Deck 22: The Economic Case for and Against Government: Five Topics Considered

Question 1

Suppose that for Jim the marginal benefit (MB)of producing is $60 and that the marginal cost (MC)of producing is $10.  Suppose also that his marginal benefit of stealing is $50 and the marginal cost of stealing is $10.  Is Jim currently maximizing utility in terms of producing and stealing?  If not, should he produce more and steal less, or produce less and steal more to move toward utility maximization?

A)Yes, Jim is maximizing utility.
B)No, Jim is not maximizing utility.  Since the MB\MC ratio for producing is less than the MB\MC ratio for stealing, Jim should produce more and steal less.
C)No,  Jim is not maximizing utility.  Since the MB\MC ratio for producing is greater than the MB\MC ratio for stealing, Jim should produce more and steal less.
D)No,  Jim is not maximizing utility.  Since the MB\MC ratio for producing is greater than the MB\MC ratio for stealing, Jim should steal more and produce less.

Answer 1

No,  Jim is not maximizing utility.  Since the MB\MC ratio for producing is greater than the MB\MC ratio for stealing, Jim should produce more and steal less.

Question 2

Special interest groups are very unlikely to push for policies that increase the size of their slice of the economic pie if it means that the overall size of the economic pie will shrink.

Answer 2

False

Question 3

Government can overcome the free rider problem by collecting taxes and using the funds to provide individuals with nonexcludable public goods that they want to buy but the market cannot provide.

Answer 3

True

Question 4

Which of the following statements is true?

A)Government cannot remove individuals from a prisoner's dilemma setting and make them better off.
B)As long as government charges each individual a tax that is greater than the gain received by being removed from a prisoner's dilemma setting, then government makes that individual better off.
C)Government can remove individuals from a prisoner's dilemma setting by changing the payoff matrix.
D)Government can remove individuals from a prisoner's dilemma setting,, but only in a perfectly competitive market structure.

Question 5

In the case of a positive externality, in order to achieve efficiency the government must set the _________________ equal to the marginal ____________________.

A)tax; external costs
B)tax; external benefits
C)subsidy; external costs
D)subsidy; external benefits
E)subsidy; private costs

Question 6

Some people see the government as being more heavily involved in taking sides than in serving the common interest.

Question 7

In the case of a negative externality, in order to achieve efficiency the government must set the _________________ equal to the marginal ____________________.

A)tax; external costs
B)tax; external benefits
C)subsidy; external costs
D)subsidy; external benefits
E)tax; private costs

Question 8

Government always makes individuals better off when it removes them from a prisoner's dilemma setting.

Question 9

In the case of externalities, government can use taxes and subsidies to turn an inefficient outcome into an efficient outcome.

Question 10

In the case of a nonexcludable public good, the market will fail to produce the good because of the free rider problem.

Question 11

Suppose that for Alicia the marginal benefit (MB)of producing is $75 and that the marginal cost (MC)of producing is $5.  Suppose also that her marginal benefit of stealing is $85 and the marginal cost of stealing is $5.  Is Alicia currently maximizing utility in terms of producing and stealing?  If not, should she produce more and steal less, or produce less and steal more to move toward utility maximization?

A)Yes, Alicia is maximizing utility.
B)No, Alicia is not maximizing utility.  Since the MB\MC ratio for producing is less than the MB\MC ratio for stealing, Alicia should produce more and steal less.
C)No,  Alicia is not maximizing utility.  Since the MB\MC ratio for producing is greater than the MB\MC ratio for stealing, Alicia should produce more and steal less.
D)No,  Alicia is not maximizing utility.  Since the MB\MC ratio for producing is less than the MB\MC ratio for stealing, Alicia should steal more and produce less.

Question 12

Critics of government frequently assert that special interest groups favor transfer policies rather than economic growth policies.

Question 13

When a negative externality exists, _______________________ and thus _______________ intervention may be needed to achieve efficiency.

A)external costs are necessarily greater than private costs; government
B)social costs equal private costs; no government
C)social costs are less than private costs; government
D)social costs are greater than private costs; government

Question 14

Given that the demand for unskilled labor curve is downward-sloping, an unintended effect of raising the minimum wage is that some people who worked at the lower wage will lose their jobs at the higher wage.

Question 15

Involuntary transfers are the type of transfers used in the case against government.

Question 16

A divisive society is one in which members of society work together for the common good.

Question 17

Which of the following statements is false ?

A)In the case of a negative externality, the market equilibrium is inefficient.
B)In the case of a negative externality, when a tax is set equal to the marginal external costs (MEC)efficiency can be achieved.
C)In the case of a negative externality, when a tax is set that is greater than the marginal external costs (MEC)inefficiency will result.
D)In the case of a positive externality, when a tax is set equal to the marginal external benefits (MEB)efficiency can be achieved.

Question 18

It is possible for the government to remove individuals from a prisoner's dilemma setting and make them better off.

Question 19

If the government grants tax credits to first-time homebuyers, the supply of houses would increase and the price of housing would fall.

Question 20

When a positive externality exists, _______________________ and thus _______________ intervention may be needed to achieve efficiency.

A)external costs are necessarily greater than private costs; government
B)social costs equal private costs; no government
C)social costs are less than private costs; government
D)social costs are greater than private costs; government

Question 21

Which of the following statements is false ?

A)One of the intended effects of the health-care reform bills passed in March 2010 was for some people who had health insurance before the reform to choose to become uninsured after health-care reform.
B)One of the provisions of the health-care reform bills passed in March 2010 is that individuals will be fined for not buying insurance.
C)Among the provisions in the health-care reform bills passed in March 2010 is that insurance companies are prohibited from turning down a person with a preexisting disease.
D)One of the objectives of the health-care reform bills passed in March 2010 was to bring more people into the pool of insured persons so that insurance policies would become cheaper.

Question 22

In the case of a negative externality, the government can use a ________________ to turn an inefficient outcome into an efficient one.  In the case of a positive externality, the government can use a ________________ to turn an inefficient outcome into an efficient one.

A)tax; subsidy
B)subsidy; tax
C)tax; tax
D)subsidy; subsidy

Question 23

Which of the following statements is true?

A)Special interest groups are more likely to push for policies that increase the size of the economic pie than to increase their slice of the pie.
B)Special interest groups are likely to push for policies that decrease the size of their slice of the economic pie even if it means that the overall size of the economic pie will shrink.
C)Special interest groups are more likely to favor policies that increase the size of their slice of the economic pie than policies that favor economic growth.
D)Special interest groups are more likely to push for policies that decrease the size of the economic pie than to increase their slice of the pie.

Question 24

One of the objectives of the health-care reform bills passed in March 2010 was to bring _____________ people into the pool of insured persons so that insurance policies would become ________________.  However, provisions in the bill are likely to make the average cost of an insurance policy _____________ than it would have been without reform.

A)fewer; cheaper; lower
B)fewer; more expensive; lower
C)more; cheaper; lower
D)more; cheaper; higher

Question 25

Which of the following statements is false ?

A)Government can remove individuals from a prisoner's dilemma setting and make them better off.
B)In a prisoner's dilemma setting, it is impossible for the government to define and enforce property rights that the individuals involved in the setting want to have defined and enforced.
C)As long as government charges each individual in a prisoner's dilemma setting a tax that is less than the gain received by being removed from the setting, then government has made the individuals better off.
D)Depending upon the amount of the tax charged to each individual in a prisoner's dilemma setting, the government can make both persons better off, both persons worse off, or one person better off and the other person worse off.

Question 26

A negative externality exists and government wants to impose a tax in order to bring about an efficient outcome. To accomplish its objective, government must set the tax equal to marginal

A)private cost.
B)social benefit.
C)external cost.
D)social cost.
E)external benefit.

Question 27

An unintended effect of a new tax placed on the producers of good A may likely include

A)a lower price paid by the consumers of good A.
B)more consumers' surplus for the buyers of good A.
C)fewer workers employed in the production of good A.
D)more producers' surplus for the producers of good A.

Question 28

In the prisoner's dilemma setting for stealing and producing, both participants end up __________, which turns out to be ________________________ stolen.  The government _________ make both participants better off by changing the payoff matrix.

A)stealing; better for them than if they had both not; can
B)stealing; worse for them than if they had both not; can
C)not stealing; better for them than if they had both; cannot
D)not stealing; worse for them than if they had both; cannot

Question 29

Special interest group X receives a 1\150^th slice of the economic pie.  Its net benefits from an economic growth policy are $7,000, which are the same as its net benefits from a transfer policy.  What is the change in the size of the economic pie (Real GDP)that is required to bring about this result?

A)$1,050,000
B)$46.67
C)$150,000
D)$2,500,000

Question 30

When a good is nonexcludable, then individuals

A)will purchase the good for more than what it cost to produce the good.
B)cannot obtain the benefits of the good without paying for it.
C)have an incentive to become free riders.
D)will purchase more than the optimum amount.

Question 31

Which of the following is usually discussed in the case against government?

A)positive externalities
B)the unintended effects of governments actions
C)removal from the prisoner's dilemma
D)negative externalities

Question 32

A positive externality exists and government wants to apply a per-unit subsidy in order to bring about an efficient outcome. Under what condition will the solution (the subsidy)be worse than the problem (the market failure)?

A)Under the condition that the subsidy is greater than the marginal external benefit (associated with the positive externality).
B)Under the condition that the post-subsidy output is not farther away from the efficient level of output than the pre-subsidy output is from the efficient level of output.
C)Under the condition that the post-subsidy output is farther away from the efficient level of output than the pre-subsidy output is from the efficient level of output.
D)Under the condition that the subsidy is less than the marginal external benefit (associated with the positive externality).

Question 33

A positive externality exists and government wants to impose a subsidy in order to bring about an efficient outcome. To accomplish its objective, government must set the subsidy equal to marginal

A)private cost.
B)social benefit.
C)external cost.
D)social cost.
E)external benefit.

Question 34

A tax credit given to first-time home buyers would result in a _____________ shift in the ______________ curve for housing, which would lead to the unintended result of a(n)_____________ in the price of housing.

A)leftward; supply; increase
B)leftward; demand; decrease
C)rightward; supply; decrease
D)rightward; demand; increase

Question 35

A consequence of a negative externality is that social costs __________ private costs, and the efficient level of output __________.

A)equal; does not require any type of government intervention
B)are less than; requires the government to create a subsidy
C)are greater than; requires the government to impose a tax
D)are greater than; requires the government to create a subsidy
E)are less than; requires the government to impose a tax

Question 36

In the case of nonexcludable goods, economists contend that the market ___________ produce these goods because of the ________________________.

A)will; free rider problem
B)will not; law of diminishing marginal utility
C)will not; law of diminishing marginal returns
D)will not; free rider problem.

Question 37

When the government imposes a tariff on imported goods, it _____________ prices for domestic consumers, ________________ consumers' surplus and _________________ the producers' surplus for domestic producers.

A)raises; lowers; raises
B)lowers; raises; raises
C)lowers; raises; lowers
D)raises; lowers; lowers

Question 38

Which of the following situations is not  used as a justification for government?

A)negative externalities
B)removal from the prisoner's dilemma
C)nonexcludable goods
D)positive externalities
E)free markets encourage innovation

Question 39

Special interest group Z receives a 1\200^th slice of the economic pie.  Its net benefit from both an economic growth policy and a transfer policy is $30,000.  How much does the size of the economic pie (Real GDP)need to grow before group Z is indifferent between the two policies?

A)$150
B)$600,000
C)$600,000,000
D)$6,000,000

Question 40

Most economists believe that the market __________ produce nonexcludable public goods because of the __________.

A)will;  monetary incentive they have to produce them
B)will not; externality problem
C)will not; free rider problem
D)will;  market shortage that often accompanies the production of public goods.

Question 41

Situation 37-2 Dan and Ann live in the same community and both can participate in two activities, producing and stealing.
Refer to Situation 37-2.  Both Dan and Ann realize that they are better off producing and not stealing from each other than producing and stealing from each other.  They agree not to steal from each other.  There is no enforcer of their agreement to not steal.  It is likely that

A)Dan and Ann are in a prisoner's dilemma setting.
B)Dan is in a prisoner's dilemma setting but Ann is not.
C)Ann is in a prisoner's dilemma setting but Dan is not.
D)neither Dan nor Ann is in a prisoner's dilemma setting.

Question 42

In the prisoner's dilemma setting for producing and stealing, a tax imposed on participants could end up changing the payoff matrix so that

A)one participant is better off, and one participant is worse off.
B)both participants are worse off.
C)both participants are better off.
D)any of the outcomes stated here are possible.

Question 43

The essence of a prisoner's dilemma setting is that if both person A and person B do what is best for each of them,

A)they end up in a position that is "the best" for each of them.
B)they end up in a position that is "the worst" for each of them.
C)one ends up in a position that is "the best" for him and the other ends in a position that is "the worst" for him.
D)they end up in a position from which each would prefer to move away.

Question 44

Exhibit 37-1
Refer to Exhibit 37-1, where the higher the number, the better the position for the person to whom the number is connected.  Jaden and Karen are currently in box 4, each receiving 10.  they would like to move to box  1, where each receives 12.  Without someone to ________________ their agreement, moving from box 4 is ______________________.

A)enforce; likely
B)enforce; unlikely
C)break; unlikely
D)break; likely
E)There is not enough information to answer the question.

Question 45

In a divisive society the members of groups within the society see themselves as

A)working in harmony with other groups in the society.
B)equal to other groups within the society.
C)pitted against other groups in the society.
D)working in harmony with most groups in society, but not in a few groups in society.

Question 46

Situation 37-2 Dan and Ann live in the same community and both can participate in two activities, producing and stealing.
Refer to Situation 37-2.  If Dan's MB\MC ratio for producing is currently greater than his MB\MC ratio for stealing, then he will

A)steal more and produce less.
B)steal less and produce less.
C)produce more and steal more.
D)produce more and steal less.

Question 47

If government removes two people from a prisoner's dilemma setting (and, in the process, requires that the two persons pay taxes for the service that government provides), it  holds that on net

A)each of the two persons is better off.
B)each of the two persons is worse off.
C)one person is better off and the other person is worse off.
D)any of the outcomes noted here is possible.

Question 48

Which of the following statements is false ?

A)Government can remove individuals from a prisoner's dilemma setting and make both participants better off.
B)Government can define and enforce the property rights that individuals actually want defined and enforced.
C)Individuals in a prisoner's dilemma setting may want to get out of the prisoner's dilemma setting.
D)Individuals in a prisoner's dilemma setting will definitely not want to get out of the prisoner's dilemma setting.

Question 49

A divisive society is a nonexcludable public _____________ because it comes with ____________.

A)good; utility
B)bad; disutility
C)bad; utility
D)good; disutility

Question 50

Consider a setting in which there is a negative externality, but no positive externality.  The market outcome is __________________; government can bring about the ___________________ outcome if it sets a tax equal to the __________________.

A)efficient; inefficient; MSC
B)efficient; inefficient; MEC
C)inefficient; efficient; MEC
D)inefficient; efficient; MPC
E)inefficient; efficient; MSB

Question 51

Special interest group K receives a 1\100^th slice of the economic pie.  Its net benefit from either an economic growth policy or a transfer policy is $200,000.  In order for group K to be indifferent between the two policies, the economic growth policy would have to make the size of the economic pie (Real GDP)grow by  _________________.  This type of analysis is used to show that special interest groups tend to press government for ______________ instead of ________________.

A)$20,000,000; economic growth; transfers
B)$2,000,000; transfers; economic growth
C)$20,000,000; transfers; economic growth
D)$2,000,000; economic growth; transfers

Question 52

Special interest group Q receives a 1\10,000^th slice of the economic pie.  Its net benefit from either an economic growth policy or a transfer policy is $50,000.  In order for group Q to be indifferent between the two policies, the economic growth policy would have to make the size of the economic pie (Real GDP)grow by  _________________.  This type of analysis is used to show that special interest groups tend press government for ______________ instead of ________________.

A)$50,000,000; economic growth; transfers
B)$500,000; transfers; economic growth
C)$500,000,000; transfers; economic growth
D)$5,000,000; transfers; economic growth

Question 53

Consider a setting in which there is a positive externality, but no negative externality.  The market outcome is __________________; government can bring about the ___________________ outcome if it sets a subsidy equal to the __________________.

A)inefficient; efficient; MEB
B)inefficient; efficient; MEC
C)efficient; inefficient; MPC
D)inefficient; efficient; MPB
E)inefficient; efficient; MSB

Question 54

Situation 37-2 Dan and Ann live in the same community and both can participate in two activities, producing and stealing.
Refer to Situation 37-2.   Ann spends 8 hours of each day producing and 1 hour of each day stealing.  It is probably the case for her that

A)at some point the MB\MC ratio for producing fell below the MB\MC ratio for stealing.
B)her MB\MC ratio for producing was always greater than her MB\MC ratio for stealing.
C)her MB\MC ratio for producing never changed, no matter how much or how little she produced.
D)her MB\MC ratio for stealing never changed, no matter how much or how little she stole.
E)There is not enough information to answer the question.

Question 55

Which economist said, "This focus on distribution makes the significance of distributional issues (transfer issues)in political life relatively greater and the significance of widespread common interest in political life relatively smaller."?

A)John Maynard Keynes
B)Milton Friedman
C)David Friedman
D)Mancur Olson
E)David Ricardo

Question 56

Exhibit 37-1
Refer to Exhibit 37-1, where the higher the number, the better the position for the person to whom the number is connected.  Jaden and Karen have entered into an agreement and are currently in box 1.  There is no enforcer to their agreement.  Jaden and Karen are likely to

A)remain in box 1.
B)move to box 2, because this box is better for Jaden.
C)move to box 3, because this box is better for Karen.
D)move to box 4.
E)There is not enough information to answer the question.

Question 57

The strongest case for government with respect to a negative externality is that government needs to set the

A)subsidy equal to the marginal private benefits.
B)tax equal to the marginal external costs plus $1.
C)tax slightly below the marginal external costs.
D)tax equal to the marginal external costs.
E)subsidy equal to the marginal social benefits.

Question 58

The government can _______________ change an inefficient market outcome (in the case where there is a negative externality)into an efficient outcome by imposing a tax on the activity that generates the negative externality.

A)in almost all situations
B)possibly
C)not
D)in all situations

Question 59

Consider a setting in which there is a negative externality, but no positive externality.  It follows that

A)MSB > MPB.
B)the market outcome is efficient.
C)MSC > MPC
D)MPC > MSC

Question 60

In the case of a negative externality,

A)marginal external costs are greater than marginal private costs.
B)marginal external costs are less than marginal private costs.
C)marginal external benefits are greater than marginal private benefits.
D)marginal external benefits are equal to marginal private costs.

Question 61

To say that government sometimes functions as a "transfer mechanism," means that government sometimes

A)ends up transferring goods to individuals in return for taxes paid.
B)ends up transferring negative externalities into positive externalities.
C)ends up taking from group X to give to group Y.
D)transfers taxes into subsidies.

Question 62

Government provides a nonexcludable public good that no one wants.  This situation is most closely related with:

A)government solving a market failure.
B)government failure.
C)market failure.
D)the market solving a government failure.

Question 63

A special interest group has a good chance of redistributing (transferring)income from others to itself if the

A)costs of the transfer are spread over a very large number of people.
B)costs of the transfer are spread over a very small number of people.
C)costs of the transfer are spread over the same number of people that comprise the special interest group.
D)the number of members in the special interest group is greater than 100.

Question 64

Person A argues that government is unnecessary and often does more harm than good.  Economist A disagrees.  What does economist A --- who believes that there is a legitimate case that can be made for government --- most likely say to support his position?

A)Government almost always does more good than harm.
B)Without government, life would be anarchy.
C)There are some things that individuals want done that can't get done without government.
D)There are better people going into government work than are going into the private sector.

Question 65

Economist A believes that the case for government is a strong one, but she doesn't always say, when it comes to negative externalities, that government can turn an inefficient market outcome into an efficient outcome.  Which statement is economist A most likely to make?

A)If the tax placed on the activity that generates the negative externality is too large, we are not likely too move from inefficiency to efficiency.
B)If the subsidy placed on the activity that generates the negative externality is too small, we are not likely to move from inefficiency to efficiency.
C)If there is a free rider problem, then government cannot solve the problem of negative externalities.
D)There is not enough information provided to answer this question.

Question 66

Economist B thinks that it is important to identify the condition(s)under which the case for government is strongest.  With respect to the provision of nonexcludable public goods, she says

A)people must pay taxes to pay for the nonexcludable public good.
B)firms must pay taxes to pay for the nonexcludable public good.
C)people must actually want the nonexcludable public good that the government provides.
D)people must express their desire for the nonexcludable public good by voting for it.

Question 67

Suppose health-care reform X makes it unlawful for insurance companies to deny insurance to persons with a preexisting disease.  One unintended effect of this reform is that some people

A)will buy more health insurance than they would have without reform X.
B)may wait until they have a particular disease before they buy health insurance.
C)will try to work longer hours, to earn more income, to pay for increasing health insurance premiums.
D)will be less likely to purchase health insurance than they would without reform X.

Question 68

The answer is, "Because of the free rider problem."  The question is:

A)Why can't the government produce nonexcludable public goods?
B)Why can't the market produce nonexcludable public goods?
C)Why do negative externalities exist?
D)Why do positive externalities exist?

Question 69

Which of the following statements is false ?

A)A government with the power to tax can solve the free rider problem.
B)A government with the power to tax will set a tax greater than the MEC when trying to change the market outcome into the efficient outcome.
C)A government with the power to subsidize can set a subsidy greater than the MEB when trying to change the market outcome into the efficient outcome.
D)Government can remove individuals from a prisoner's dilemma setting by changing the payoffs in the payoff matrix.
E)A government with the power to tax should set a tax equal to the MEC when trying to change the market outcome into the efficient outcome.

Question 70

Suppose health-care reform Y makes it unlawful for insurance companies to deny insurance to persons with a preexisting disease and sets a fine for those people who do not buy insurance.  It follows that if the fine is

A)larger than the benefits derived from not buying insurance right away, then people will not buy the insurance and pay the fine.
B)smaller than the benefits derived from not buying the insurance right away, then people will not buy the insurance and pay the fine.
C)larger than the benefits derived from not buying insurance right away, then people will buy the insurance right away and not pay the fine.
D)There is not enough information provided to answer this question.

Question 71

Tiffany gives $50 to Jeremy for his birthday.  This is an example of a(n)

A)involuntary transfer.
B)involuntary-voluntary transfer.
C)voluntary transfer.
D)government transfer payment.

Question 72

List and describe the three different types of transfers discussed in this chapter.  Give a hypothetical example of each to help support your answer.

Question 73

Special interest group A receives a 1\10,000^th slice of the economic pie (Real GDP).  It is seeking a transfer of $1,000.  For group A to be indifferent between a transfer policy and an economic growth policy, economic growth must be ________________ times larger than the _________________.

A)1,000; transfer
B)10,000; transfer
C)100; transfer
D)10,000; transfer minus $1,000
E)1,000; transfer; minus $10,000

Question 74

Why might special interest groups be more likely to push for transfers instead of economic growth?  The answer is because it usually takes a much __________________ percentage _______________ in growth to equal what they can get from the transfer.

A)smaller; decrease
B)larger; increase
C)larger; decrease
D)smaller; increase

Question 75

Individuals want nonexcludable public good X, but the market does not provide it because of the free rider problem.  Government overcomes the free rider problem by ______________ individuals and then either producing good X itself or paying someone to produce it.

A)forcing individuals to work longer hours
B)taxing
C)surveying
D)subsidizing

Question 76

"I'm not going to pay for the good if, once produced, the good cannot be denied to anyone."  This statement is most relevant to

A)negative externalities.
B)positive externalities
C)private goods.
D)nonexcludable public goods.
E)the issue of rivalry versus nonrivalry in consumption.

Question 77

The federal government and many state governments gave tax credits to first-time home buyers in 2009 and 2010.  An effect of these tax credits was to

A)make the price of houses higher than they would have been without the tax credit.
B)lower house prices.
C)shift the demand curve for houses leftward.
D)shift the supply curve for houses leftward.

Question 78

Government provides a nonexcludable public good that the public demands and can't seem to acquire through the market.  This is government

A)acting as a transfer mechanism.
B)being non-productive.
C)engaging in rent-seeking activities.
D)being productive.

Question 79

A nonexcludable public good is

A)rivalrous in consumption and nonexcludable
B)nonrivalrous in consumption and excludable
C)nonrivalrous in consumption and nonexcludable
D)rivalrous in consumption and excludable

Question 80

A community of 100 persons wants to redistribute (transfer)some income from themselves to members of group A.  So far, they don't seem to be able to do what they say they want to do.  This is most likely because each member of the community of 100 persons sees his contribution as __________________ relative to the total (of contributions)and therefore chooses to be a __________________.

A)large; rent-seeker
B)small; rent-seeker
C)small; free rider
D)large; free rider