchard owner.

A positive externality will cause a market to produce...

• more than is socially desirable.

• less than is socially desirable.

• the socially optimal equilibrium amount.

• more than the same market would produce in the presence of a negative externality.

Suppose that university education creates a positive externality. If the government does not subsidize education, then

• the equilibrium quantity of education will be equal the socially optimal quantity of education.

• the equilibrium quantity of education will be greater than the socially optimal quantity of education.

•             the equilibrium quantity of education will be less than the socially optimal quantity of education.

• There is not enough information to answer the question.

Which letter represents the DWL in this market?

• d + g

• i

• a + c + f

• b + e + h

Identify the DWL in the market

Note: MPC = MC

• e

• d + g

• a + b

• e - d - g

Select all the features of an allocative efficient market.

• S = D

• No DWL

• Total surplus is maximised

• CS = PS