No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 318 CHAPTER THIRTEEN: QUESTIONS FOR REVIEW THE FOLLOWING QUESTIONS ARE TRUE OR FALSE 1. An output level is said to be allocatively efficient if profit is maximized at MR=MC (for all market structures). 2. If a market transaction produces positive externalities, the output level is higher than is socially desirable. 3. Since it is impossible to know the socially optimal quantity, we cannot know that market exchanges with negative externalities are not socially optimal. 4. If a producer fully “internalizes the negative externality,” the socially optimal quantity will be produced. THE FOLLOWING QUESTIONS ARE SHORT ANSWER OR CALCULATION 5. Describe what the “knowledge problem” is for government regulators. How does this affect their ability to improve on market “failure”? 6. What is the market’s principle way to help internalize externalities? 7. What are the two features of public goods? 8. Are the following public goods? Why or why not (i.e., apply the two features from #4): a. Public schools b. National missile defense c. Cancer research at the National Institutes for Health 9. Think about markets where firms have pricing power (monopoly) and you are glad they do. Give an example (not Apple products) and explain why. 10. Illustrate the markets for a bath with a supply and demand diagram. Show whether the number of daily baths would go up if people “internalized the externality.” Is a bath a positive or negative externality? 11. If you concluded that baths did have an externality, does that suggest government needs to correct this “market failure?” Are there other ways to produce the optimal number of baths? 12. List at least three reasons why “the rich get richer and the poor get poorer” is not true. THE FOLLOWING QUESTION IS TRUE OR FALSE 13. The vast majority of income transfers in the U.S. are made to alleviate poverty.