T3W10 Mon Lecture

What is the term used to describe uncompensated spillover effects arising from the consumption or production of a good?

• Public Goods

• Asymmetric Information

• Imperfect Information

• Externalities

What is the main example used to explain how positive externalities in production lead to market failure?

• Production of paper using slash-and-burn method

• Engaging in Research and Development (R&D)

• Usage of private vehicles

• Development of more advanced remanufacturing processes

What is the purpose of imposing a production quota by the government?

• To increase production to the socially optimal level

• To reduce production to the socially optimal level

• To encourage production

• To eliminate all consumption of the good

What is the primary cause of market failure due to adverse selection in the insurance market?

• High premiums

• Low premiums

• High-risk individuals being more likely to purchase insurance

• Low-risk individuals being more likely to purchase insurance

In which market is supplier-induced demand most likely to occur?

• Used car market

• Healthcare market

• Real estate market

• Stock market

What is moral hazard?

• When one party takes on more risk because they do not bear the full consequences.

• When both parties take on equal risk

• When there is no risk involved in a transaction

• When information is perfectly symmetrical

Which of the following is a method to reduce moral hazard?

• Increasing the supply of goods.

• Implementing co-payments in insurance policies.

• Reducing prices for high-risk individuals.

• Eliminating all forms of insurance.

Which of the following is/are NOT considered a public good?

• Street Lighting

• Public hospital

• Unfenced public park

• Public Toilets

Which of the following illustrates how Negative Externalities in Production Lead to Market Failure?

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In explaining the welfare loss area on the diagram for how Negative Externalities in Consumption Lead to Market Failure due to the usage of private cars, at the private optimal level of output 0Q_p, society values an additional unit of private vehicle consumed (i.e. (a)   ) less than what it would cost society (i.e. MSC). As such, less of private cars should be consumed to increase social welfare.