Deck 16: Governments Role in Economic Efficiency

Question 1

Which of the following is not an example of a Pareto improvement?

A)You buy a dozen oranges at a produce stand.
B)Two children trade baseball cards.
C)Your sister buys a new car.
D)Two adults trade cars.
E)A man is robbed at gunpoint.

Answer 1

A man is robbed at gunpoint.

Question 2

The rights of a co-owner to a share of a firm's profits are

A)protected under tort law
B)protected under contract law
C)not protected under any form of law
D)protected under antitrust law
E)less valuable than the costs of pursuing action against the company

Answer 2

protected under contract law

Question 3

If a widow is harmed by mail fraud,

A)she may be compensated under property law
B)her legal action will be in the category of antitrust law
C)she may be compensated under tort law
D)this is a potential Pareto improvement
E)an economic inefficiency has arisen

Answer 3

an economic inefficiency has arisen

Question 4

Price-fixing agreements among competing firms are a violation of the Clayton Antitrust Act.

Question 5

Property law

A)helps to ensure that only voluntary exchanges occur
B)tends to decrease the level of economic efficiency
C)helps define ownership rights to resources
D)establishes property taxes
E)helps to distribute government property

Question 6

Which of the following helps encourage specialization?

A)property law
B)criminal law
C)contract law
D)tort law
E)constitutional law

Question 7

Involuntary exchanges,such as robbery,

A)represent potential Pareto improvements
B)are positive externalities
C)are not Pareto improvements
D)are antitrust violations
E)may be Pareto improvements

Question 8

Antitrust law

A)protects consumers from fraud or similar harm
B)helps define resource ownership
C)is designed to enforce contracts
D)helps prevent firms from limiting competition
E)cannot be used to increase economic efficiency

Question 9

Price-fixing agreements among competing firms are a violation of the Sherman Antitrust Act.

Question 10

Economies with poorly defined property rights are often inefficient because

A)individuals spend time trying to protect their resources
B)there are no voluntary exchanges
C)all exchanges are voluntary
D)there are no side payments
E)of the absence of free riders

Question 11

Disputes over resource ownership are the domain of

A)property law
B)antitrust law
C)tort law
D)contract law
E)constitutional law

Question 12

An economic benefit of contracts is that they

A)protect property rights
B)encourage involuntary exchanges
C)reduce the number of possible Pareto improvements
D)encourage market concentration
E)encourage specialization

Question 13

Output per worker tends to be higher in countries with

A)low-quality infrastructures
B)high-quality infrastructures
C)perfectly competitive labor markets
D)low taxes
E)free riders

Question 14

Contracts reduce the level of specialization in an economy.

Question 15

One way in which antitrust law fosters economic efficiency is by

A)defining property rights for firms
B)encouraging voluntary trade
C)prohibiting firms from colluding to raise prices
D)enforcing contracts between firms
E)encouraging mergers that increase market power

Question 16

An economic function of criminal law is to

A)reduce opportunities for Pareto improvements
B)reduce the number of involuntary exchanges
C)define property rights
D)increase prices in the economy
E)protect involuntary exchanges in the economy

Question 17

Robbery reduces economic efficiency by

A)creating voluntary exchanges
B)decreasing government spending
C)increasing unemployment
D)creating involuntary exchanges
E)lowering the number of potential Pareto improvements

Question 18

The Sherman Antitrust Act prohibits price fixing by competitors,monopolization of a market,and attempts to monopolize a market.

Question 19

Contracts tend to increase the level of specialization in an economy.

Question 20

Individuals in countries with __________ often spend considerable time trying to secure resources from others.

A)free riders
B)no criminal law
C)poorly defined property rights
D)side payments
E)Pareto efficiency

Question 21

By making involuntary exchanges illegal,

A)criminal law eliminates such exchanges
B)tort law contributes to economic efficiency
C)criminal law channels energies into activities that benefit everyone
D)criminal law reduces producer surplus while increasing consumer surplus
E)antitrust law contributes to monopolization of markets

Question 22

Anti-trust law

A)has been used to create monopolies
B)has been used to eliminate patents and copyrights
C)has been used to maximize producer surplus
D)should not be used to break up a monopoly that results from network externalities
E)has been used to break up monopolies

Question 23

A firm is said to have monopoly power

A)it if produces the quantity at which MR = MC.
B)if it produces the quantity at which P = MC.
C)when it can influence the price of its product
D)if it tries to monopolize a market
E)if it is the only firm that hires a particular kind of labor

Question 24

Using anti-trust law to break up a monopoly

A)will increase economic efficiency
B)makes sense if the market would function well under competitive conditions
C)makes sense if the monopoly resulted from network externalities
D)makes sense if the monopoly resulted from a patent or copyright
E)would increase producer surplus

Question 25

If firms make agreements that reduce the amount of competition in a market,

A)the market price usually falls
B)they would face penalties under antitrust legislation
C)mergers will result
D)there must be diseconomies of scale in the industry
E)they would face penalties under contract law

Question 26

Which of the following is an example of a regulatory action?

A)Drivers who exceed the speed limit will pay a fine if caught.
B)Automobile manufacturers are required to include built-in infant seats.
C)Two firms receive $100,000 fines for engaging in a price-fixing agreement.
D)A junk mail solicitor is taken to jail for mail fraud.
E)The tobacco industry is required to pay for the hospital bills of a lifelong smoker who develops cancer.

Question 27

If a monopoly arises as a natural monopoly

A)using anti-trust law to break it up is a poor remedy
B)anti-trust law should be used to break it up
C)that is most likely due to a patent or copyright
D)it will evolve into a perfectly competitive market in the long run
E)it should be encouraged,because it is "natural"

Question 28

If all unwelcome or harmful activities were eliminated,

A)the benefits from eliminating these activities would exceed the cost of eliminating them
B)there would be no remaining potential Pareto improvements
C)society would be more efficient
D)society would be less efficient
E)the result would be Pareto efficient

Question 29

Market failure occurs when

A)all Pareto improvements are undertaken
B)refusal to make a side payment reduces Pareto efficiency
C)the economy operates above the production possibilities frontier
D)markets are perfectly competitive
E)some Pareto improvements are not made

Question 30

Under Section 2 of the Sherman Act,

A)firms cannot act in ways that increase prices
B)contracts between parties are deemed binding
C)firms cannot operate in perfectly competitive markets
D)firms that earn short-run profits face penalties
E)a firm cannot attempt to monopolize an industry

Question 31

If property rights are poorly defined

A)no one can really "own" property
B)time and energy are wasted in disputes about ownership
C)most exchanges are involuntary exchanges
D)consumer surplus cannot exist
E)producer surplus cannot exist

Question 32

A contract

A)is an example of a side payment
B)eliminates the possibility of simultaneous exchange
C)is worthless unless it refers to a perfectly competitive market
D)often requires one party to do something first,and the other party to do something later
E)can be enforced through the application of criminal law

Question 33

Monopoly is a prime example of a market failure that leaves potential Pareto improvements unexploited.This is demonstrated by the fact that

A)monopolies produce public goods rather than private goods
B)monopolies substitute excludability for rivalry
C)monopolies substitute rivalry for excludability
D)the price in a monopolized market is less than the marginal cost of production
E)the price in a monopolized market exceeds the marginal cost of production

Question 34

Government can play a crucial role in promoting economic efficiency by

A)taxing income
B)providing physical and institutional infrastructures
C)establishing price ceilings to help certain buyers
D)establishing price floors to help certain sellers
E)creating barriers to market entry whenever there is a threat of excessive competition

Question 35

A monopoly's

A)supply curve is the same as its marginal cost curve
B)supply curve is the same as its marginal revenue curve
C)marginal cost curve is downward sloping
D)demand curve is horizontal
E)marginal revenue curve is downward sloping

Question 36

Single-price monopoly is inefficient because

A)side payments are not made
B)a monopoly firm charges a price that exceeds its marginal cost
C)a monopoly firm charges a price equal to its marginal cost
D)a monopoly firm produces the quantity at which P = MR = MC.
E)a monopoly firm produces the quantity at which MR = MC.

Question 37

A market failure occurs when

A)a market equilibrium is economically inefficient
B)a market equilibrium is economically efficient
C)perfect competition maximizes the sum of consumer and producer surplus
D)crime is not completely eliminated
E)involuntary exchanges are not completely eliminated

Question 38

A monopolist that price discriminates

A)produces too much output to be efficient
B)produces too little output to be efficient
C)produces the efficient level of output
D)charges a price equal to its marginal cost
E)faces an upward sloping demand curve

Question 39

In a single-price monopoly market

A)total benefit (the sum of consumer and producer surplus)is as large as it can possibly be
B)price and output are higher than they would be in an otherwise similar perfectly competitive market
C)price and output are lower than they would be in an otherwise similar perfectly competitive market
D)the quantity produced is artificially low,thereby creating an inefficiency
E)the price charged is artificially low,thereby creating an inefficiency

Question 40

Firms produce too little output

A)when tort laws are not enforced
B)in perfectly competitive markets
C)to achieve economic efficiency
D)when they have monopoly power
E)when there are no remaining Pareto improvements

Question 41

Left to itself,a natural monopoly will produce

A)nothing
B)the efficient level of output
C)the quantity at which marginal cost equals marginal revenue
D)the quantity at which the marginal cost and demand curves intersect
E)the quantity at which the long-run average total cost and demand curves intersect

Question 42

Pollution is a form of market failure called a negative externality.

Question 43

Suppose that Pat has the legal right to fly an extremely noisy airplane over Chris's apartment and that he values that right at $1,000 per year.Chris would be willing to pay $1,200 per year to avoid the noise.In that case

A)Pat will be required to eliminate the overflight
B)Chris will move to a new apartment
C)Pat and Chris have a powerful incentive to agree to eliminate the overflight because both would benefit from it
D)some governmental agency will step in to require Pat to choose a different flight pattern
E)some governmental agency will require Chris to move to a new apartment

Question 44

A natural monopoly,left to itself,

A)will take over other industries
B)will produce the quantity that minimizes long-run average total cost
C)will produce the quantity that minimizes marginal cost
D)will produce an inefficient level of output
E)will charge an inefficiently low price

Question 45

Suppose that Pat has the legal right to fly an extremely noisy airplane over Chris's apartment and that he values that right at $1,000 per year.Chris would be willing to pay $800 per year to avoid the noise.In this case,

A)Pat will be required to eliminate the overflight
B)Chris will move to a new apartment
C)Pat and Chris have a powerful incentive to eliminate the overflight because both would benefit from it
D)some governmental agency will step in to require Pat to choose a different flight pattern
E)there is no basis for an agreement to eliminate the overflight

Question 46

One way that natural monopolies are typically regulated is

A)by setting a price that makes economic profit zero.
B)by forcing the firm to set price equal to marginal cost
C)by setting a price that gives owners a "fair rate of return"
D)by forcing the firm to set price equal to minimum average total cost
E)by setting a price that maximizes the firm's economic profit

Question 47

A market failure in the form of an externality arises when

A)production costs are included in the price of a good
B)not all costs and benefits are included in the price of a good
C)the benefits of consuming a good exceed the costs
D)a market fails to achieve equilibrium
E)equilibrium price is unstable

Question 48

An externality is defined as

A)the revenue generated by a firm in the external market
B)a byproduct of a good or activity that affects someone not immediately involved in the transaction
C)an additional cost of consumption that is borne by a third party
D)a cost or benefit arising from price changes
E)the value of a good or service to a consumer

Question 49

Using average cost pricing,regulators of a natural monopoly

A)force the firm's economic profit to zero
B)maximize the firm's economic profit
C)achieve Pareto efficiency
D)set price equal to cost where the LRATC curve crosses the demand curve
E)set price equal to marginal cost where the MC curve crosses the demand curve

Question 50

The noise inflicted on bystanders by users of chain saws,lawn mowers,and motorcycles is an example of

A)a positive externality
B)a public good
C)nonexcludability
D)marginal private benefit exceeding marginal social benefit
E)marginal social cost and the free-rider problem

Question 51

If consumption of a good by one person imposes costs on a party other than the producer,

A)the consumption creates a positive externality
B)the good is a public good
C)the consumption creates a negative externality
D)too little of the good is produced from society's point of view
E)the market will correct the problem if left alone

Question 52

If an externality is created by a single person or firm,and affects only a single person or firm,then

A)it is referred to as a single externality
B)the inefficiency caused by that externality may be resolved by those two parties
C)the externality takes the form of a side payment
D)Pareto efficiency is guaranteed
E)fairness dictates that the externality be removed

Question 53

A natural monopoly

A)typically arises because of a patent or copyright
B)is a firm that,due to economies of scale,can serve a market at lower average cost than two or more firm could
C)is a Pareto improvement as compared to a perfectly competitive market
D)enjoys diseconomies of scale,so average total cost falls as more output is produced
E)enjoys economies of scale,so average total cost rises as more output is produced

Question 54

One reason why it is difficult to regulate a natural monopoly is

A)the lack of relevant economic theory
B)determining what price the firm is actually charging its customers
C)determining the appropriate side payment
D)an information problem - the monopoly's managers have an incentive to overstate costs
E)an information problem - the monopoly's managers have an incentive to overstate revenues

Question 55

When regulating a natural monopoly,government officials

A)can set an efficient price,but the firm will suffer a loss
B)can arrange a Pareto improvement by leaving the firm alone
C)should force the firm to set a price equal to minimum marginal cost
D)should force the firm to set a price equal to minimum long-run average total cost
E)will increase efficiency if they force the firm to produce where MR = MC.

Question 56

One problem with average cost pricing for a natural monopoly is that

A)it requires a side payment
B)maximizes the firm's revenue
C)makes the firm's total cost equal to zero
D)maximizes the firm's profit
E)it provides no incentive for the firm to economize on capital

Question 57

Suppose that production of a good creates a negative externality.An excise tax equivalent to the difference between the marginal social cost and the marginal private cost of production can correct the inefficiency.

Question 58

When breaking up a natural monopoly is not advisable

A)it should be left alone
B)government regulation should be used to set marginal revenue equal to marginal cost
C)government regulation should be used to set price equal to marginal revenue
D)government regulation should be used to set marginal cost equal to long-run average total cost.
E)public ownership and operation may improve efficiency

Question 59

Talking loudly in a library creates

A)a market for noise
B)a positive externality
C)a side payment
D)a public good
E)a negative externality

Question 60

Pollution is a form of market failure called a public externality.

Question 61

Because of the free rider problem

A)private solutions to externality problems are often needed
B)side payments are needed in order to achieve Pareto improvements
C)governmental solutions to externality problems are often needed
D)side payments are needed in order to solve externality problems
E)private solutions to externality problems are common

Question 62

Suppose that production of the product in Figure 14-2 imposes a cost on society of $7.00 per unit.If the free market equilibrium is at the intersection of demand curve D and supply curve S,what should the government do to internalize the externality?

A)impose a tax of $2.50 per unit
B)reduce the market output level by approximately 39 units
C)impose a tax of $350 per period
D)impose a tax of $7.00 per unit
E)impose a tax of $175 per period

Question 63

In the presence of a negative externality

A)the market solution is efficient,but the market price is too high
B)the market price is efficient,but the corresponding quantity is inefficient
C)the market solution results in too little output being produced
D)the efficient outcome is determined where the marginal social cost and market demand curves intersect
E)the efficient outcome is determined where the marginal cost and market supply curves intersect

Question 64

Production involving a positive externality is inefficient.

Question 65

If a firm is not forced to take account of a negative externality it creates,it will produce the quantity at which

A)the marginal cost of production equals the marginal private benefit
B)the marginal cost of production equals the marginal social benefit
C)the marginal social cost of production the equals marginal private benefit
D)the marginal social cost of production equals the marginal social benefit
E)price equals marginal social benefit

Question 66

The marginal social cost (MSC) curve

A) lies above the market demand curve
B) lies below the market supply curve
C) is perfectly elastic at the market price
D) is perfectly inelastic
E) indicates the total cost of production, when all costs are considered

Question 67

A typical market supply curve

A)is identical to the firm's marginal cost curve
B)does not reflect any external cost borne by third parties
C)is identical to the firm's marginal revenue curve
D)reflects external benefits enjoyed by third parties
E)is perfectly inelastic

Question 68

If production creates a negative externality,social welfare can be increased through

A)antitrust law
B)subsidization
C)taxation
D)free market policies
E)allocative efficiency

Question 69

According to the Coase theorem,

A)government intervention is necessary in order to solve an externality problem
B)an externality is a form of market failure
C)under certain conditions,the private market will solve externality problems efficiently
D)the private market will usually solve externality problems,except when side payments are necessary
E)negative externalities are less efficient that positive externalities

Question 70

The free rider problem occurs when

A)individual gainers will not contribute the side payment needed for an efficient outcome
B)those harmed will not contribute the side payment needed for an efficient outcome
C)side payments are not necessary for an efficient outcome
D)the marginal cost of arranging a side payment is zero
E)the total cost of arranging a side payment is zero

Question 71

In the presence of a negative externality

A)the market marginal benefit curve lies above the market supply curve
B)a market will produce less than the efficient quantity
C)the market price will be too high for an efficient solution to exist
D)the marginal social cost curve lies above the market supply curve
E)Pareto optimality is automatically guaranteed

Question 72

Each of the following,except one,is a condition necessary for a private market solution to an externality problem.Which is the exception?

A)Legal rights must be clearly established.
B)Legal rights must be easily transferred.
C)The number of people involved must be very small.
D)The amount of money involved must be very small.
E)Side payments must be arranged without cost.

Question 73

One way to achieve efficiency in a market with a negative externality is

A)to raise the market demand curve to the position of the marginal social cost curve
B)to apply the Coase theorem
C)to lower the marginal social cost curve to the position of the market supply curve
D)to eliminate all side payments
E)to raise the market supply curve to the position of the marginal social cost curve

Question 74

Suppose that production of the product in Figure 14-2 imposes a cost on society of $7.00 per unit.If the government imposes a tax of $7.00 per unit of output on the producer the equilibrium price will

A)rise by $7.00
B)fall by $7.00
C)rise by $2.50
D)fall by $2.50
E)not change

Question 75

According to the Coase Theorem

A)when side payments are costly,the private market cannot solve any externality problem
B)government intervention is needed to solve a negative externality problem
C)government intervention is needed to solve a positive externality problem
D)when side payments can be costlessly negotiated,the private market will solve any externality problem
E)recourse to the legal system is the only way of eliminating negative externalities

Question 76

A market with a negative externality

A)will be regulated by the government
B)is an example of a natural monopoly
C)will be Pareto efficient,as long as bargaining costs are high enough
D)will produce less than the efficient quantity,thereby creating a welfare loss
E)will produce more than the efficient quantity,thereby creating a welfare loss

Question 77

Which of the following conditions is necessary in order for the private market to efficiently solve an externality problem?

A)The person who creates the externality must have the legal right to do so.
B)The person harmed by the externality must have a legal right to be compensated.
C)The value of any side payment must be smaller than the marginal cost of producing the externality.
D)The value of any side payment must be smaller than the marginal cost of creating the externality.
E)Side payments must be arranged without cost.

Question 78

To make a market efficient in the presence of a negative externality,a tax could be imposed that is equal to the marginal

A)social cost
B)private benefit
C)social cost minus marginal private cost
D)social cost minus marginal private benefit
E)private benefit minus marginal social benefit

Question 79

A subsidy equal to the marginal private benefit of a good can be used to make a market with a positive externality efficient.

Question 80

Because of the free rider problem

A)side payments are necessary in order to achieve an efficient outcome
B)a needed side payment can shrink until it is not large enough to compensate losers and still leave gainers better off
C)efficient outcomes can never be achieved
D)the Coase Theory often applies to real-world situations
E)externalities are less common than they would otherwise be