When the consumption of a good generates an external benefit,
the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.
Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome would
result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.
Externalities cause the market mechanism to allocate goods and resources inefficiently because
competitive markets fail to give producers and consumers correct price signals.
If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,
more education must be produced.
If education creates external benefits,
actual market outcomes provide less than the efficient quantity of education.
Which of the following would tend to increase the price of lumber?
an increase in the demand for newly constructed homes
Taxes adversely affect the allocation of resources because
they distort prices and thus distort the decisions of households and firms.
If the government wants to raise tax revenue and shift most of the tax burden to the consumers, it would impose a tax on a good with a
steep (inelastic) demand curve and a flat (elastic) supply curve.
The burden of a tax will fall primarily on buyers when the
demand for the product is highly inelastic and the supply is relatively elastic.
The federal government currently levies a 15.3 percent payroll tax (7.65 percent on both the employer and employee) on the wages of all workers. If the supply of labor is relatively inelastic when compared to the elasticity of the demand for labor, the bu
fall primarily on employees.
The actual burden of a tax
falls most heavily on the side of the market that is more inelastic.
Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?
Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem
A competitive market economy is unlikely to provide an efficient quantity of some public goods because
the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers.
If a firm is making zero economic profit, it
is doing as well as typical firms in other markets.
If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, it should
operate during the summer but shut down during the winter months
The more elastic the supply of a product, the more likely that the actual benefit of a subsidy granted of the product will
go to buyers.
The benefit of a subsidy will go primarily to sellers when the
demand for the product is highly elastic and the supply is relatively inelastic.
When profits occur in a competitive market, this indicates that
consumers value the goods more than the resources used to produce them.
If a firm is losing money, this implies that
the value of the resources used to make the product is being reduced.
The dynamic process of competition
puts the profit motive of sellers to work for buyers.
The dynamic process of competition
provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
Suppose the market equilibrium price of wheat is $5 per bushel, and the government sets a price floor of $7 per bushel to aid growers. What is the most likely result of this action?
There will be a surplus of wheat.
When a shortage of a good is present due to a price ceiling,
non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good
When government imposes price controls in a market,
non-price factors become more important in the rationing of the good.
If a government-imposed price floor legally sets the price of milk above market equilibrium, which of the following will most likely happen?
There will be a surplus of milk.