13. Externalities (a) are not reflected in market prices, so they can be a source of economic inefficiency. (b) do become reflected in market prices, so they can be a source of economic inefficiency. (c) are not reflected in market prices, so they do not adversely affect economic efficiency. (d) do become reflected in market prices, so they do not adversely affect economic efficiency. (e) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event. 14. In equilibrium, the price of a transferable emissions permit (a) is constrained to the amount the government first charged for it. Page 4 out of 10 (b) equals the marginal cost of abatement for all firms. (c) equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms. (d) equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms. (e) equals the marginal social cost of emissions. 15. The problem of adverse selection in insurance results in a situation in which (a) people choose inappropriate or inadequate coverage because they do not understand the complex information in the policies. (b) people choose too much coverage because they do not understand the complex informa- tion in the policies. (c) people choose too little coverage because they do not understand the complex informa- tion in the policies. (d) unhealthy people become more likely to buy insurance than healthy people, which drives premiums up, which drives even more healthy people away from the market. (e) healthy people become more likely to buy insurance than unhealthy people, which drives premiums up, which drives even more unhealthy people away from the market even though they are the ones who need it most. 16. Over the past several years, the federal government has rescued a few financially distressed banks and other large private companies, and the key reasons for these actions is to stabilize financial markets and to prevent additional business failures that may arise from the original problem. However, critics of these interventions argue that these actions generate a moral hazard problem. Why? (a) Government oversight of rescued firms is typically based on limited information, so the outcome is economically inefficient. (b) Rescued firms will have a difficult time buying insurance in private markets, so the government will also have to insure the firm against losses from fire, theft, etc. (c) Managers have more information about the financial strength of their firm than govern- ment officials, so the rescue attempts may be unnecessary. (d) Managers may be more likely to invest in risky projects if they believe the government will save the firm in case of failure