Deck 16: Market Failures and Government Intervention

Question 1

The essential coordinating mechanism of a free- market economy is

A)profit maximization.
B)allocative efficiency.
C)the price system.
D)opportunity cost.
E)productive efficiency.

Answer 1

C

Question 2

Examples of direct costs of government intervention include

A)the production cost of meeting new emission standards on new cars.
B)the government's administrative costs of conducting the Census.
C)the time spent by Canadians completing their income- tax forms.
D)the regulatory affairs departments of many Canadian corporations.
E)costs of complying with provincial sales taxes.

Answer 2

B

Question 3

In a free- market system,a disequilibrium in one market

A)provides evidence that the market system does not work.
B)means that the economy will fall into chaos.
C)shows that government intervention is always necessary to restore the market to equilibrium.
D)produces forces that eventually bring that market back to equilibrium.
E)suggests that no seller or buyer has an incentive to alter his or her behaviour.

Answer 3

D

Question 4

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Refer to Figure 16- 4.Once some quantity of this public good is provided,the efficient price to charge for its use is

A)P4.
B)P2.
C)approximately zero.
D)P1.
E)P3.

Question 5

Moral hazard is said to exist when one party to a transaction

A)has the incentive to,and is able to,shift costs to another party in the transaction.
B)is not able to take advantage of the other party.
C)has no morals.
D)purchases insurance because they know they are involved in risky activities.
E)is subject to a hostile corporate takeover.

Question 6

An example of a common- property resource is

A)privately owned ranch land.
B)a sport- fishing river in BC.
C)a national park with an entrance fee.
D)privately owned cattle grazing land in Alberta.
E)a congested toll highway.

Question 7

Services such as those within the justice system are usually provided by the government.What broader social goal is being met in this case?

A)income distribution
B)preference for public provision
C)protecting individuals from others or themselves
D)social responsibility
E)policies for economic growth

Question 8

Export Development Canada (EDC)provides insurance to Canadian exporters for their accounts receivable from foreign buyers.If EDC charges an insurance premium that reflects the average level of risk of the exporting firms,it is only the most risky firms that will tend to purchase insurance.This is an example of

A)a public good.
B)moral hazard.
C)a common property resource.
D)adverse selection.
E)the free- rider problem.

Question 9

Which of the following statements about market economies is true?

A)Market failure means that a market economy is incapable of satisfying human wants.
B)Most present- day economists advocate extensive government intervention in most parts of market economies.
C)Externalities make free- market outcomes socially efficient.
D)An important characteristic of the market system is its ability to set in motion forces that tend to correct disequilibrium.
E)Pure market economies provide the best social outcome.

Question 10

The "formal defence" of free markets includes the argument that competitive markets

A)provide a stimulus to innovation and economic growth because of the pursuit of profits.
B)permit a decentralization of economic power.
C)lead to political freedom.
D)provide automatic coordination of the actions of decentralized decision makers.
E)lead to allocative efficiency.

Question 11

FIGURE 16- 1
Refer to Figure 16- 1.Suppose the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC0 and MB0,respectively,then there exists

A)a negative external benefit.
B)a negative external cost.
C)no externality whatsoever.
D)a positive external cost.
E)a positive external benefit.

Question 12

The concept of "institution building" is becoming more prominent.Which of the following best describes the aim of institution building?

A)In Canada,for example,the strengthening of existing financial institutions is key to the country's economic well- being.
B)The rich,developed countries focus on the success of institutions that are global in nature,such as the United Nations,The World Bank and the International Monetary Fund.
C)Canada's aid to developing countries is being focused on creating the economic institutions,such as a central bank,that are key to a country's economic growth.
D)The rich,developed countries focus their assistance to developing countries on creating stable political infrastructures.

Question 13

A free- market economy with perfect allocative efficiency does not exist in reality because

A)firms in many industries have some degree of market power and face negatively sloped demand curves,and produce a level of output where P > MC.
B)the decentralization of economic power in a free- market economy does not allow for allocative efficiency.
C)government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome.
D)the assumption of profit- maximization is not a realistic assumption about the behaviour of firms.
E)the assumption of utility maximization is not a realistic assumption about the behaviour of consumers.

Question 14

An efficient level of provision of a public good is achieved when

A)the cost of providing an extra unit of the good is equal to the sum of the valuations of all consumers for that unit.
B)the cost of providing an extra unit of the good is equal to the valuation of each consumer of the extra unit.
C)the cost of providing an extra unit of the good is equal to the price of the good.
D)voters are satisfied that an adequate amount of the good is being produced.
E)the valuation of each consumer for the last unit of the good produced is zero.

Question 15

The "informal defence" of free markets includes the argument that markets

A)achieve the maximum feasible rate of economic growth.
B)lead to allocative efficiency.
C)lead to productive efficiency.
D)permit a centralization of economic power.
E)provide automatic coordination of the actions of decentralized decision makers.

Question 16

All Canadian provincial governments have legislated minimum wages.What broader social goal is being met in this case?

A)social responsibility
B)policies for economic growth
C)income distribution
D)protecting individuals from others or themselves
E)preference for public provision

Question 17

FIGURE 16- 1
Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC0 and MB1,respectively,then the competitive equilibrium quantity is

A)too low for allocative efficiency.
B)consistent with allocative efficiency.
C)not enough information to determine allocative efficiency.
D)too high for allocative efficiency.

Question 18

Which of the following best describes the reason for over fishing in Canadian offshore fisheries?

A)The private marginal cost incurred by current fishermen is less than the social marginal cost.
B)The private marginal cost incurred by future generations of fishermen is greater than the private marginal cost incurred by current fishermen.
C)The Canadian government encourages foreign fishing within the Canadian offshore boundary.
D)Fishing has depleted fish stocks leading to smaller catches.
E)None of the above can explain overfishing.

Question 19

In economics,the term "public good" refers to a product

A)that is widely advertised.
B)that is produced by a publicly owned corporation.
C)which consumers cannot be excluded from using.
D)that has a very low marginal cost of production.
E)that only private producers will provide.

Question 20

A plausible example of market failure due to an externality is

A)a farmer with an apple orchard who also keeps bees.
B)the cost of building new highways outside of major cities.
C)the high salaries enjoyed by professional athletes.
D)the despoiling of rivers and lakes by nitrogen run- off from agricultural fertilizers.
E)the line- ups at the theatre when a good movie is playing.

Question 21

When prices are determined in a free- market system

A)demand shifts,caused by price changes,coordinate all necessary changes in the economy.
B)changes in the economy can be foreseen by officials.
C)supply shifts,caused by price changes,coordinate all necessary changes in the economy.
D)resources are allocated without conscious central coordination.
E)firms respond to changes in the economy mainly by altering the wage rate.

Question 22

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Refer to Figure 16- 4.Suppose the optimal amount of this good is provided,but that Individual B was only consuming Q2 units of the good.What would be the marginal cost of Individual B consuming an extra unit of this good?

A)P4- P2.
B)MB.
C)P4.
D)P2.
E)approximately zero.

Question 23

Private markets will always provide too few public goods because

A)the private marginal cost is less than the social marginal cost.
B)private markets will never provide goods that they know the government could provide.
C)of the negative externalities associated with these goods.
D)it is unlawful for private firms to provide public goods.
E)private markets will never provide goods at a price of zero,which is the efficient price.

Question 24

FIGURE 16- 1
Consider a product (say,tulip bulbs)that generates positive externalities when it is consumed (other people enjoy looking at them).In this case,

A)firms will produce too little of this product unless they internalize the external benefits.
B)at the market equilibrium,the price is too high to be allocatively efficient.
C)at the market equilibrium,the output would be greater than the socially optimal amount.
D)the government could tax the production of this good to improve efficiency.
E)at market equilibrium,the marginal social benefit is less than the marginal cost of producing the last unit.

Question 25

Economists use the term "market failure" to refer to those free- market situations where

A)externalities are present in the economy.
B)government has intervened in the economy.
C)allocatively efficient outcomes are not achieved.
D)the economy is not in equilibrium.
E)income is not distributed equitably.

Question 26

The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16- 2
Refer to Figure 16- 2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there are no externalities in production.In this case,for allocative efficiency.

A)P1 and Q1 are appropriate
B)the price P1 is appropriate but the quantity Q1 is too high
C)the price P1 is appropriate but the quantity Q1 is too low
D)the price P1 is too high but the quantity Q1 is appropriate
E)the price P1 is too low but the quantity Q1 is appropriate

Question 27

The efficient price to charge consumers for their use of a public good is

A)equal to the price that the free market would achieve.
B)equal to the average per- person cost of providing this good.
C)that price that prevents free riding by some consumers.
D)equal to the cost of providing the good to one additional consumer.
E)equal to the highest individual marginal benefit from consuming a unit of the good.

Question 28

Consider a non- rivalrous good,like national defence,provided by the government.At the socially optimal level of provision of this good,the marginal

A)cost of production of the last unit of the good is equal to all consumers' combined marginal willingness to pay.
B)sacrifice society needs to make to supply the last unit of the good is more than each consumer's marginal willingness to pay.
C)cost of production of this good is zero.
D)cost of production of the last unit of the good is more than all consumers' combined marginal willingness to pay.
E)cost of production of the last unit of the good is equal to the consumers' marginal willingness to pay.

Question 29

Which of the following is the best description of a "free rider"? Someone who

A)receives the benefit of a good without having to pay for it.
B)consumes a good until the marginal benefit received from the last unit is zero.
C)pays for a good but does not receive any benefit from the good.
D)does not produce any goods but is able to consume them.
E)consumes a good until the marginal benefit received from the last unit is equal to the marginal cost of producing the good.

Question 30

FIGURE 16- 1
Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC1 and MB0,respectively,then there exists

A)no externalities at all.
B)a negative external benefit.
C)a positive external cost.
D)a negative external cost.
E)a positive external benefit.

Question 31

The existence of imperfectly competitive firms implies a market failure because

A)they lead to a socially undesirable distribution of income.
B)those firms will maximize profits by setting price above marginal cost.
C)there is no way to prevent these firms from abusing their market power.
D)they do not produce a productively efficient level of output.
E)their market power allows them to deceive consumers.

Question 32

A flu vaccine has an associated externality.In the absence of government intervention,the quantity of flu vaccines purchased will be the socially optimal quantity.

A)positive; less than
B)negative; the same as
C)negative; less than
D)positive; more than
E)positive; the same as

Question 33

Which of the following is the best example of the phenomenon of "rational ignorance"?

A)The ignorance of most voters with regard to the position of the economy's production possibilities boundary.
B)Consumers are unaware of the quantity supplied by producers,and producers are unaware of the quantity demanded by consumers.
C)The ignorance of a profit- maximizing firm on the location and shape of its long- run average cost curve,which is extremely difficult to determine.
D)You choose not to become informed about an important government policy because the benefits of doing so are outweighed by the costs of doing so.
E)The theory of perfect competition assumes that consumers have full knowledge of all prices,while in reality they know the prices of only the goods and services they purchase.

Question 34

Which of the following statements about the price system is most accurate? The price system

A)operates only in a laissez- faire economy.
B)is the only feasible method of allocating resources.
C)is automatic and functions perfectly in reallocating economic resources.
D)depends on planned coordination between firms and governments.
E)is automatic,although it does not function perfectly.

Question 35

Consider an industry producing good X.The quantity of good X produced in a competitive free market will be less than the socially optimal level if

A)the consumption of good X generates a positive externality.
B)the government is subsidizing the production of good X.
C)the production of good X generates a negative externality.
D)good X has negative third party effects associated with its consumption.
E)the consumption of good X generates a negative externality.

Question 36

Providing subsidies to for- profit firms that offer day- care services represents government intervention through

A)progressive taxation.
B)regulation.
C)public provision.
D)merit- goods allowances.
E)the influencing of economic incentives.

Question 37

In a competitive market economy with no externalities,allocative efficiency would exist if

A)prices equal marginal revenue in all markets.
B)stringent government intervention exists.
C)prices equal marginal costs in all markets.
D)prices equal average variable cost in all markets.
E)prices equal total cost in all markets.

Question 38

The diagram below shows the supply and demand diagrams for the competitive market for honey in one region.MC0 represents private marginal cost and MB0 represents private marginal benefit.
FIGURE 16- 3
Refer to Figure 16- 3.Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches.The bees provide a benefit to the orchard keepers by pollinating their peach trees.We can say that there is a _ externality in the production of honey.The curve represents the _ marginal benefit of honey.

A)positive; MB2; social
B)negative; MB1; private
C)positive; MB2; private
D)negative; MB2; social
E)positive; MB1; social

Question 39

What is meant by the term "market failure"?

A)that the free market has failed to achieve desirable social goals
B)that one or more markets are not in equilibrium
C)that allocative efficiency has not been achieved
D)that the market economy is a failure
E)that a small group in society is affected

Question 40

Moral hazard often arises in the case of insurance because

A)insurance companies have no incentive to investigate fraudulent claims.
B)people generally underestimate the amount of insurance coverage needed.
C)people who are in the most need of insurance have the most trouble obtaining insurance coverage.
D)insured people will not take sufficient care to reduce risks because the private benefit of reducing risks exceeds the private cost of reducing risks.
E)insured people will not take sufficient care to reduce risks because the private cost of reducing risks exceeds the private benefit of reducing risks.

Question 41

FIGURE 16- 1
One reason that national defence is a classic example of a public good is that

A)it would be immoral for private firms to provide this essential commodity.
B)society deems it to be too important to be provided by the private sector.
C)military technology is too expensive for private firms to provide.
D)the benefits of national defence cannot be kept from those who do not pay.
E)all citizens want national defence.

Question 42

Consider a remote village with a limited,freely available water supply and no government intervention in the allocation of water.Economic theory predicts that the water will be

A)allocated efficiently because users will tend to use the water until marginal cost and marginal benefit are both equal to zero.
B)overexploited because users will tend to use the water until their marginal benefit is zero.
C)allocated efficiently because users will tend to use the water until the supply and demand are in equilibrium.
D)overexploited because users will tend to use the water until the marginal cost of providing the water is zero.
E)allocated efficiently because users will tend to use the water as though it were a public good.

Question 43

FIGURE 16- 1
Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC0 and MB0,respectively,then

A)the competitive price and quantity are consistent with allocative efficiency.
B)the competitive quantity is too high.
C)the competitive price is too high.
D)the competitive quantity is too low.
E)the competitive price is too low.

Question 44

Government intervention in a particular industry is unnecessary if each of the industry's firms is operating where

A)price is equal to private marginal cost.
B)the demand curve is perfectly elastic.
C)there are no positive externalities.
D)marginal social benefit is equal to marginal social cost.
E)there are no negative externalities.

Question 45

The diagram below shows the supply and demand diagrams for the competitive market for honey in one region.MC0 represents private marginal cost and MB0 represents private marginal benefit.
FIGURE 16- 3
Refer to Figure 16- 3.Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches.The bees provide a benefit to the orchard keepers by pollinating their peach trees.If MB2 represents the social marginal benefit of honey,the external benefit associated with producing one unit of honey is

A)$1.
B)$5.
C)$3.
D)$2.
E)$4.

Question 46

Economists consider a product such as a university education to be ,whereas a product such as your local library is generally considered to be _.

A)non- rivalrous and excludable; non- rivalrous and excludable
B)rivalrous and excludable; rivalrous and non- excludable
C)non- rivalrous and non- excludable; rivalrous and non- excludable
D)rivalrous and non- excludable; rivalrous and excludable
E)rivalrous and excludable; non- rivalrous and excludable

Question 47

The direct resource costs of government intervention include the

A)resulting loss of productivity in the private sector.
B)increased costs of production arising from compliance with regulations.
C)salaries of government regulators.
D)opportunity costs of forgone investment.
E)rent seeking.

Question 48

Suppose an advertising firm purchases additional insurance against theft,and as a result,the partners are not very careful about locking their office doors when they leave.This is an example of

A)moral hazard.
B)a public good.
C)the free- rider problem.
D)a common property resource.
E)adverse selection.

Question 49

An example of adverse selection is

A)asking a doctor if you are sick.
B)purchasing the required homeowner's insurance when you buy a condo.
C)purchasing more dental insurance when you know your teeth are especially bad.
D)asking your lawyer if you should sue your doctor for malpractice.
E)asking a private pilot about the safety of his plane.

Question 50

Economists describe prices as "signals" in a market economy because

A)they tell consumers how to act to keep the market system functioning well.
B)prices are the only mechanism through which supply and demand will balance.
C)changes in these signals bring about changes in market structure.
D)changes in these signals bring about changes in economic behaviour.
E)they tell government agents how to act to keep the market system functioning well.

Question 51

The concept of moral hazard was publicly discussed in the context of the 2007- 2008 financial crisis because

A)it was feared that government bailouts of financial institutions would encourage the institutions to continue their risky behaviour.
B)it was argued that the U.S.government should invoke moral hazard to sustain the financial sector.
C)it was claimed that moral hazard was necessary to prevent large U.S.financial institutions from going bankrupt.
D)it was feared that the U.S.government was taking advantage of its special knowledge in the financial markets.
E)it was feared that government bailouts of financial institutions would reduce competition in financial markets.

Question 52

"Rent- seeking" is a problem of

A)all economies,given the existence of government.
B)landlords and tenants.
C)centrally planned economies.
D)private organizations in which ownership is not identical to management.
E)pure free- market economies.

Question 53

Which of the following statements about public goods is true?

A)The firms producing them must be listed on a public stock exchange.
B)They are essentially negative externalities.
C)They cannot be publicly provided.
D)They are unlikely to be provided by private,profit- seeking firms.
E)They respond to market signals.

Question 54

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Refer to Figure 16- 4.Suppose the government provides Q4 units of the public good.If the government was able to require consumers to pay a price of P4,then

A)the market would clear,although not enough would be produced.
B)the inefficient quantity would be being produced.
C)consumers would not use the public good at all,and this would not be an efficient outcome for society.
D)consumers would not use the public good at all,and this would be socially optimal.
E)the appropriate price would be achieved,although not enough would be consumed.

Question 55

The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16- 2
Refer to Figure 16- 2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there is a negative externality in production.In this case,for allocative efficiency.

A)the price P1 is appropriate but the quantity Q1 is too low
B)P1 and Q1 are appropriate
C)the price P1 is too high and the quantity Q1 is too low
D)the price P1 is appropriate but the quantity Q1 is too high
E)the price P1 is too low and the quantity Q1 is too high

Question 56

Which of the following statements concerning cost- benefit analysis is true?

A)Large potential benefits,regardless of their time horizon,always justify government intervention.
B)Large potential costs,regardless of their time horizon,always preclude government intervention.
C)Though benefits from a government policy can be accurately measured,costs are usually impossible to quantify.
D)Though it is often difficult to estimate costs and benefits with precision,cost- benefit analysis can be useful in determining whether to implement a given government policy.
E)Cost- benefit analysis can be used effectively by private firms but should not be used in the public sector.

Question 57

FIGURE 16- 1
Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC2 and MB0,respectively,then the competitive equilibrium quantity is

A)too low for allocative efficiency.
B)consistent with allocative efficiency.
C)too high for allocative efficiency.
D)not enough information to determine allocative efficiency.

Question 58

The diagram below shows the supply and demand diagrams for the competitive market for honey in one region.MC0 represents private marginal cost and MB0 represents private marginal benefit.
FIGURE 16- 3
Refer to Figure 16- 3.Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches.The bees provide a benefit to the orchard keepers by pollinating their peach trees.If the external marginal benefit is $4 per unit of honey,then what is the allocatively efficient output?

A)60 kg
B)80 kg
C)100 kg
D)40 kg
E)120 kg

Question 59

Attempts by professional lobbyists in Ottawa to influence the government's subsidy to the shipbuilding industry,even when such a subsidy is not in the national interest,represents

A)the government acting like a monopolist.
B)an inefficient public choice.
C)asymmetric information.
D)rent seeking.
E)an externality.

Question 60

In a free- market economy,

A)economic power is centralized.
B)market failures are automatically corrected.
C)there is no role for government intervention.
D)temporary shortages and surpluses become permanent.
E)the existence of profits and losses provide signals to other economic agents.

Question 61

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Refer to Figure 16- 4.The curve MBABC is derived by

A)a vertical summation of the marginal benefits of all individuals at each level of output.
B)observation of the consumption of public goods at a price of zero.
C)a horizontal summation of the marginal benefits of all individuals at each given price level.
D)observation of the consumption of public goods at the optimal price.
E)determining the private marginal cost of the public good.

Question 62

The main point about public choice theory is that

A)elected officials never compromise the public interest in order to gain votes.
B)most politicians are corrupt.
C)there is adverse selection in the selection of elected officials.
D)most civil servants act solely in the public interest.
E)the choices of public officials may be governed more by their own self- interest than the public interest.

Question 63

Consider a childhood vaccination program that is fully effective if all children are vaccinated.Now suppose that all children except one are vaccinated - and as a result that one child will not contract the disease.In economics,we can compare this situation to

A)the free- rider problem.
B)asymmetric information.
C)common property problem.
D)moral hazard.
E)adverse selection.

Question 64

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
The government has seatbelt and airbag requirements in cars,and laws requiring individual drivers to use them.What broader social goal is being met in this case?

A)social responsibility
B)policies for economic growth
C)preference for public provision
D)income distribution
E)protecting individuals from others or themselves

Question 65

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Refer to Figure 16- 4.Suppose the government provides Q4 units of the public good.If consumers were then required to pay a price of zero for the good,

A)the inefficient quantity would be being produced.
B)the market would clear,although not enough would be produced.
C)consumers would use the public good until their marginal benefit was zero,and this would be socially optimal.
D)consumers would use too little of the public good,and the outcome would be inefficient for society.
E)the appropriate price would be achieved,although not enough would be consumed.

Question 66

The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16- 2
For a production process that involves a positive externality,it is true that

A)marginal social cost is more than marginal private cost.
B)a subsidy to producers could increase production to the socially optimal level.
C)a per unit tax could be imposed on the producer to achieve the socially optimal level of production.
D)marginal social benefit is less than marginal private benefit.
E)without government intervention the market will produce too much of this good.

Question 67

A good example of a product that is both nonexcludable and nonrivalrous is

A)natural gas.
B)food.
C)grazing land.
D)public information.
E)electricity.

Question 68

An example of a public good is

A)air travel.
B)municipal transit service.
C)insurance.
D)apples on a tree in a public park.
E)street lighting.

Question 69

Which of the following best explains why it is sometimes efficient to charge a positive price for the use of some products such as museums,beaches,and roads?

A)Each person consuming the product has a positive marginal benefit and should therefore pay a positive price.
B)Since these products are non- excludable,it is sometimes efficient to charge a positive price.
C)Once these products become congested they become rivalrous,marginal cost is positive,and a positive price is then efficient.
D)Since these products are excludable and non- rivalrous,it is always efficient to charge a positive price.
E)Since these products are excludable,marginal cost is always positive,and a positive price is appropriate.

Question 70

The total costs of government intervention in the market economy include

A)direct resource costs,such as the salaries of civil servants.
B)compliance costs.
C)extra costs arising from regulation.
D)the costs of rent seeking.
E)all of the above.

Question 71

FIGURE 16- 1
Refer to Figure 16- 1.Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A.If the social marginal costs and social marginal benefits are represented by MC0 and MB1,respectively,then there exists

A)an external benefit.
B)a social cost that exceeds the private cost.
C)an external benefit and an external cost.
D)no external benefits or costs.
E)an external cost.

Question 72

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Refer to Figure 16- 4.What is the optimal provision of this public good?

A)Q
B)Q1
C)Q2
D)Q3
E)Q4

Question 73

The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16- 2
Refer to Figure 16- 2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there is a positive externality in production.In this case,for allocative efficiency.

A)the price P1 is appropriate but the quantity Q1 is too low
B)the price P1 is too low and the quantity Q1 is too high
C)the price P1 is too high and the quantity Q1 is too low
D)P1 and Q1 are appropriate
E)the price P1 is appropriate but the quantity Q1 is too high

Question 74

The diagram below shows the marginal benefit and marginal cost of a public good.This economy has 3 individuals,A,B and C.The diagram shows the MB for each individual and a summation of their marginal benefits.
FIGURE 16- 4
Which of the following statements about free- market economies is false?

A)Markets tend to be impersonal and to decentralize economic power.
B)The government has a role to play in correcting market failures.
C)An efficiently functioning market economy will correct temporary shortages and surpluses.
D)The existence of profits and losses provides signals to other economic agents.
E)In a free- market economy there is no role for government intervention.

Question 75

Economic losses in an industry are a signal that

A)the economy is in a recession.
B)a government subsidy is necessary.
C)all of the firms should leave the industry.
D)too few resources are allocated to the industry.
E)will lead resources to leave the industry (until the losses disappear).

Question 76

The diagram below shows the supply and demand diagrams for the competitive market for honey in one region.MC0 represents private marginal cost and MB0 represents private marginal benefit.
FIGURE 16- 3
Refer to Figure 16- 3.Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches.The bees provide a benefit to the orchard keepers by pollinating their peach trees.In the absence of any government intervention,the equilibrium price and quantity in the honey market are

A)$5 and 100 kg.
B)$11 and 80 kg.
C)$7 and 80 kg.
D)$5 and 60 kg.
E)$9 and 60 kg.

Question 77

If typical firms in a competitive industry are earning economic profits,the industry

A)must be experiencing an increase in monopoly power
B)is allocatively efficient.
C)has too many resources allocated to it.
D)can be expected to experience the entry of new firms.
E)is in a long- run equilibrium.

Question 78

The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16- 2
A common- property resource is one that is

A)non- rivalrous and excludable.
B)rivalrous and non- excludable.
C)non- rivalrous and non- excludable.
D)rivalrous and excludable.

Question 79

Because of the free- rider problem,

A)government will not be able to produce an efficient amount of a public good.
B)too many people will over- consume a public good.
C)people need to pay a government user fee to pay for the good's production.
D)the private market will generally produce the efficient amount of a public good.
E)it is difficult to make people pay for a public good,and thus private markets will tend not to produce it.

Question 80

In the context of government intervention in the economy,an example of paternalism is

A)taxation law.
B)regulation to reduce pollution.
C)economic regulation of monopolies.
D)laws requiring the use of bicycle helmets.
E)the provision of public goods.