Market Failures and Externalities

In which of the following situations is market failure least likely to occur? A situation where;

• externalities exist

• many producers compete in the market

• there is a sole producer in market

• there is a very uneven distribution of income and wealth

Which of the following statements is true about externalities?

• When externalities exist, resources are allocated efficiently

• When positive externalities exist, efficiency is improved by taxing the product

• From society's point of view, the output of goods for which a positive externality exists is too low

• The price system overproduces goods with positive externalities

When social costs are greater than private costs, there is a;

• positive externality

• negative externality

• less than socially optimal output

• socially optimal output

A tin-mining company is found guilty of polluting a river. Which one of the following government measures would an economist describe as an appropriate market-based solution?

• Imposition of regulations and direct control on the company

• A reduction of private property rights over the river

• Increase tax on the tin produced

• Nationalization of the tin-mining company

Government regulations exist to

• Increase economic freedom
• Protect consumers from negative externalities
• Punish people who intervene in the free market
• Provide incentives to privatize

Driving a car on crowded highway produces

• a negative externality.

• a positive externality.

Apartment dwellers who buy fire alarms or fire extinguishers generate a

• negative externality.

• positive externality.

A tax equal to the external cost on firms that emit pollutants would

• not reduce pollution levels at all.

• provide firms with the incentive to increase the level of activity creating the pollution.

• provide firms with the incentive to decrease the level of activity creating the pollution.

• provide firms with little incentive to search for less environmentally damaging production methods.

Which of the following is an example of a positive externality resulting from an outdoor band concert?

• An elderly woman in her apartment hears a song that she liked as a child.

• A pair of endangered birds leave their nest in a nearby tree when the concert starts.

• A pizza parlor closes early, because all of its customers are at the concert.

• A traffic jam occurs as drivers hunt for parking spots near the concert.

An Economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.

• Public good

• Free rider

• Externalities

• Private sector