Deck 16: Market Failures and Government Intervention

Question 1

Which of the following statements about free-market economies is false?

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

Answer 1

In a free-market economy there is no role for government intervention.

Question 2

Profit-motivated product and process innovation is primarily a characteristic of ________ systems.

A)market
B)centrally planned
C)oligopolistic
D)socialist
E)monopolistic

Answer 2

market

Question 3

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

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

Answer 3

is automatic,although it does not function perfectly.

Question 4

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

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

Question 5

Economic losses in an industry are a signal that

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

Question 6

Economists describe prices as ʺsignalsʺ in a market economy because

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

Question 7

In a free-market economy,

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

Question 8

Which of the following roles of the government is most fundamental to a societyʹs ability to function safely and carry on normal economic and social life?

A)provider of health care
B)provider of education
C)provider of a justice system
D)holder of a monopoly of violence
E)regulator of free markets

Question 9

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

A)government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome.
B)the assumption of profit-maximization is not a realistic assumption about the behaviour of firms.
C)the assumption of utility maximization is not a realistic assumption about the behaviour of consumers.
D)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.
E)the decentralization of economic power in a free -market economy does not allow for allocative efficiency.

Question 10

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

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

Question 11

The essential coordinating mechanism of a free-market economy is

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

Question 12

Economists use the term ʺmarket failureʺ to refer to those free-market situations where

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

Question 13

When prices are determined in a free-market system

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

Question 14

One part of the ʺinformal defenceʺ of the market system is the argument,made forcefully by the late Milton Friedman,that free markets provide for the

A)greatest equality in income distribution.
B)decentralization of economic power.
C)greatest security for members of society.
D)government with the highest tax revenues.
E)greatest scope for international trade.

Question 15

In a free-market economy that is continually adjusting toward equilibrium,a primary force driving this adjustment is

A)opportunity costs.
B)diminishing returns.
C)the pursuit of allocative efficiency.
D)the scarcity of resources.
E)the pursuit of profits.

Question 16

The concept of ʺinstitution buildingʺ 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 countryʹs economic well-being.
B)Canadaʹs aid to developing countries is being focused on creating the economic institutions,such as a central bank,that are key to a countryʹs economic growth.
C)The rich,developed countries focus their assistance to developing countries on creating stable political infrastructures.
D)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.

Question 17

The ʺinformal defenceʺ of free markets includes the argument that markets

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

Question 18

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

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

Question 19

Which of the following statements about market economies is true?

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

Question 20

The ʺformal defenceʺ of free markets includes the argument that competitive markets

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

Question 21

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

Question 22

A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon.An externality associated with this decision is

A)the increased work for the homeowner in yard cleanup.
B)the cost of purchasing the dogs.
C)the neighboursʹ lost sleep.
D)the homeownerʹs lost sleep.
E)the veterinary costs of keeping the dogs healthy.

Question 23

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

Question 24

Which of the following phenomena is NOT an example of market failure?

A)moral hazard
B)a positive externality
C)asymmetric information
D)diminishing marginal returns
E)public goods

Question 25

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

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 low
C)the price P1 is appropriate but the quantity Q1 is too high
D)the price P1 is too low but the quantity Q1 is appropriate
E)the price P1 is too high but the quantity Q1 is appropriate

Question 27

The problem with externalities is essentially one of

A)a discrepancy between private and social costs.
B)asymmetric information.
C)the inability of a firm in an industry characterized by increasing returns to scale to make positive profits if it sets price equal to marginal cost.
D)a failure of the market to generate socially valued outcomes.
E)the failure of the market to solve social problems.

Question 28

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

Question 29

If a firm produces a good and its consumption generates external benefits,then at the competitive market equilibrium

A)the government could subsidize the production of this good to improve efficiency.
B)the marginal private benefit is greater than the marginal cost of producing the last unit.
C)the output would be more than the socially optimal amount.
D)the firm will not produce an additional amount if it can internalize the external benefits.
E)the marginal social benefit is less than the marginal cost of producing the last unit.

Question 30

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

Question 31

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

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

Question 32

If a homeowner uses wood to heat his house,

A)he may generate an external cost if the smoke bothers his neighbours.
B)the price of the wood represents an external cost to the homeowner.
C)the price of the wood represents an external cost to the homeowner,unless he harvests the wood himself.
D)he may generate an external benefit if the smoke bothers his neighbours.
E)he may generate an external benefit if the price of heating oil goes down in his region.

Question 33

Government intervention in an effort to promote allocative efficiency in all industries would likely impose a cost in terms of economic growth.One explanation for this is that

A)some policies to promote allocative efficiency will lead to increased income inequality.
B)some policies to promote allocative efficiency will lead to decreased income inequality.
C)correcting externalities inevitably reduces the economyʹs growth rate.
D)firms in perfectly competitive industries that are already allocatively efficient would also be affected by the intervention and become inefficient.
E)much of the innovation and productivity growth that leads to economic growth comes from oligopolistic firms.

Question 34

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

A)the production of good X generates a positive externality.
B)the consumption of good X generates a positive externality.
C)the production of good X generates a negative externality.
D)the government has imposed a tax on the production of good X.
E)good X is a public good.

Question 35

The existence of imperfectly competitive firms implies a market failure because

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

Question 36

What is meant by the term ʺmarket failureʺ?

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

Question 37

A plausible example of market failure due to an externality is

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

Question 38

For a production process that involves a positive externality,it is true that

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

Question 39

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

Question 40

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

A)the government could tax the production of this good to improve efficiency.
B)at market equilibrium,the marginal social benefit is less than the marginal cost of producing the last unit.
C)at the market equilibrium,the output would be greater than the socially optimal amount.
D)too few tulips will be produced and consumed unless external benefits are internalized.
E)at the market equilibrium,the price is too high to be allocatively efficient.

Question 41

A public good is a product that is

A)produced by the government.
B)excludable but nonrivalrous.
C)nonexcludable and nonrivalrous.
D)rivalrous but nonexcludable.
E)excludable and rivalrous.

Question 42

Consider an ordinary rivalrous good,provided in a competitive market.At the socially optimal level of provision of this good,the marginal

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

Question 43

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

Question 44

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)$2.
C)$3.
D)$4.
E)$5.

Question 45

The price charged for access to an uncongested, excludable, non-rivalrous good should be ________ because________.

A)positive; consumers receive a positive marginal benefit from consuming the good
B)positive; marginal cost and marginal benefit for this good are both positive
C)positive; more than one person can consume this good at the same time
D)zero; it is inefficient to exclude people from consuming this good once it has been supplied
E)zero; the marginal benefit of the last unit consumed is zero

Question 46

Consider a remote village with a limited,freely available water supply and no government intervention in the allocation of water.In this case,each individual has an incentive to use water until their

A)private marginal benefit is zero.
B)private marginal cost is zero.
C)social marginal benefit is maximized.
D)social marginal cost is minimized.
E)private and social marginal costs are equal.

Question 47

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

Question 48

Common-property fishing grounds are

A)often underexploited because non-excludability means there is little investment in the resource.
B)always efficiently exploited because fishermen now understand the dangers of over-fishing.
C)often overexploited because individual fishermen have no incentive to leave fish for the ʺnextʺ fisherman.
D)often overexploited because fishing grounds are rivalrous and excludable.
E)often overexploited because fishermen are concerned with preserving fish stocks for future fishermen.

Question 49

An example of a rivalrous good is

A)toxic emissions from a factory smokestack.
B)an empty toll highway.
C)an uncrowded beach.
D)a visit to the dentist.
E)the weather forecast.

Question 50

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 the marginal cost of providing the water 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 their marginal benefit is zero.
E)allocated efficiently because users will tend to use the water as though it were a public good.

Question 51

Which of the following are characteristics of a common-property resource?

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

Question 52

In economics,the term ʺpublic goodʺ refers to a product

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

Question 53

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

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

Question 54

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

Question 55

Why might it be economically efficient to offer access to an uncongested art gallery or museum at a price of zero?

A)because they are non-rivalrous and non-excludable and therefore should be provided at a price of zero
B)because the marginal benefit received by the visitor is zero,and marginal benefits and marginal cost should be equal
C)because the marginal cost of providing access to one more visitor is zero,while the visitor has a positive marginal benefit
D)because it is good for society if more people visit art galleries and museums
E)because they are public goods,which would not be provided by the free market

Question 56

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

Question 57

Consider a remote village with a limited,freely available water supply and no government intervention in the allocation of water.In economics,the resulting outcome of a situation such as this is often referred to as

A)the Coase theorem.
B)the tragedy of the commons.
C)moral hazard.
D)adverse selection.
E)asymmetric information.

Question 58

An example of a common-property resource is

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

Question 59

If you consume some good,and by doing so you diminish other peopleʹs possible use of that good,we say that the good is

A)rivalrous.
B)excludable.
C)a common resource.
D)not productively efficient.
E)a public good.

Question 60

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 government subsidizes the beekeepers so as to fully internalize the externality,the equilibrium price of honey would be ________ and the allocatively efficient output would be ________.

A)3; 80
B)5; 100
C)7; 100
D)9; 60
E)11; 80

Question 61

An example of a public good is

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

Question 62

One reason that national defence is a classic example of a public good is that

A)all citizens want national defence.
B)society deems it to be too important to be provided by the private sector.
C)the benefits that accrue to one person do not diminish the benefits available to others.
D)military technology is too expensive for private firms to provide.
E)it would be immoral for private firms to provide this essential commodity.

Question 63

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

Question 64

Under what circumstances would it be efficient to charge a positive price for drivers to cross the Champlain Bridge in Montreal or the Lionʹs Gate Bridge in Vancouver?

A)when it is possible to exclude drivers from the bridge
B)when it is not possible to exclude drivers from the bridge
C)when the sum of marginal benefits to all drivers is positive
D)when the marginal private benefit to the last driver is greater than the marginal private cost to that driver
E)when congestion on the bridge means that the marginal cost of providing access to one more driver is positive

Question 65

It is inefficient for the government to charge a price for consuming public health information because

A)too much of the information will be produced.
B)the price cannot be set to cover all research costs.
C)no one will be willing to pay to use this information.
D)the cost of providing this information to an additional person is essentially zero.
E)the marginal costs of producing it exceed the marginal benefits of using it.

Question 66

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

Question 67

How might a government intervene in a market to prevent the overuse of a common -property resource,such as an ocean fishery?

A)subsidies to the consumers of fish
B)reducing the marginal social cost such that marginal social cost equals marginal social benefit,thereby establishing allocative efficiency
C)subsidies to the firms catching the fish
D)a system of licences and quotas for fishers
E)encouraging the use of larger,more efficient trawlers to reduce the marginal private cost to fishers

Question 68

Which of the following is the best description of a ʺfree riderʺ? Someone who

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

Question 69

One reason that national defence is a classic example of a public good is that

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

Question 70

The fact that it is difficult to prevent people from using public goods once they are produced,even if they have not paid,is known as

A)the easy-rider problem.
B)the over-consumption problem.
C)moral hazard.
D)the free-rider problem.
E)adverse selection.

Question 71

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 quantity of this public good to provide?

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

Question 72

Because of the free-rider problem,

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

Question 73

Which of the following statements about public goods is true?

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

Question 74

Which of the following is the best example of a public good?

A)a municipal swimming pool
B)a seat on an airplane flight
C)light from a lighthouse
D)a school bus
E)a publicly owned subway system

Question 75

Why are goods that are non-rivalrous and excludable (such as an uncrowded library or art gallery)often provided by the government?

A)Because when these goods are used beyond capacity,they would not be provided by private firms.
B)The marginal cost to society of providing access to one more user is zero,so it is allocatively efficient to provide this good at a price of zero.
C)Because the government can provide these goods with fewer resources,so it is productively efficient.
D)The marginal private benefit to the last user is greater than the marginal private cost.
E)The marginal benefit to society of providing access to one more user is zero,so it is allocatively efficient to provide this good at a price of zero.

Question 76

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

Question 77

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

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

Question 78

An efficient amount of a public good is unlikely to be produced in a free market because

A)there is no way to prevent a person who is not willing to pay for the good from receiving benefits from the good.
B)of the high cost of producing the public good.
C)social benefits exceed social costs.
D)of the existence of moral hazard.
E)of the existence of adverse selection.

Question 79

Private markets will always provide too few public goods because

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

Question 80

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

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