A negative externality is an example of market failure. The root of the problem lies in the definition and enforcement of property rights. Explain
What will be an ideal response?
If harmed parties do not have rights or have rights that are not enforced or weakly enforced, producers can make choices that impose costs on others and do not have to bear the full cost of their actions. This creates a discrepancy between the private cost of production and the social cost of production, the true cost of production being the social cost. Since the private cost is less than the social cost, firms will produce more than the economically efficient output level, resulting in a market failure. (Students can also explain using positive externalities.)
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If airfares to Europe were to increase, other things equal, an economist would predict that: a. most people will not change their travel and vacation plans
b. more individuals will choose to fly to Europe because now it is a more valuable experience. c. some individuals will substitute toward other travel destinations. d. airlines will make significantly greater profits.
The human-capital theory explanation for why people invest in education has been challenged by a theory that suggests
a. schooling acts only as a signal of ability. b. humans cannot be considered "capital." c. productivity is not linked to wages. d. ability, effort, and chance matter more.
Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Canadian rates of inflation would
A) have no effect on nominal exchange rates. B) be completely offset by changes in the real exchange rate. C) be completely offset by changes in the nominal exchange rate. D) lead to a change in the real purchasing power of each country's currency when it is converted to the other country's currency.
John is currently spending all of his income. For the last unit of Good X consumed John gets 20 utils and for the last unit of Good B consumed he gets 10 utils. The price of Good X is $10. The price of Good Y is $5. If John wants to maximize his utility
he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y.