Question 1

Your next- door neighbour has a beautiful flower garden. However, you are allergic to flowers and cannot use your patio because of the flower pollen that drifts into it. In this case, the flower garden is an example of:

Accepted Answer

The flower garden imposes an external cost on you because the pollen affects your ability to use your patio, which is a negative externality.

Question 2

If non- payers cannot be excluded from consuming a good this gives rise to the:

Accepted Answer

The free rider problem occurs when individuals can benefit from a good without paying for it, typically associated with public goods where non-payers cannot be excluded.

Question 3

Public goods are characterised by being non- rival in consumption, therefore:

Accepted Answer

Public goods are non-rival and non-excludable, meaning that one person's consumption does not reduce availability for others, and it's difficult to exclude non-payers. This makes it challenging for the private sector to profit from providing them, leading to under-provision without government intervention.

Question 4

An external cost of production will occur when:

Accepted Answer

An external cost of production occurs when a firm does not account for the total social cost, leading to overproduction and negative externalities affecting third parties.

Question 5

If an external cost arises in the production of paint:

Accepted Answer

External costs lead to overproduction because producers do not bear the full cost of production, resulting in too much paint being produced compared to the socially optimal level.

Question 6

Environmentally harmful effects often tend to be long term, even though the benefits of using the environment are almost immediate. This is an example of what type of market failure?

Accepted Answer

Inter-generational problems occur when the benefits of an activity are enjoyed by the current generation, but the costs are borne by future generations. In this case, the benefits of using the environment are enjoyed by the current generation, but the environmental harm caused by this use will be borne by future generations.

Question 7

Social efficiency occurs when:

Accepted Answer

Marginal social benefits of an activity are equal to the marginal social costs.

Question 8

From the list below, the best example of a good that is non- excludable but is rival in consumption would be:

Accepted Answer

Fishing waters are non-excludable because it's difficult to prevent people from accessing them, but they are rival in consumption because one person's fishing can reduce the availability of fish for others.

Question 9

Producer surplus:

Accepted Answer

Producer surplus is the difference between the price producers would have been willing to accept for a good and the price they actually receive.

Question 10

Bill sells Mary a worthless coin that Bill incorrectly told Mary 'belonged to an ancient Persian king and is of enormous value to coin collectors'. Economists would call this an:

Accepted Answer

The exchange is inefficient because it was based on false information provided by Bill, which misled Mary into believing the coin had value.

Question 11

Because public goods are characterised by being collectively consumed:

Accepted Answer

Public goods are non-excludable and non-rivalrous, meaning individuals cannot be excluded from use and one person's use does not reduce availability to others, leading to potential market failure as private firms may not find it profitable to provide them.

Question 12

Assume that price underestimates the value that society places on flu vaccine. If firms produce where P=MC, firms will be producing:

Accepted Answer

If the price underestimates the value society places on the flu vaccine, it means that the market price is lower than the true societal value. As a result, firms will produce less than the efficient amount because they are not capturing the full value that society places on the vaccine.

Question 13

Which of the following is NOT an example of an externality?

Accepted Answer

A lack of competition in the market is not an externality; it is a market structure issue. Externalities are costs or benefits that affect third parties who did not choose to incur those costs or benefits.

Question 14

General equilibrium occurs when__________ in all markets.

Accepted Answer

General equilibrium occurs when demand equals supply in all markets, meaning that all goods and services are being bought and sold at prices where the quantity demanded equals the quantity supplied.

Question 15

One role of the Australian Competition and Consumer Commission (ACCC) is to:

Accepted Answer

The ACCC evaluates potential mergers to ensure they do not substantially lessen competition in the market.

Question 16

In order to induce a more socially optimal level of output governments can __________goods associated with negative externalities and__________ goods associated with positive externalities.

Accepted Answer

Governments tax goods with negative externalities to reduce their consumption and subsidize goods with positive externalities to encourage their consumption, aiming for a socially optimal level of output.

Question 17

Suppose a company moves its most polluting production to a factory in a developing country where it knows environmental regulation is less strict than in its home location. In the new location the firm's output is likely to:

Accepted Answer

The company is likely to produce more than the efficient level of output because it is taking advantage of the less strict environmental regulations, which allows it to externalize the environmental costs and produce more than what would be considered efficient if those costs were internalized.

Question 18

An economist has estimated that the maintenance of a public park costs $25 000 a year and that the public park generates $30 000 a year in revenue for merchants near the park. From society's point of view, the maintenance of this park is:

Accepted Answer

The park generates more revenue for merchants than it costs to maintain, so it is potentially efficient.

Question 19

Which of the following is not a characteristic of a tradable permit system of pollution control?

Accepted Answer

In a tradable permit system, firms are allowed to sell their pollution permits to other firms, making option A incorrect as a characteristic of such a system.

Question 20

Common resources are characterised by:

Accepted Answer

The answer of Common resources are characterised by:
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Quiz 7: Market Failures and Government Policy