Economics B 1.5.1

What is the main reason competitive markets drive innovation and bring about newer and better products?

• Because they need to keep up with government regulations

• Because they need to keep customers by making their goods relatively cheaper than other firms

• Because they need to focus on non-price factors, such as quality of a good

• Because they need to increase the price of their goods

What are 'externalities' in the context of market transactions?

• Costs and benefits that are accounted for by producers and consumers

• Costs and benefits that only affect the government

• Costs and benefits that are not accounted for by producers and consumers and impact a third party

• Costs and benefits that are only considered in perfect market conditions

Which of the following is NOT a type of cost?

• Private Costs

• External Costs

• Social Costs

• Public Costs

What do 'Social Costs' include?

• Only the costs incurred by the economic agents directly involved in the market transaction

• Only the costs that impact a third party who is not involved in the market transaction

• The total costs involved in the market transaction including both private and external costs

• The costs associated with government intervention in the market

What is an externality as defined in the text?

• A benefit of consuming or producing a good/service that is included in the market transaction

• A cost of consuming or producing a good/service that is included in the market transaction

• An effect of consuming or producing a good/service that is external to the market transaction and is, therefore, not accounted for when the free market finds equilibrium

• A governmental action that affects the market transaction

What results from the consumption or production of a good or service and impacts a third party in a positive way?

• Negative externality

• Marginal private benefit

• Positive externality

• Marginal social cost

What is the term for the additional benefit to society from the consumption or production of a good, which is not included in the market mechanism?

• Marginal private cost

• Marginal social benefit

• Marginal private benefit

• Marginal social cost

What is the shaded triangle in the positive externality diagram referred to as?

• Market failure area

• Welfare gain area

• Social optimum area

• External benefit area

Why is the socially optimal equilibrium price higher in the case of a positive externality?

• Because the external benefit means the good has more worth

• Because the supply of the good is artificially inflated

• Because the demand for the good is lower

• Because the production costs are higher

What can be implemented to increase quantity to the socially optimum level in the case of a positive externality?

• A tax on the good

• A subsidy on the good

• A price ceiling on the good

• A price floor on the good