ECONOMICS 201 SPRING 2015 REVIEW QUESTIONS FOR EXAM 2 – KEY Market Failure The graph below shows the market for blue jeans. Use it to answer the next several questions. 1. What is the equilibrium price (P*) and quantity (Q*)of blue jeans? a) P* is $90; Q* is 45 thousand blue jeans per day b) P* is $70; Q* is 36 thousand blue jeans per day c) P* is $80; Q* is 28 thousand blue jeans per day d) P* is $80; Q* is 36 thousand blue jeans per day e) P* is $70; Q* is 28 thousand blue jeans per day Suppose that blue jean sellers, during the process of making blue jeans, also make a significant amount of pollution. This pollution seeps into the underground water supply, causing severe health problems in neighborhoods located next to the factories. However, these health problems $ 80 $ 70 $ 90 $ 100 P Blue jeans Q Blue jeans / day ) ( thousands 20 28 3 6 45 5 0 S Dand costs are not accounted for by the blue jean makers. Use this to answer the next few questions. 2. This type of problem is known as (a) ____ a. Negative externality b. Positive externality c. Price fixing d. Public good problem e. Inequality problem 3. Given your answer above, what can we say about the price and quantity of blue jeans? a. The market price is too low, and jeans should be priced higher than $80 b. The market price is too high, and jeans should be price lower than $80 c. Too many jeans are produced, and Q* should be less than 36 thousand per day d. Not enough jeans are produced, and Q* should be more than 36 thousand per day e. Both a and c are true 4. What would be one economic method of fixing the problem above? a. Shut down all blue jean facilities b. Impose a tax on blue jean makers to force them to pay for the pollution generated c. Require all blue jean producers to cut their pollution levels to zero d. Do nothing, this problem cannot be solved 5. Which of the following is true about market failure? a. For various reasons, sometimes markets, on their own, cannot find the socially efficient level of quantity (Q*) b. It is extremely difficult to provide some goods that people value because of their nature, it is hard to collect from everyone who uses it c. Sometimes, the behavior of market participants affect parties not involved in the market d. Market failure and government attempts to help are generally controversial topics e. All of the above are true of market failure 6. Which of the following is not an example of market failure discussed in class? a. Extreme unequal distribution of the good/service/product b. When the market price of a new car is more than you can afford c. Lack of competition among sellers or buyers d. Public goods e. Externalities7. Suppose that buyers and sellers make up a market, and through their actions and supply and demand, they determine the price and quantity of a good/product. However, also suppose that others not involved (third parties) are affected by the buyers and sellers actions. What type of market failure do we call this? a. Lack of competition among sellers or buyers b. Lack of rational behavior and decision-making c. Public Goods d. Unequal distribution of resources or output goods e. Externalities 8. Which of the following is the best example of a negative externality? a. When you neighbor plays good music out his window while you wash your car b. When your co-worker received flowers that brighten up the whole office c. When a person next you is smoking, which makes you cough d. When someone in your group didn’t help with the group project, but still got the ‘A’ that everyone got e. When firms work together to drive up their prices to customers in order to make more money 9. Suppose that the production of a good generates a negative impact upon third parties. If the market does NOT take these negative consequences into account, then what is the expected market price and quantity? a. Price and quantity will both be higher than the efficient price and quantity b. Price will be higher and quantity lower than the efficient price and quantity c. Price will be lower and quantity higher than the efficient price and quantity d. Price and quantity will both be lower than the efficient price and quantity e. Price will be higher than the efficient price, but quantity will be equal to its efficient level.Consider a coal mining company for the next several questions. Let’s say that the company extracts 2,000 tons of coal per day. In order to do this, it ONLY pays for both its workers and the equipment it uses. However, to extract the coal, the mining company also leaves giant, barren holes in the mountain that need to be replanted with trees. Replanting trees cost $10 per ton of coal. Also, when electric companies burn the coal to produce electricity, it pollutes the air, leading to numerous health problems. Placing pollution control devices on the electric plants would cost $15 per ton of coal. 10. What is the economic problem caused by the mining and burning of coal? a. A free-rider problem b. Negative externalities c. Positive externalities d. A public good problem e. Not generating enough coal and electricity 11. Great! Now what does that mean in English? a. The mining company and the electric company do NOT account for tree planting and pollution control in their decision, and too much coal is mined and burned b. Coal is a public good and therefore not enough is mined and burned c. Because coal is a public good, free riders will get some of the benefit of the coal without paying, and therefore the mining company won’t mine enough coal d. Everyone enjoys the beautiful sunsets that air pollution causes, yet no one pays for them; therefore the mining company and electric company mine and burn too little coal 12. What are the private costs of mining and burning coal? a. The $10/ton cost of replanting the trees b. The $15/ton cost of installing pollution control devices c. $25/ton (for both replanting trees and installing pollution control devices) d. The labor and equipment costs to the mining company e. The cost of the labor, the equipment, the cost of tree replanting and the cost of installing pollution control devices 13. What are the total costs of mining and burning coal? a. The cost of the labor and the equipment b. The cost of installing the pollution