Market Failure and Government Intervention Questions
1.
In the case of a market in which a negative externality is produced, which of the following is true of marginal social cost? a) MSC=MPC b) MSC=MPB c) Government can intervene to cause MSC=MEC d) Marginal social cost is not reflected in the supply curve e) Bystanders are bearing the marginal social cost
2.
At the socially efficient output and price for a good whose production causes pollution, we can expect that a) The offending pollution will be eliminated b) The marginal social cost of production will exceed the marginal social benefit of production c) The private cost of production will equal the private benefit of production d) The marginal social benefit of production will equal the marginal social cost of production e) Too little of the good will be produced
3.
Assume that product X is produced in a perfectly competitive market and yields costs that are borne by third party individuals. Using a correctly labeled graph, show the market output and price if the market ignores the externality. a) Identify the problem in this market. b) Identify and explain a remedy to the problem of misallocation of resources. c) Amend the graph to show how your remedy has changed the output to the socially optimum amount.
4.
Assume that product X is produced in a perfectly competitive industry and that product X yields costs to individuals who are neither consumers not producers of product x. a) Using one correctly labeled graph, show the industry output and price under each of the following conditions.
I.
The industry ignores the externality.
II.
The industry produces the socially optimal level of output. b) Assume that the market is producing the level of output you identified in (i).
Identify one policy the government might use to achieve the level of output you indentified in (ii).