Question

1) Which of the following is the best example of a supply-side market failure?

a) No one provides street lights ina town because once the lights are in operation, people don't have to pay to use them.

b) A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area.

c) Government imposes taxes on the production of a socially desirable good.

d)Street performers don't get full payment for the value of their output because people watch and enjoy the shows without paying their artist.

2) Producer surplus is the difference between

a) to the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

b) the quantity supplied and quantity demanded at an above equilibrium price.

c) the minimum prices producers are willing to accept for a product and the higher equilibrium price.

d) the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

3) Other things equal, a fail in the market price caused by a change in supply will

a) increase consumer surplus

b) decreaser consumer surplus

c) increase producer surplus while leaving consuer surplus unchanged

d) decrease producer surplus while leaving consumer surplus unchanged

Answer 1

1. Supply-side market failure: It results from a situation where a firm doesn't have to pay the full cost of producing a good. A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality for residents in the area. Hence, option (b) is correct.

2. Producer surplus is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price . Hence, option(c) is correct.

3. Other things equal , a fall in the market price caused by a change in supply will increase consumer surplus. Because now there is the more area for consumer surplus.Hence, option (a) is correct.