4

4
Student: ___________________________________________________________________________
1. Suppose for a given market that the MWTP = 300 - 0.5QD and MC = 50 + 2QS. Assuming all market
and non-market values are incorporated into these equations, the MWTP at the socially efficient level of
output is equal to ________.
A. 100 units
B. 140 units
C. $230
D. $250
2. In the following figure the net social value is equal to ________.
A. area c
B. areas a + b - c
C. areas a + b + c
D. areas a + b
3. ________ cause private and social marginal cost curves to diverge while ________ cause private demand
and social marginal WTP to diverge.
A. External benefits; external costs
B. External costs; external benefits
C. Market failures; public goods
D. Taxes; subsidies
4. In the case of an open access resource, a(n) ________ takes place due to a lack of ________.
A. externality; regulation
B. free rider problem; property rights
C. market failure; property rights
D. external benefit; rivalry in consumption
5. When production results in environmental degradation, private firms do not take the ________ into
consideration when making their output decisions resulting in ________.
A. external costs; a market failure
B. market failure; an externality
C. social costs; pollution
D. market failure; pollution
6. In the following figure, the socially efficient level of output is equal to ________.
A. Q1
B. Q2
C. Q3
D. none of the choices are correct
7. In the following figure, social MWTP equals private MWTP plus external benefits from production. In
this market, the socially efficient level of output is ________.
A. Q1
B. Q2
C. Q3
8. The fact that my consumption of a public good does not diminish your consumption is called ________
and the fact that once a public good is made available to one individual it automatically becomes
available to all is called ________.
A. non-exclusion; non-rivalness
B. non-rivalness; free-riding
C. free access; non-exclusion
D. non-rivalness; non-exclusion
9. When the rate of output is at the socially efficient level, the total willingness to pay is as large as
possible.
True False
10. If social values are not reflected in the market values determined by the market demand and market
supply curves, the competitive market equilibrium output will still be the socially efficient level of
output.
True False
11. External costs can drive a wedge between the market demand curve and the social marginal WTP curve
resulting in a market failure.
True False
12. External benefits can drive a wedge between the market demand curve and the social marginal WTP
curve resulting in a market failure.
True False
13. In the case of open access resources and public goods, the competitive market output level will be
socially efficient.
True False
14. Free parking is an example of a pure public good.
True False
15. Suppose the marginal willingness to pay for a certain good is represented by the equation MWTP = 490
- 0.25QD and the marginal cost of production equation for this good is represented by the equation MC
= 40 + 2QS. Assuming these curves capture all market and non-market values, solve for the socially
efficient level of output and the net social benefits at this level of output.
16. List three causes of market failure and give an example of each.
17. Solve for the competitive market equilibrium output and the socially efficient level of output for this
market.
MPC = 55 + 0.5QS
The following equations represent the MWTP function and the private MC function in the market for
some good where a negative externality (i.e., pollution) results in damages of $12 per unit of the good
produced:
MWTP = 400 - QD
market.
MPC = 2 + QS
some good where an external cost like pollution results in damages of $6 per unit of the good produced:
MWTP = 65 - 0.5QD
market.
MC = 20 + 0.25QS
The following equations represent the private MWTP function and the MC function in the market for
some good where an external benefit results in benefits of $9 per unit of the good consumed:
Private MWTP = 98 - 0.5QD
20. Suppose demand for a public park (assume it is a pure public good) for two groups of consumers (A and
B) is given by:
QA = 12 - 2P
QB = 8 - P
where Q is the number of hectares each group would like to see incorporated into the park. If the
marginal cost to provide the park is a constant $9.50/ha, what is the socially efficient number of hectares
for the park?
21. Suppose demand for a public park (assume it is a pure public good) for two groups of consumers (A and
B) is given by:
QA = 4 - 0.5P
QB = 7 - P
where Q is the number of hectares each group would like to see incorporated into the park. If the
marginal cost to provide the park is a constant $3/ha, what is the socially efficient number of hectares for
the park?
4 Key
1. Suppose for a given market that the MWTP = 300 - 0.5QD and MC = 50 + 2QS. Assuming all market
and non-market values are incorporated into these equations, the MWTP at the socially efficient level
of output is equal to ________.
A. 100 units
B. 140 units
C. $230
D. $250
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 04 #1
Learning Objective: 04-01 Define social efficiency and graphically illustrate when it is achieved.
2. In the following figure the net social value is equal to ________.
A. area c
B. areas a + b - c
C. areas a + b + c
D. areas a + b
Difficulty: Easy
3. ________ cause private and social marginal cost curves to diverge while ________ cause private
demand and social marginal WTP to diverge.
A. External benefits; external costs
B. External costs; external benefits
C. Market failures; public goods
D. Taxes; subsidies
Difficulty: Easy
Learning Objective: 04-02 Explain why a competitive market may fail to reach a socially efficient equilibrium.
4. In the case of an open access resource, a(n) ________ takes place due to a lack of ________.
A. externality; regulation
B. free rider problem; property rights
C. market failure; property rights
D. external benefit; rivalry in consumption
Difficulty: Easy
Learning Objective: 04-03 List and explain the causes of market failure.
5. When production results in environmental degradation, private firms do not take the ________ into
consideration when making their output decisions resulting in ________.
A. external costs; a market failure
B. market failure; an externality
C. social costs; pollution
D. market failure; pollution
Difficulty: Easy
6. In the following figure, the socially efficient level of output is equal to ________.
A. Q1
B. Q2
C. Q3
Difficulty: Easy
Learning Objective: 04-04 Contrast the equilibrium outcomes in markets where externalities are accounted for versus when they are not.
7. In the following figure, social MWTP equals private MWTP plus external benefits from production.
In this market, the socially efficient level of output is ________.
A. Q1
B. Q2
C. Q3
Difficulty: Easy
8. The fact that my consumption of a public good does not diminish your consumption is called
________ and the fact that once a public good is made available to one individual it automatically
becomes available to all is called ________.
A. non-exclusion; non-rivalness
B. non-rivalness; free-riding
C. free access; non-exclusion
D. non-rivalness; non-exclusion
Difficulty: Easy
Learning Objective: 04-05 Explain the distinguishing characteristics of public goods and why they give rise to free riding.
9. When the rate of output is at the socially efficient level, the total willingness to pay is as large as
possible.
FALSE
At the socially efficient level of output net social value which is equal to total WTP minus total costs
is as large as possible.

Difficulty: Easy
10. If social values are not reflected in the market values determined by the market demand and market
supply curves, the competitive market equilibrium output will still be the socially efficient level of
output.
FALSE
Difficulty: Easy
11. External costs can drive a wedge between the market demand curve and the social marginal WTP
FALSE
External costs drive a wedge between private marginal costs (i.e., the market supply curve) and social
marginal costs.

Difficulty: Easy
12. External benefits can drive a wedge between the market demand curve and the social marginal WTP
TRUE
Difficulty: Easy
13. In the case of open access resources and public goods, the competitive market output level will be
socially efficient.
FALSE
Market failure in both cases results in the competitive market output level differing from what is
socially efficient.

Difficulty: Easy
14. Free parking is an example of a pure public good.
FALSE
Although free parking is non-excludable, it is still a rival good since when someone has taken the free
parking spot no one else can use it.

Difficulty: Easy
Learning Objective: 04-05 Explain the distinguishing characteristics of public goods and why they give rise to free riding.
15. Suppose the marginal willingness to pay for a certain good is represented by the equation MWTP
= 490 - 0.25QD and the marginal cost of production equation for this good is represented by the
equation MC = 40 + 2QS. Assuming these curves capture all market and non-market values, solve for
the socially efficient level of output and the net social benefits at this level of output.
First set MWTP equal to MC to solve for the socially efficient level of output, QE.
490 - 0.25QE = 40 + 2QE
QE = 450/2.25 = 200
The MWTP at the socially efficient level of output will equal $440. The net social benefits at the
socially efficient level of output will be equal to the area of two triangles. The first has height of 490 -
440 = 50 and width of 200 yielding an area of 5,000. The second triangle has height of 440 - 40 = 400
and width of 200 yielding an area of 40,000. Therefore the net social benefits at the socially efficient
level of output equal $45,000.
Difficulty: Moderate
16. List three causes of market failure and give an example of each.
A correct answer could include any three of the following: 1) external costs; 2) external benefits;
3) open access resources; and 4) public goods. Examples of external costs could include air, water
or noise pollution; examples of external benefits could include positive effects from education,
bee keeping or agricultural land; examples of open access resources could include ocean fisheries,
common pastureland or free highways; and examples of public goods could include public parks,
clean air or national defence.
Difficulty: Easy
market.
MPC = 55 + 0.5QS
some good where a negative externality (i.e., pollution) results in damages of $12 per unit of the good
produced:
MWTP = 400 - QD
The competitive market equilibrium output can be found by equating MWTP with MPC and solving
for QM:
400 - QM = 55 + 0.5QM
QM = 345/1.5 = 230
To solve for the socially efficient level of output in this market we need to determine the MSC
equation which in this case equals MPC plus the constant external damage cost of 12 such that MSC =
67 + 0.5QS. Equate MWTP with MSC and solve for Q*:
400 - Q* = 67 + 0.5Q*
Q* = 333/1.5 = 222
market.
MPC = 2 + QS
The following equations represent the MWTP function and the private MC function in the market
for some good where an external cost like pollution results in damages of $6 per unit of the good
produced:
MWTP = 65 - 0.5QD
The competitive market equilibrium output can be found by equating MWTP with MPC and solving
for QM:
65 - 0.5QM = 2 + QM
QM = 63/1.5 = 42
To solve for the socially efficient level of output in this market we need to determine the MSC
equation which in this case equals MPC plus the constant external damage cost of 6 such that MSC =
8 + QS. Equate MWTP with MSC and solve for Q*:
65 - 0.5Q* = 8 + Q*
Q* = 57/1.5 = 38
market.
MC = 20 + 0.25QS
The following equations represent the private MWTP function and the MC function in the market for
some good where an external benefit results in benefits of $9 per unit of the good consumed:
Private MWTP = 98 - 0.5QD
The competitive market equilibrium output can be found by equating private MWTP with MC and
solving for QM:
98 - 0.5QM = 20 + 0.25QM
QM = 78/0.75 = 104
To solve for the socially efficient level of output in this market we need to determine the social
MWTP equation which in this case equals private MWTP plus the constant external benefits of 9 such
that social MWTP = 107 - 0.5QD. Equate social MWTP with MC and solve for Q*:
107 - 0.5QM = 20 + 0.25QM
QM = 87/0.75 = 116

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