Multiple Choice
If there are external benefits associated with the consumption of a good or service, which of the following is most likely to occur in a free market without government intervention?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
An extraordinarily small crop of farm products due to drought causes which of the following effects in the market?
A
A surplus of farm products in the market
B
An increase in the equilibrium price of farm products
C
No change in the equilibrium price of farm products
D
A decrease in the equilibrium price of farm products
Verified step by step guidance1
Step 1: Understand the concept of supply and demand. A drought reduces the quantity of farm products available, which means the supply curve shifts to the left (a decrease in supply).
Step 2: Recall that when supply decreases while demand remains constant, the new equilibrium is found where the reduced supply curve intersects the demand curve.
Step 3: Analyze the effect of the supply shift on equilibrium price and quantity. A leftward shift in supply typically leads to a higher equilibrium price because fewer goods are available, but demand remains the same.
Step 4: Recognize that the equilibrium quantity will decrease because there are fewer farm products available in the market due to the drought.
Step 5: Conclude that the drought causes an increase in the equilibrium price of farm products, not a surplus or decrease in price.
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