Beruflich Dokumente
Kultur Dokumente
McGraw-Hill/Irwin
Market Failures
LO1
5-2
Demand-Side Failures
LO1
5-3
Supply-Side Failures
LO1
5-4
consumers full willingness to pay Supply curve must reflect all the costs of production
LO1
5-5
Consumer Surplus
LO2
5-6
Consumer Surplus
Consumer Surplus (2) Maximum Price Willing to Pay $13 12 11 10 9 (3) Actual Price (Equilibrium Price) $8 8 8 8 8
Betty
0 (= $8-$8)
LO2
5-7
Consumer Surplus
Consumer Surplus
Equilibrium Price
P1
D Q1 Quantity (bags)
5-8
LO2
Producer Surplus
LO2
5-9
Producer Surplus
Producer Surplus (2) Minimum Acceptable Price $3 4 5 6 (3) Actual Price (Equilibrium Price) $8 8 8 8 (4) Producer Surplus $5 (=$8-$3) 4 (=$8-$4) 3 (=$8-$5) 2 (=$8-$6)
Craig
Chad
7
8
8
8
1 (=$8-$7)
0 (=$8-$8)
LO2
5-10
Producer Surplus
Producer surplus
P1
Equilibrium price
Q1 Quantity (bags)
LO2
5-11
Efficiency Revisited
P1
5-12
Efficiency Losses
a
Efficiency loss from underproduction
b e
D c
Q2 Q1 Quantity (bags)
5-13
LO2
Efficiency Losses
a S
f b g
D c Q1 Q3 Quantity (bags)
LO2
5-14
Private Goods
Produced in the market by firms Offered for sale Characteristics Rivalry Excludability
LO3
5-15
Public Goods
Provided by government Offered for free Characteristics Nonrivalry Nonexcludability Free-rider problem
LO3
5-16
Summary
Excludable Rivalrous Non-excludable
Private Good
Food, clothing, cars, personal electronics
Common Goods
Fish stocks, timber, coal
Non-rivalrous
Club Good
Cinemas, private parks, satellite television
Public Good
Free-to-air television, air, national defense, city fireworks shows
LO3
5-17
LO3
5-18
D2
1 2 3 4 5 Q
Benson
D1
1 2 3 4 5 Q
Adams P
$9 7 5 3 1 0 1 2 3 4
Optimal Quantity
Collective Willingness To Pay
Q
DC
5
5-19
Cost-Benefit Analysis
LO3
Cost-Benefit Analysis
Cost-Benefit Analysis for a National Highway Construction Project (in Billions)
(1) Plan
No new construction A: Widen existing highways B: New 2-lane highways C: New 4-lane highways D: New 6-lane highways
LO3
5-21
Quasi-Public Goods
LO3
5-22
Government Taxes individuals and businesses Takes the money and spends on
production of public goods
LO3
5-23
Externalities
LO4
Externalities
Negative Externalities
P
St S y z x D
Overallocation
St
Positive Externalities
Dt D
Underallocation
Qo
Qe
0 Q Qe Qo Q
LO4
5-25
Government Intervention
Correct negative externalities Direct controls Specific taxes Correct positive externalities Subsidies and government
provision
LO4
5-26
Government Intervention
P
Negative Externalities
a
P
St S
St a T S
c D Overallocation
D 0 Q o Qe
(b)
Qo Qe
(a)
Negative Externalities
LO4
5-27
Government Intervention
St z
Positive Externalities
St
St
Subsidy
S't
Dt D
Underallocation
Subsidy Dt
D
0 Qe Qo 0 Qe Qo
Qe
Qo
LO4
5-28
Government Intervention
Methods for Dealing with Externalities Resource Allocation Outcome
Problem
Ways to Correct
1. 2. 3. 4. 5.
1. 2. 3. 4.
Private bargaining Liability rules and lawsuits Tax on producers Direct controls Market for externality rights
Private bargaining Subsidy to consumers Subsidy to producers Government provision
LO4
5-29
MC
Q1
LO5
5-30
LO5
5-31
Problem #1
Market failure is said to occur whenever: A. private markets do not allocate resources in the most economically desirable way. B. prices rise. C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay. D. government intervenes in the functioning of private markets.
5-33
Problem #2
Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We can conclude that the government is correcting for: A. negative externalities in diagram (a) and positive externalities in diagram (b). B. positive externalities in diagram (a) and negative externalities in diagram (b). C. negative externalities in both diagrams. D. positive externalities in both diagrams.
5-34
Problem #3
Refer to the diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The shift of the supply curve from S to S1 in diagram (a) might be caused by a per unit: A. subsidy paid to the producers of this product. B. tax on the producers of this product. C. subsidy paid to the buyers of this product. D. tax on the buyers of this product.
5-35
Problem #4
Producer surplus: A. is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B. rises as equilibrium price falls. C. is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D. is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.
5-36
Problem #5 The two main characteristics of a public good are: A. production at constant marginal cost and rising demand. B. nonexcludability and production at rising marginal cost. C. nonrivalry and nonexcludability. D. nonrivalry and large negative externalities.
5-37
Problem #6
Demand-side market failures occur when: A. the demand and supply curves don't reflect consumers' full willingness to pay for a good or service. B. the demand and supply curves don't reflect the full cost of producing a good or service. C. government imposes a tax on a good or service. D. a good or service is not produced because no one demands it.
5-38
Problem #7
Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences: A. a consumer surplus of $10 and Tony experiences a producer surplus of $190. B. a producer surplus of $200 and Tony experiences a consumer surplus of $10. C. a consumer surplus of $670 and Tony experiences a producer surplus of $200. D. a producer surplus of $10 and Tony experiences a consumer surplus of $190.
5-39
Problem #8 Unlike a private good, a public good: A. has no opportunity costs. B. has benefits available to all, including nonpayers. C. produces no positive or negative externalities. D. is characterized by rivalry and excludability.
5-40
Problem #9 Refer to the above diagram. Assuming equilibrium price P1, consumer surplus is represented by areas: A. a + b. B. a + b + c + d. C. c + d. D. a + c.
5-41
Problem #10
From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically: A. generates more of a benefit than it costs to produce. B. produces a benefit exactly equal to the cost of producing the last unit. C. maximizes the net benefit to society. D. costs more to produce than it provides in benefits.
5-42
Problem #11 Public goods are those for which there: A. is no free-rider problem. B. are no externalities. C. is nonrivalry and nonexcludability. D. is rivalry and excludability.
5-43
Problem #12 Refer to the diagram. With MB1 and MC1, society's optimal amount of pollution abatement is: A. Q1. B. Q2. C. Q3. D. Q4.
5-44
Problem #13
Which of the following statements is not true? A. Some public goods are paid for by private philanthropy. B. Private provision of public goods is usually unprofitable. C. The free-rider problem results from the characteristics of nonrivalry and nonexcludability. D. Public goods are only provided by government.
5-45
Problem #14
If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then which of the following is true? A. The benefit surpluses shared between consumers and producers will be maximized. B. The benefit surpluses received by consumers and producers will be equal. C. There will be no consumer or producer surplus. D. Consumer surplus will be maximized, and producer surplus will be minimized.
5-46
Problem #15
Which of the following statements is not true? A. Some public goods are paid for by private philanthropy. B. Private provision of public goods is usually unprofitable. C. The free-rider problem results from the characteristics of nonrivalry and nonexcludability. D. Public goods are only provided by government.
5-47
Problem #16
Refer to the diagram. If actual production and consumption occur at Q1: A. efficiency is achieved. B. consumer surplus is maximized. C. an efficiency loss (or deadweight loss) of b + d occurs. D. an efficiency loss (or deadweight loss) of e + d occurs.
5-48
Problem #17
Allocative efficiency occurs only at that output where: A. marginal benefit exceeds marginal cost by the greatest amount. B. consumer surplus exceeds producer surplus by the greatest amount. C. the combined amounts of consumer surplus and producer surplus are maximized. D. the areas of consumer and producer surplus are equal.
5-49
Problem #18
An efficiency loss (or deadweight loss): A. is measured as the combined loss of consumer surplus and producer surplus. B. results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. C. can result from underproduction, but not from overproduction. D. can result from overproduction, but not from underproduction.
5-50
Problem #19
The MC curves in the above diagram slope upward because of the law of: A. demand. B. conservation of matter and energy. C. diminishing marginal utility. D. diminishing returns.
5-51