Government Intervention In The + Exam Questions Ch.9

Chapter 09 Test Bank KEY

1. The most desirable combination of output attainable with available resources, technology, and social values is known as the

A. economic choice of output.

B. efficient choice of production.

C. preferred output choice.

D. optimal mix of output.

2. If market prices and sales are used to signal desired output, then the optimal mix of output would be determined by

A. the market mechanism.

B. the political process.

C. the Federal Reserve System.

D. government intervention.

3. Which of the following is an economic justification for a policy of laissez-faire?

A. the existence of externalities

B. the free-rider dilemma

C. the efficiency of the market mechanism

D. public goods

4. In a market economy, producers will produce the goods and services that

A. are least expensive to produce.

B. consumers need the most.

C. consumers demand.

D. the government finds most beneficial.

5. A market failure occurs when

A. market prices signal producers to produce the optimal mix of output.

B. the economy produces at a point on the production possibilities curve.

C. producers supply the goods that earn the greatest profit.

D. an imperfection in the market mechanism prevents an optimal outcome.

6. A market failure means that the economy is definitely producing

A. a suboptimal mix of output.

B. at a point beyond the production possibilities curve.

C. at a point inside the production possibilities curve.

D. zero output.

7. The existence of a market failure would imply that a policy of laissez-faire would

A. lead the economy to a point beyond the production possibilities curve.

B. lead the economy to an undesirable point on the production possibilities curve.

C. be superior to government intervention.

D. cause government failure.

8. Which of the following does NOT explain why the market sometimes fails to produce the optimal mix of output?

A. Some producers have market power.

B. Public goods can have free-riders.

C. Private goods cannot be consumed jointly.

D. There are externalities associated with production.

9. The optimal mix of output is

A. the most desirable combination of output attainable with existing resources, technology, and social values.

B. an attempt to analyze the actual value of various goods and services.

C. an exercise to determine if is better to reduce government expenditures or reduce taxes.

D. the most desirable distribution of income.

10. The tendency for the market to underproduce public goods results from

A. the law of diminishing returns.

B. the producers are reluctant to produce something they cannot sell for a positive price.

C. public goods are not as important as private goods.

D. the law of diminishing marginal utility.

11. Which of the following is NOT an example of market failure?

A. public goods

B. government intervention

C. market power

D. externalities

12. Market failure establishes a basis for

A. market power.

B. externalities.

C. government intervention.

D. private goods.

13. Sources of microeconomic failure that may require government intervention include all of the following except

A. the abuse of market power.

B. the need for private goods.

C. the need for public goods.

D. inequities in the distribution of goods and services.

14. A private good is unique because

A. nonpayers can be prevented from consuming it.

B. it can be enjoyed exclusively by free riders.

C. the market is likely to produce too little of it.

D. it is provided most efficiently by government.

15. A private good is a good that:

A. is financed by private dollars instead of taxes

B. can be jointly consumed

C. can be denied to those who do not pay for it

D. consumers use privately in their homes

16. Which of the following is most likely a private good?

A. police protection

B. cars

C. highways

D. parks

17. Which of the following is most likely a private good?

A. flood control.

B. military protection.

C. food.

D. bridges.

18. In economics, a public good

A. is any good produced by the government.

B. has social costs that are lower than private costs.

C. is provided in an optimal amount by the market.

D. cannot be denied to consumers who do not pay.

19. A public good is a good that

A. can be jointly consumed.

B. can be consumed by just one person.

C. is financed by the public sector, not the private sector.

D. affects a third party.

20. In economics, a public good

A. is any good produced by the government.

B. always causes government failure.

C. is provided in an optimal amount by the market.

D. allows free riders to benefit from the good.

21. A public good is

A. any good produced by a unit of government.

B. priced in the market like private goods.

C. the source of the free-rider dilemma.

D. only consumed by the purchaser.

22. Public goods

A. can be consumed by more than one person at the same time.

B. include most goods and services that the market produces.

C. lead to the pay-as-you-go problem.

D. by definition, must be produced by the government.

23. Which of the following is most likely a public good?

A. a park

B. electricity

C. a computer

D. social Security payments

24. The communal nature of a highway means that no one individual is motivated to pay for it because even those who do not pay will still benefit from using it. This is an example of

A. the free-rider dilemma.

B. government failure.

C. inequity.

D. a natural monopoly.

25. The free-rider problem arises because those who

A. do not pay cannot be excluded.

B. pay are not willing to share.

C. demand the goods are excluded.

D. supply the goods are greedy.

26. The free-rider problem arises because

A. private goods are not available.

B. most public goods involve illegal activity.

C. people prefer private goods.

D. public goods can be jointly consumed.

27. The problem with public goods is that those who do not pay receive

A. none of the good.

B. the same amount of the good as those who pay.

C. some of the good but less than those who pay.

D. more of the good than those who pay.

28. Since those who do not pay for the goods still get to benefit, _____ goods have _____.

A. private; joint-consumers

B. private; free-payers

C. public; minimal costs

D. public; free-riders

29. The free-rider dilemma is associated with

A. private goods.

B. public goods.

C. externalities.

D. market power.

30. When public goods are marketed like private goods

A. too many goods are produced.

B. many consumers want to buy the goods.

C. too few goods are produced.

D. government failure results.

31. If the economy relies entirely on markets to answer the WHAT question, it tends to

A. overproduce private goods and overproduce public goods.

B. overproduce private goods and under produce public goods.

C. under produce private goods and overproduce public goods.

D. under produce private goods and under produce public goods.

32. The distinction between public goods and private goods is based on

A. government regulation.

B. who produces the goods.

C. how much the goods cost.

D. the link between payment and consumption.

33. The market produces too few public goods because

A. the link between payment and consumption is broken.

B. they must be paid for by wealthy individuals.

C. only the government can produce public goods.

D. the market distributes goods to those with the most money.

34. The market underproduces public goods because

A. the government is mandated to produce public goods.

B. people do not want public goods as much as private goods.

C. people are less willing to pay for public goods than for private goods.

D. of concerns about equity.

35. The term externalities refers to

A. the inequitable distribution of output.

B. all costs and benefits of a market activity borne by a third party.

C. the impact that imported goods have on domestic markets.

D. free-riders who benefit but do not pay.

36. Externalities are a type of market failure because

A. buyers do not have complete information about the product.

B. producers have too much power.

C. third parties bears the costs or benefits of a market activity.

D. goods and services are not distributed fairly.

37. Externalities are the

A. domestic economic impact of foreign events.

B. generate a gap between social costs or benefits and private costs or benefits.

C. outside costs that producers absorb.

D. effects of government actions on the private sector.

38. An individual firm will not normally have any incentive to internalize external costs because to do so would

A. make it subject to government regulation.

B. cause its marginal cost curve to shift to the right.

C. put it at a competitive disadvantage to rival producers.

D. not help improve customer relations.

39. The federal government's role in protecting the environment is justified by considerations of

A. externalities.

B. equity issues.

C. market power.

D. public goods.

40. Firms in Colorado dump waste into the Colorado River and as a result the people in California and Mexico cannot use the water. What type of market failure is most likely involved?

A. inequity

B. public goods

C. externalities

D. market power

41. Noise generated by an airport best illustrates

A. an inequity.

B. an externality.

C. market power.

D. overproduction of private goods.

42. Social demand is equal to market

A. demand plus externalities.

B. supply plus market demand.

C. demand minus externalities.

D. demand multiplied by externalities.

43. If the economy relies entirely on markets to answer the WHAT question, it tends to _____ goods with external benefits and _____ goods with external costs.

A. overproduce; overproduce

B. overproduce; underproduce

C. underproduce; overproduce

D. underproduce; underproduce

44. If a good generates an external cost, the market will produce

A. some of the good but not enough.

B. too much of the good.

C. an optimal amount of the good.

D. none of the good.

45. Whenever external costs exist

A. social demand is less than market demand.

B. market demand is less than social demand.

C. market demand and social demand are equal.

D. market demand understates the social benefits.

46. The market will

A. always provide the optimal mix of output.

B. overproduce goods that yield external benefits.

C. produce an optimal amount of goods that generate external costs.

D. underproduce goods that generate external benefits.

47. Whenever external benefits exist

A. market demand will exceed social demand.

B. social demand will exceed market demand.

C. market demand and social demand will be equal.

D. market demand overstates the social benefits.

48. If external benefits exist

A. the market will overproduce the good.

B. private demand will exceed social demand.

C. market demand will understate social demand.

D. the market will generate the optimal outcome.

49. If external benefits occur when a good is consumed, then the government should

A. tax the producers of the good.

B. make transfer payments to those who incur the externalities.

C. subsidize the consumption or production of the good.

D. enforce antitrust laws against producers of the good.

50. Social demand exceeds market demand whenever

A. private costs exist.

B. external costs exist.

C. private benefits exist.

D. external benefits exist.

51. Which of the following is most likely to have social demand greater than market demand?

A. healthcare services

B. cars

C. housing

D. cigarettes

52. The most important motivation for producers is the desire to

A. minimize external costs.

B. minimize social costs above private costs.

C. maximize economic profits.

D. maximize social benefits and private revenues at the same time.

53. Other things being equal, if a perfectly competitive firm is forced to switch to a more expensive, non-polluting production process

A. the average cost curve will shift downward.

B. the profit-maximizing level of output will be increased.

C. the marginal cost curve will shift downward.

D. total profits will decrease.

54. External costs are primarily caused by

A. the law of diminishing returns.

B. economic incentives which prompt firms to use recycled inputs.

C. increased government regulation.

D. the growth of a modern economy.

55. Whenever external benefits exist then

A. economic profits are zero.

B. the social demand exceeds the market demand.

C. the social demand is lower than market demand.

D. product differentiation increases the variety of products available to consumers.

56. Social costs

A. are less than private costs.

B. include private costs.

C. are unrelated to private costs.

D. do not affect society.

57. Social costs are

A. the full resource costs of an economic activity.

B. usually less than private costs.

C. the costs of an economic activity borne by the producer.

D. always less than private costs.

58. Private costs are identified as

A. costs borne by a third party as a result of polluting activities by producers.

B. the difference between the social and public costs of a market activity.

C. the costs of an economic activity borne directly by the immediate producer or consumer.

D. being greater, in general, than social costs.

59. External costs arise when

A. private costs are too low.

B. private costs are greater than social costs.

C. social costs are greater than private costs.

D. social costs are too low.

60. External costs are equal to the difference between

A. social costs and private costs.

B. marginal benefits and marginal costs.

C. average benefits and average costs.

D. marginal social benefits and marginal social costs.

61. Whenever there is a divergence between social costs and market costs, the result is

A. market power.

B. market failure.

C. maximized social welfare.

D. a higher minimum wage.

62. When there are external costs, maximum social welfare occurs where marginal revenue equals

A. private marginal cost.

B. social marginal cost.

C. the minimum of the average cost curve.

D. social marginal benefit.

63. In order to maximize society's welfare, a firm should produce where

A. price equals social marginal revenue.

B. all pollution is entirely eliminated.

C. marginal revenue equals price.

D. social marginal cost equals marginal revenue.

64. The market overproduces goods that have external costs because producers

A. do not experience the full costs of production for these goods.

B. must bear higher costs than society experiences for these goods.

C. expect the government to subsidize these goods.

D. cannot compete with the government in producing these goods.

65. The costs of lead contamination have been estimated to be $1 billion for medical care of those sickened by lead, plumbing repairs, and reduced earnings of those affected by lead. This $1 billion can best be classified as

A. the benefits of government intervention.

B. the costs of government intervention.

C. external costs of market failure.

D. external costs of government failure.

66. An emission charge is a

A. tax on the consumption of goods that are produced by pollution-causing firms.

B. fee imposed on polluters based on the quantity of pollution they impose on society.

C. tax levied on the third parties involved in externalities.

D. fee imposed on free-riders for the use of a good or service.

67. An emission charge can be used to

A. reduce the difference between social and private costs.

B. encourage firms to externalize pollution costs.

C. encourage the equitable distribution of goods.

D. reduce the abuses of market power.

68. A completely successful emission fee

A. results in zero pollution.

B. shifts the private marginal cost curve to the same position as the social marginal cost curve.

C. shifts the social marginal cost curve to the same position as the private marginal cost curve.

D. does not affect the private or social marginal cost curve.

69. A firm that incurs an emissions charge for polluting will install more pollution control equipment only if the

A. equipment cost is less than the marginal cost of production.

B. equipment will reduce pollution.

C. emissions charge exceeds the increased cost of installing the equipment.

D. emissions charge falls.

70. If a system of emission charges forces firms to internalize all external costs

A. relative prices of polluting activities will rise.

B. the elimination of externalities will fully compensate for any excessive market power.

C. the elimination of externalities will allow greater production of all goods and services.

D. pollution will increase.

71. The use of emission charges to control pollution can impact all of the following except a firm's

A. production decision.

B. profitability.

C. lease payment.

D. long-run plans.

72. In order to reduce pollution, the government can use all of the following except

A. income transfers.

B. emissions charges.

C. forced recycling.

D. regulatory standards.

73. When firms have the ability to change the market price of a good or service, the market failure involved is

A. market power.

B. public goods.

C. externalities.

D. inequities.

74. Which of the following leads to market failure?

A. regulation

B. market power

C. antitrust laws

D. government planning

75. Which of the following is NOT considered to be a source of market power for a firm?

A. a copyright.

B. control of resources.

C. efficiencies of large-scale production.

D. antitrust laws.

76. In order to reduce pollution, the government can use all of the following except

A. income transfers.

B. emissions charges.

C. forced recycling.

D. regulatory standards.

77. Which of the following is NOT considered to be a source of market power for a firm?

A. externalities

B. patents

C. restrictive production agreements

D. economies of scale

78. Market power is considered to be a market failure because firms with market power

A. do not respond to consumer demand.

B. tend to ignore external costs.

C. produce less output than is socially optimal.

D. charge a lower price than is socially optimal.

79. Market power is a form of market failure because

A. competition is restricted, output is reduced, and the price is higher.

B. it involves externalities.

C. monopolies produce more output than is optimal.

D. administrative costs of compliance are high.

80. Which of the following is a form of government intervention designed to correct market failures?

A. externalities

B. laissez faire

C. public goods

D. antitrust laws

81. The federal government's role in antitrust enforcement is justified by considerations of

A. equity.

B. public goods and externalities.

C. market power.

D. macro failure.

82. The first antitrust act to prohibit "conspiracies in restraint of trade" was

A. the Sherman Act.

B. the Clayton Act.

C. the Federal Trade Commission Act.

D. case decisions such as those against Microsoft.

83. Which of the following prohibits price discrimination?

A. the Sherman Act

B. the Clayton Act

C. the Federal Trade Commission Act

D. the Full Employment and Balanced Growth Act

84. Which of the following created an agency to identify anticompetitive practices?

A. the Sherman Act

B. the Clayton Act

C. the Federal Trade Commission Act

D. the Federal Reserve Act

85. By breaking up AT&T, the Justice Department expected that the telecommunications market would change from

A. an oligopoly to a perfectly competitive market.

B. a competitive market toward a monopoly.

C. a monopoly toward a competitive market.

D. a contestable market to a monopoly.

86. According to the text, what type of market failure provided the justification for the antitrust case against Microsoft?

A. externalities

B. inequity

C. market power

D. public goods

87. Government antitrust activity led to the breakup of AT&T in the 1980s because, among other things, it felt that AT&T had too much control over the telecommunications market. What type of market failure was most likely involved?

A. inequity

B. public goods

C. externalities

D. market power

88. After the government filed its antitrust case, Microsoft

A. ignored the power of antitrust policy.

B. became even bolder in its use of market power.

C. won its case in the courts and continued using predatory pricing.

D. changed some of its exclusionary licensing practices.

89. The federal government's role in providing aid to the poor and the aged is justified because of concerns about

A. inequity.

B. externalities.

C. market power.

D. macro failure.

90. Which of the following is NOT an income transfer?

A. unemployment benefits

B. social Security payments

C. food stamps

D. welfare

91. Which of the following is NOT a goal of macro intervention?

A. price stability

B. market power

C. full employment

D. economic growth

92. When the economy experiences high unemployment, there is

A. government failure.

B. microeconomic failure.

C. macroeconomic failure.

D. government waste.

93. All of the following are macro failures that justify government intervention except for

A. high unemployment.

B. a rising price level.

C. a decline in the production capacity.

D. inequitable distribution of output.

94. Government intervention in the economy

A. always fixes macroeconomic market failures.

B. always fixes microeconomic market failures.

C. always makes the economy worse off.

D. may fix market failures or make the economy worse off.

95. According to the public confidence survey presented in the text, the public

A. has substantial doubts about the ability of government to correct market failures.

B. believes the government can be very effective in correcting market failures.

C. expects government intervention to solve the problem of market power.

D. believes government intervention will never improve market outcomes.

96.Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, what is the marginal social benefit (in dollars per PPM) of reducing pollution rates from 35 to 25 PPM?

A. $5 per PPM

B. $7 per PPM

C. $10 per PPM

D. $50 per PPM

97.Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, what is the marginal social benefit (in dollars per PPM) of reducing pollution rates from 25 to 10 PPM?

A. $1 per PPM

B. $2 per PPM

C. $3 per PPM

D. $30 per PPM

98. Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, what is the marginal social benefit (in dollars per PPM) of reducing pollution rates from 10 to 0 PPM?

A. $35 per PPM

B. $30 per PPM

C. $2 per PPM

D. $1 per PPM

99. Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, what is the marginal social cost (in dollars per PPM) of reducing pollution rates from 35 to 25 PPM?

A. $1 per PPM

B. $5 per PPM

C. $7 per PPM

D. $10 per PPM

100. Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, what is the marginal social cost (in dollars per PPM) of reducing pollution rates from 25 to 10 PPM?

A. $30 per PPM

B. $15 per PPM

C. $10 per PPM

D. $2 per PPM

101. Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, which rate of pollution is optimal?

A. 50 PPM

B. 35 PPM

C. 25 PPM

D. 10 PPM

102. Costs of Reducing Water Pollution

Using the Costs of Reducing Water Pollution table, which of the following explains why the lake should not be made entirely free of pollution?

A. Society cannot clean up the lake.

B. There would be no benefit in making the lake completely clean.

C. The total social cost would exceed the total social benefit of completely cleaning the lake.

D. The marginal social costs of reaching 0 PPM are greater than the marginal social benefits from doing so.

103. External Costs

Based on the External Costs table, which firm has the lowest absolute level of costs borne directly by the producer?

A. Firm A

B. Firm B

C. Firm C

D. Firm D

104. External Costs

Based on the External Costs table, which firm has the greatest difference between social costs and private costs?

A. Firm A

B. Firm B

C. Firm C

D. Firm D

105.

Assume point D represents the optimal mix of output. The market mechanism is likely to produce the mix of output represented by point:

A. C because the market mechanism tends to underproduce public goods.

B. E because the market mechanism tends to underproduce private goods.

C. D because the market mechanism is efficient.

D. G because full employment can never be reached.

106.

Assume point D represents the optimal mix of output. If market forces cause society to produce at point C then

A. there is government failure.

B. the forces of supply and demand will return society to point D.

C. points D and E are unattainable with the given resources and technology.

D. there is market failure.

107.

This figure implies that

A. there are external costs associated with cigarette smoking.

B. all the costs associated with cigarette smoking are paid by those who smoke.

C. cigarette smoking results in equity issues.

D. social costs and private costs for cigarette smoking are equal.

108.

 At price p1

A. the market demands 1000 packs of cigarettes.

B. society desires 1000 packs of cigarettes.

C. the market demand understates the social benefits of cigarette smoking.

D. society demands 2400 packs of cigarettes.

109.

Refer to the figure. The market demand curve is above the social demand curve because

A. there are internal costs associated with cigarette smoking.

B. there are free riders associated with cigarette smoking.

C. the external costs of cigarette smoking are being passed on to those who do not smoke.

D. positive externalities are being passed on to those who do not smoke.

110.

Refer to the figure. If pollution costs are external, the rate of output will be

A. less than 200 units per time period.

B. 200 units per time period.

C. 320 units per time period.

D. greater than 320 units per time period.

111.

Refer to the figure. If the firm chooses a production method that results in zero external costs, the rate of output will be

A. less than 200 units per time period.

B. 200 units per time period.

C. 320 units per time period.

D. greater than 320 units per time period.

112.

Refer to the figure. If the rate of output is 320 units per time period, then

A. social costs equal private costs.

B. social costs exceed private costs.

C. private costs exceed social costs.

D. external costs equal private costs.

113.

Refer to the figure. If the rate of output is 200 units per time period, then

A. the firm absorbs all the costs of production.

B. there are external costs that society must absorb.

C. too much of the good is being produced.

D. too little output is being produced.

114. The News Wire article in the text titled "Secondhand Smoke Kills More Than 600,000 a Year: A Study" addresses the costs of tobacco use. Secondhand smoke is an example of

A. market power.

B. inequity.

C. an externality.

D. the free-rider dilemma.

115. One News Wire article in the text links secondhand smoke to cancer and other health issues. Which type of market failure does the article illustrate?

A. a negative externality

B. a failure to produce public goods

C. market power by the cigarette producers

D. external benefits

116. One News Wire article in the text links secondhand smoke to cancer, heart attacks, and strokes. This implies that

A. the social demand and market demand for smoking are equal.

B. cigarette smoking produces inequities.

C. cigarette producers have market power.

D. there are external costs associated with smoking.

117. One News Wire article in the text carries the headline "Forced Recycling Is a Waste." If the city forces people to recycle rather than cutting the recycling program, which type of market failure is it attempting to correct?

A. public goods

B. externalities

C. market power

D. inequity

118. The market mechanism always leads the economy to the optimal mix of output.

The market mechanism reacts only to internal costs and benefits and may miss costs and benefits external to market interactions.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Define what market failure means.
Topic: Market Failure

119. Even if society is producing a combination of goods and services on the production possibilities curve, it may not be producing the optimal mix of output.

The optimal mix of output will include all costs and benefits associated with production of all goods and services in the economy.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Define what market failure means.
Topic: Market Failure

120. Market failure occurs when the government intervenes in the marketplace.

Market failure occurs when the market does not produce the optimal mix of public and private goods.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Define what market failure means.
Topic: Market Failure

121. Market failure implies that the forces of supply and demand have not led society to the optimal mix of output.

Since the market will react to only internal costs and benefits, some goods will be overproduced or underproduced.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Define what market failure means.
Topic: Market Failure

122. Sources of microeconomic market failure include public goods, externalities, and market power.

Since the market will react to only internal costs and benefits, public goods will be underproduced. Negative externalities lead to overproduction and external benefits lead to underproduction. Market power causes firms to charge higher prices and to produce less output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Define what market failure means.
Topic: Market Failure

123. Goods produced by the federal, state, and local governments are known as public goods.

Public goods are those goods that cannot be excluded from those who do not pay for them.

AACSB: Reflective Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why the market underproduces public goods.
Topic: Public Goods

124. A distinguishing characteristic about public goods is that they can be jointly consumed.

Public goods are those goods that cannot be excluded from those who do not pay for them.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why the market underproduces public goods.
Topic: Public Goods

125. The consumption of a private good by one person does not preclude consumption of the same good by another person.

A private good can be withheld from those who do not pay for it and consumption of a private good reduces the amount available for someone else.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why the market underproduces public goods.
Topic: Public Goods

126. The free-rider dilemma refers to a situation in which an individual can consume a good or service without having to pay for it.

Unlike a private good, a public good cannot be withheld from someone who does not pay for it and this may lead to a free-rider dilemma.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why the market underproduces public goods.
Topic: Public Goods

127. The market tends to overproduce public goods and under produce private goods.

Since a public good cannot be withheld from a nonpayer, a market will tend to overproduce private goods and underproduce public goods.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Explain why the market underproduces public goods.
Topic: Public Goods

128. Externalities are always harmful to third parties.

Externalities include both benefits received and costs borne by third parties.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

129. The market will underproduce goods that yield external benefits and overproduce goods that yield external costs.

The market will only react to internal costs and benefits, those goods and services that have externalities will tend to be overproduced (external costs) or underproduced (external benefits).

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

130. If most people are inoculated against chicken pox and even though you are not inoculated your chances of getting the disease are reduced, this is an example of a negative externality.

The fact that most people are inoculated against chicken pox and your chances of getting the disease are reduced would constitute a positive externality.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

131. If you play your music too loud and your neighbor cannot study, this is an example of a negative externality.

When you play music too loud and you don’t have to pay the external costs, you will likely play the music much longer and louder than socially optimal.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

132. External costs exist when the market demand is less than the social demand.

External benefits exist when the market demand is less than the social demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

133. If a firm implements a more expensive but less-polluting production process, both the marginal cost and average total cost curves will shift upward.

Increasing a firm’s costs will shift the marginal cost curve and the average total cost curve upward.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

134. Firms that are able to push part of their costs onto society by polluting will produce more output than society desires.

If a firm does not have to bear all of the costs it generates, then it will produce a greater level of output than the level that society would want.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

135. Even if external costs or benefits exist, a private firm will allocate its resources and operate its plant in such a way as to maximize social welfare.

Most firms will only operate in a manner so as to maximize internal profits.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

136. An emission charge increases private marginal cost and encourages lower output.

An emission charge is designed to shift external costs to the firm and this will then encourage a lower output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

137. If a firm has market power, it can produce and sell as much output as it desires since no competition exists.

When a firm has market power, it will produce less output and charge a higher price even though it must still contend with the demand curve.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-04 Describe how market power prevents optimal outcomes.
Topic: Market Power

138. Patents and copyrights contribute to market power for a firm.

Patents and copyrights are tools the government uses to encourage innovation, but they also add to a firm’s market power.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-04 Describe how market power prevents optimal outcomes.
Topic: Market Power

139. Ceteris paribus, monopolies take advantage of their market power by charging higher prices than competitive firms charge.

Since a monopolist faces a downward sloping demand curve and a marginal revenue curve below that, its profit maximizing level of output will always be less than what would occur under conditions of perfect competition. This lower output allows the monopolist to charge a higher price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-04 Describe how market power prevents optimal outcomes.
Topic: Market Power

140. Antitrust legislation was created to address the issue of externalities.

Antitrust legislation was created to address the issue of market power.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-04 Describe how market power prevents optimal outcomes.
Topic: Market Power

141. Income transfers are a government response to the market's failure to provide an equitable distribution of goods.

The government uses taxes and transfers as way to address equity issues.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Inequity

142. The government uses taxes and transfers to redistribute income more fairly.

The government uses income transfers to insure a more equitable distribution of income.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Inequity

143. Income transfers are designed to address the issue of market power.

Income transfers are designed to address the issue of equity.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Inequity

144. Social Security benefits are not an income transfer since individuals contribute to the fund during their working years.

Social Security benefits are income transfers because they transfer income from one generation to another.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Inequity

145. Macro instability refers to the underproduction of public goods.

Macro instability refers to inflation, unemployment, and insufficient growth. The goal of macro intervention is to achieve stable prices, low unemployment, and steady growth.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Macro Instability

146. Goals of macro intervention include full employment, economic growth, and price stability.

The goal of federal agencies is to maximize employment, economic growth, and price stability, where possible.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Macro Instability

147. Suppose a coal burning plant is emitting excessive pollution into the air. Suggest two ways the government can deal with this market failure.

The two ways that government has to deal with a market failure are by altering market incentives or by bypassing market incentives. With market-based incentives, the government tries to reduce the difference between private and social costs by internalizing the external costs. This can be done by emission charges or by giving firms the right to continue to pollute by purchasing a permit on the open market.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

148. Explain the impact of external costs and external benefits on the production of public verses private goods.

Whenever external costs are present, social costs will exceed private costs and the private marginal cost curve will be lower than the social cost curve. With lower private costs, production will be artificially high in the case of an external cost. Whenever external benefits exist, social demand will exceed the market demand for a good. Without all the benefits to the good being accounted for in the market, the market will tend to underproduce the good.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

149. What are the two characteristics of public good? Explain why each characteristic makes it a public rather than a private good.

The two characteristics of a public good are joint consumption and the free-rider dilemma. National defense is a good example of joint consumption in that there is no way that you can prevent someone from enjoying the benefits of the good along with you. If you are able to work for cash and not pay taxes then you would also be taking advantage of the free-rider problem as you would not contribute to national defense, but still get to enjoy its benefits.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Explain why the market underproduces public goods.
Topic: Public Goods

150. Describe the legal foundations upon which the federal government bases its decisions to reduce market power. What is the threat that the government is trying to prevent when it uses antitrust policy?

The legal foundations upon which the federal government bases its decisions to reduce market power are the Sherman Act of 1890, which prohibits conspiracies in retraint of trade, the Clayton Act of 1914, which outlawed price discrimination, and the Federal Trade Commission Act of 1914, which set up the Federal Trade Commission to carry out the responsiblities of the federal government. With all of these, the government is trying to prevent the abuse of market power as this would reduce quantities and raise prices beyond competitive levels and ultimately hurt consumers.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-05 Define what government failure is.
Topic: Market Power

151. A market failure is defined by a(n)

A. optimal mix of output.

B. suboptimal mix of output.

C. ample quantity of goods and services.

D. All of these choices are correct.

152. Government intervention always results in the optimal mix of output.

Government intervention sometimes worsens the situation, rather than improve the situation.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-05 Define what government failure is.
Topic: Macro Stability

153. The social demand represents the

A. market demand plus internal costs.

B. market demand plus social costs.

C. market demand plus externalities.

D. market demand only.

154. Automobile ownership represents private benefits and external costs.

When someone owns an automobile, they will not only derive pleasure from the benefits it brings, but there are costs of upkeep and gasoline. Pollution and traffic congestion are some of the external costs that are also associated with having an automobile.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Tell how externalities distort market outcomes.
Topic: Externalities

155. Which of the following antitrust acts prohibits price discrimination?

A. the Sherman Act

B. the Clayton Act

C. the Federal Trade Commission Act

D. the FAFSA Act

156. A market failure has occurred if

A. stores fail to be open late enough to permit us to shop on our way home.

B. there is an imperfection in the market mechanism that prevents markets from getting society to the optimal mix on the production possibilities curve.

C. energy prices rise dramatically in response to extremely cold weather, resulting in a failure of families to budget adequately for their utility bill.

D. restaurants fail to give struggling students a student discount on meals.

157. A public good is any good

A. that is paid for by tax dollars.

B. for which it is difficult to exclude users and for which consumption by one person does not subtract from what is available to others.

C. that is consumed by every member of the general public, but use by one person subtracts from what is available for others.

D. that is typically consumed in public places.

158. ____ redistribute money by taking it away from the rich; _____ redistribute money by giving it to the poor.

A. Private benefits; social benefits

B. Taxes; transfers

C. Private goods; public goods

D. Transfers, taxes

159. Micro-failures of the marketplace imply that:

A. We are inequitably distributing output.

B. We are at the wrong point on the production possibilities curve.

C. We are overproducing at a point beyond the production possibilities curve.

D. Both we are inequitably distributing output and we are at the wrong point on the production possibilities curve.

160. When the production of a good is characterized by negative externalities such as pollution

A. the price is too low and the output is too large relative to the optimal results.

B. profit-maximizing firms do not generally have an incentive to reduce pollution emissions in the absence of regulation.

C. an optimal tax on the pollution could eliminate the inefficiency.

D. All of these choices are correct.

161. When the production of a good or service results in a negative externality

A. social costs are less than private costs.

B. social costs are equal to private costs.

C. social costs can't be compared to private costs.

D. social costs are greater than private costs.

162. Government intervention in a market that results in no improvement is known as

A. excessive market power.

B. excessive externalities.

C. a market failure.

D. a government failure.

163. A(n) ______ is someone who gets direct benefits from another person’s purchase of a public good.

A. externality

B. free rider

C. economist

D. price taker

164. Which of these is an example of an externality?

A. your roommate plays loud music while you are trying to sleep

B. someone in class asks a question that you were reluctant to ask

C. both your roommate playing loud music while you are trying to sleep and someone asking a question in class that you were reluctant to ask

D. the purchase of an apple from the grocery store

165. A market failure occurs when

A. there is an imperfection in the market that prevents optimal outcomes.

B. society is not on the best point on the production possibilities curve.

C. there is a suboptimal mix of output.

D. All of these choices are

166. ______ are costs or benefits of a market activity experienced by someone outside of the immediate transaction.

A. Externalities

B. Private goods

C. Public goods

D. Accounting costs

167. The purpose of antitrust laws is to ______ concentrations of market power and ______ competition.

A. increase; increase

B. decrease; decrease

C. increase; decrease

D. decrease; increase

168. A tax on cigarette producers causes them to ______ the output of a good.

A. increase

B. decrease

C. not change

D. More information is needed to predict the effect of a tax on cigarettes.

169. Which of the following is the largest income transfer program?

A. Social Security

B. Medicare

C. Medicaid

D. Food stamps

170. The goal of government intervention at the macro level is to

A. reduce transfer payments and lower taxes.

B. achieve full employment and price stability.

C. increase regulations on businesses to completely eliminate external costs.

D. encourage greater individual economic independence.