Deck 5: Difficult Cases for the Market and the Role of Government

Question 1

Which of the following best explains why making automobiles completely safe is not efficient?

A)After some level of safety is reached, making cars even safer will not be worth the additional cost.
B)Because human life is priceless, automobile safety generally doesn't matter.
C)The benefit from additional automobile safety will generally rise as automobiles are made safer, more than offsetting the opportunity cost involved.
D)Economic efficiency suggests that automobiles should be made as safe as humanly possible.

Answer 1

A

Question 2

When production of a good generates external costs, the

A)demand curve for the good will overstate the true social benefits from consumption of the good.
B)demand curve for the good will understate the true social benefits from consumption of the good.
C)supply curve for the good will overstate the true social cost of producing the good.
D)supply curve for the good will understate the true social cost of producing the good.

Answer 2

D

Question 3

Which of the following correctly describes the external benefit resulting from an individual's purchase of a winter flu shot?

A)The flu shot is cheaper than the cost of treatment when you get the flu.
B)The income of doctors increases when you get the flu shot.
C)The flu shot reduces the likelihood others will catch the flu.
D)The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income.

Answer 3

C

Question 4

When economists say that an activity meets the criterion for economic efficiency, they mean

A)a majority of citizens favor the activity.
B)the benefits that result from the activity exceed the costs.
C)the number of people who gain from the activity exceeds the number on whom costs are imposed.
D)the costs that result from the activity exceed the benefits.

Question 5

Markets may have difficulty providing the proper quantity of a public good because

A)individuals will tend to become free riders, and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good.
B)the good generally has a very large value to consumers relative to its cost of production.
C)the good is one that tends to benefit a large number of people.
D)the large profit involved in the production of a public good is generally too much for private firms to effectively pay out to shareholders.

Question 6

If the construction of a new roadway would create $10 billion worth of benefits for citizens and would cost $8 billion to construct, then using the criterion of economic efficiency, the roadway

A)should be built.
B)should not be built.
C)results in no net improvement to the welfare of society.
D)should be built only if it passes by a majority vote.

Question 7

Because the benefits derived from an activity decline as it is expanded, it is generally

A)wise to undertake all actions that generate benefits.
B)efficient to stop well before perfection is achieved.
C)best to continue as long as it is possible to derive some additional benefits.
D)unwise to engage in activities for which the benefits decline as you do more of it.

Question 8

From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market allocation will often lead to

A)an output of the product that exceeds the amount consistent with ideal economic efficiency.
B)an output of the product that is less than the amount consistent with ideal economic efficiency.
C)an output of the product that equals the amount consistent with ideal economic efficiency.
D)product prices that are below the cost of production.

Question 9

Which of the following is a source of information that helps consumers acquire information about the quality of a good or service?

A)brand names
B)franchising
C)consumer ratings magazines
D)all of the above

Question 10

Which of the following is the most fundamental function of government?

A)protection of individuals and their property
B)imposing progressive taxes to fund income-transfer programs
C)regulating prices and wages
D)provision of postal services and garbage collection

Question 11

Economic efficiency requires that

A)individuals produce at their maximum level.
B)only long-lasting, high-quality products be produced without regard to cost.
C)income be distributed equally among consumers.
D)all economic activity generating more benefits than costs be undertaken.

Question 12

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

A)a government-run health care system
B)the Walt Disney World amusement park
C)national defense
D)long-distance telephone service

Question 13

Which of the following is most consistent with the idea that if it's worth doing, it's worth doing imperfectly?

A)We should eliminate all pollution.
B)Automobiles should be made completely safe.
C)When cleaning house, people only generally clean the most visible areas.
D)A price cannot be put on human life.

Question 14

Economic efficiency indicates that

A)if something is worth doing, you should do it as well as humanly possible.
B)all pollution should be eliminated.
C)automobiles should be made as safe as possible
D)it nearly always makes sense to stop an activity well before perfection is achieved.

Question 15

If the construction of a new hospital would create $6 million worth of benefits for citizens and would cost $8 million to construct, then using the criterion of economic efficiency, the hospital

A)should be built.
B)should not be built.
C)results in a substantial improvement to the welfare of society.
D)should be built if it passes by a majority vote.

Question 16

If an economic action generates more costs than benefits, the action

A)by definition increases the nation's economic welfare.
B)should not be undertaken from an efficiency standpoint.
C)should be subsidized by the government in order to make sure that it is undertaken.
D)is desirable from a public welfare standpoint even though many individuals will be harmed.

Question 17

The idea that an action should be undertaken if and only if the benefits exceed the costs is known as the concept of

A)economic efficiency.
B)public welfare maximization.
C)marginal comparative advantage.
D)monetary construction of values.

Question 18

Does economic efficiency indicate that all pollution should be eliminated?

A)Yes, pollution is bad; it harms both people and the environment, and therefore, it should be eliminated.
B)No, at some point, the benefits of still lower levels of pollution will not be worth the additional cost.
C)No, pollution does not harm most people, and therefore, we should not worry about it.
D)Partially, pollution caused by business firms should be eliminated, but people should still be allowed to pollute if they want.

Question 19

Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of paper in a competitive market compare with their values under conditions of ideal economic efficiency?

A)The price will be too high, and the output will be too large.
B)The price will be too low, and the output will be too large.
C)The price will be too low, and the output will be too small.
D)The price will be too high, and the output will be too small.

Question 20

Competitive markets generally give consumers and producers correct incentives when

A)externalities are present in the market.
B)property rights are well-defined and enforced.
C)the good being produced and consumed is a pure public good.
D)there is a substantial lack of information on the part of either buyers or sellers.

Question 21

Which of these activities will most likely result in an external benefit?

A)A college student buys a deck of cards to play solitaire in her dorm room.
B)An elderly woman plants a flower garden on the vacant lot next to her house.
C)An executive purchases a book to read on a business trip.
D)A ten-year-old uses his allowance to buy new Nike shoes.

Question 22

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

A)raising price and reducing output.
B)raising price and expanding output.
C)lowering price and expanding output.
D)raising price and leaving output unchanged.

Question 23

Externalities

A)are always detrimental.
B)are always beneficial.
C)arise when all costs, external and private, are included in production cost.
D)cause the price system to misallocate resources.

Question 24

When competitive forces in an industry are weak,

A)the absence of competition generally leads to overproduction.
B)prices may exceed the amount consumers are willing to pay.
C)the operational efficiency of private firms will be enhanced.
D)higher prices and less than optimal production may result.

Question 25

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the

A)productive function of government.
B)protective function of government.
C)transfer function of government.
D)illegitimate function of government.

Question 26

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

A)Human greed and selfishness.
B)Capital markets.
C)The absence of an enforceable property right.
D)The lack of understanding of pollution and its effects.

Question 27

The key explanation for the prevalence of waterway pollution is

A)the inclusion in production of all costs involving use of the waterway.
B)that there are private costs but no costs to society.
C)that waterways are often an open access, commonly owned resource.
D)that waterways are subject to the market's normal control procedures.

Question 28

Externalities cause the market mechanism to allocate goods and resources inefficiently because

A)nonconsenting third parties are generally not hurt by externalities.
B)producers and consumers ignore signals given by the competitive market.
C)prices are always higher than they should be.
D)competitive markets fail to give producers and consumers correct price signals.

Question 29

Markets fail to allocate resources efficiently when

A)prices fluctuate.
B)people who have property rights abuse their privileges.
C)property rights are poorly enforced or not well established.
D)the government refuses to intervene in private markets.

Question 30

In a market that lacks sufficient competition,

A)output will generally be less than the output that is ideal from the standpoint of economic efficiency.
B)output will generally be greater than the output that is ideal from the standpoint of economic efficiency.
C)price will generally be less than the price that would result if the market was competitive.
D)profit rates will generally be so low that government subsidies will be necessary to ensure that the firms remain in business.

Question 31

A market transaction causes an externality if someone

A)directly involved in the transaction receives uncompensated benefits or costs from it.
B)not directly involved in the transaction receives uncompensated benefits or costs from it.
C)directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out.
D)not directly involved in the transaction interferes in it by imposing regulations or product standards.

Question 32

Which of the following would be a protective function of government?

A)providing national defense
B)undertaking income redistribution
C)providing national parks
D)monopolizing mail delivery

Question 33

Which English philosopher argued that people own themselves and, as a result, own the fruits of their labor, and thus, the role of government is to protect these natural rights of individuals?

A)Karl Marx
B)John Locke
C)Immanuel Kant
D)Ralph Nader

Question 34

Many external costs occur because

A)people do not pay the true cost of using a resource.
B)people do not pay the private cost of using a resource.
C)companies do not pay the market price for natural resources.
D)companies pay more than the true cost of using a resource.

Question 35

When externalities are present,

A)suppliers will refuse to produce desired goods and services.
B)this indicates that property rights are well-defined and enforced.
C)competitive market outcomes may be inconsistent with ideal economic efficiency.
D)competitive markets will generally achieve ideal economic efficiency.

Question 36

Relative to a competitive situation, if a market lacks competition, economic theory suggests that

A)output will be lower and price higher.
B)output will be higher and price lower.
C)both output and price will be higher.
D)both output and price will be lower.

Question 37

The spillover effects of actions that affect the well-being of nonconsenting third parties are called

A)side components.
B)externalities.
C)free riders.
D)internalizations.

Question 38

There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the

A)protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets.
B)redistribution of income from some individuals to others and the waging of war to expand the nation's territory.
C)production of postal services and cable television.
D)taxation of goods that are generally considered immoral or bad and the regulation of large corporations.

Question 39

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the

A)productive function of government.
B)protective function of government.
C)construction function of government.
D)income redistribution function of government.

Question 40

Sellers have a strong incentive to lobby government for legal restrictions that would reduce the intensity of competition in their market because

A)the firms wish to be more efficient than competition will permit.
B)competition tends to result in lower prices and lower profits.
C)legal restrictions that lessen competition in a market generally benefit consumers.
D)the firms fear that intense competition will lead to higher profits that will attract additional rivals into the market.

Question 41

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

A)The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
B)The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
C)The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
D)The equilibrium price of MBAs will be greater than the efficient price of MBAs.

Question 42

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

A)firm's cost of producing electricity will be higher than the community's true opportunity cost.
B)firm will tend to produce too little electricity from the viewpoint of economic efficiency.
C)community generally receives an external benefit from the production of electricity.
D)firm's cost of producing electricity will be lower than the community's true opportunity cost.

Question 43

Suppose external benefits are present in a market which results in the actual market price of $34 and market output of 126 units. How does this outcome compare to the efficient, ideal equilibrium?

A)The efficient outcome would be greater than 126 units.
B)The efficient outcome would be less than 126 units.
C)The efficient outcome would also be 126 units.
D)The efficient price would be less than $34.

Question 44

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

A)result in a price that is lower than the efficient price for both goods.
B)result in a price that is higher than the efficient price for both goods.
C)result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost.
D)result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost.

Question 45

If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,

A)more education must be produced.
B)the same amount of education must be produced, and the price should be lower.
C)less education must be produced, and the price should be higher.
D)less education must be produced, and the price should be lower.
E)less education must be produced at the same price.

Question 46

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

A)not enough of the product is being produced.
B)the price charged for the good is too high.
C)the good produces a positive externality.
D)the good produces a negative externality.
E)the government should produce the good.

Question 47

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

A)The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
B)The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
C)The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
D)The tuition paid by the student would be exceed the efficient amount.

Question 48

As a general rule, if pollution costs are external, firms will produce

A)too little of a polluting good.
B)too much of a polluting good.
C)an optimal amount of a polluting good.
D)cannot be determined without additional information.

Question 49

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

A)The pollution will be created by those least willing and able to pay the damages.
B)The pollution will be created by those most willing and able to pay for the right to pollute.
C)The funds collected by the government will be enough to compensate any individuals harmed by the pollution.
D)Pollution will increase from zero to 1,000 units per day.
E)There will be no incentive for polluters to try to sneak emissions past government monitoring devices.

Question 50

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $15 and market output of 614 units. How does this outcome compare to the efficient, ideal equilibrium?

A)The efficient price would higher than $15 while the efficient output would be less than 614 units.
B)The efficient price would be higher than $15 while the efficient output would be greater than 614 units.
C)The efficient price would be lower than $15 while the efficient output would be less than 614 units.
D)The efficient price would be lower than $15 while the efficient output would be greater than 614 units.

Question 51

If education creates external benefits,

A)actual market outcomes provide less than the efficient quantity of education.
B)actual market outcomes provide more than the efficient quantity of education.
C)actual market outcomes provide a higher price than the efficient price of education.
D)the government should impose a depletion tax.

Question 52

When a firm generates external benefits, a more efficient outcome would result if

A)the firm produced a larger output level.
B)the firm reduced its output level.
C)a tax were levied on the firm equal to the dollar amount of the externalities.
D)price were fixed below the firm's per-unit cost.

Question 53

If production of a good creates external benefits, a competitive market will likely produce

A)less output than would maximize profit.
B)more output than would maximize profit.
C)less output than is efficient.
D)more output than is efficient.

Question 54

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

A)pollution is not a serious problem in this industry.
B)the consumers of steel are unwilling to bear the costs of pollution generated from steel production.
C)pollution is an externality in this market, since producers and purchasers of steel do not bear the full costs of the pollution.
D)pollution creates an external benefit rather than an external cost in this case.

Question 55

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium?

A)The efficient price would higher than $25 while the efficient output would be less than 1,000 units.
B)The efficient price would be higher than $25 while the efficient output would be greater than 1,000 units.
C)The efficient price would be lower than $25 while the efficient output would be less than 1,000 units.
D)The efficient price would be lower than $25 while the efficient output would be greater than 1,000 units.

Question 56

Externalities are fundamentally the result of

A)the absence of competition in a market.
B)the lack of well-defined or enforced property rights.
C)poor information on the part of consumers.
D)the presence of significant comparative advantages in production.

Question 57

If government taxes a firm which pollutes this will

A)increase the demand for the good produced.
B)decrease the supply of the good produced.
C)increase the equilibrium quantity of the good produced in the market.
D)decrease the equilibrium price of the good produced in the market.
E)all of the above.

Question 58

Suppose external costs are present in a market which results in the actual market price of $50 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

A)The efficient outcome would be greater than 800 units.
B)The efficient outcome would be less than 800 units.
C)The efficient outcome would also be 800 units.
D)The efficient price would be less than $50.

Question 59

When production of a good provides external benefits, there will be

A)too few resources devoted to its production.
B)too many resources devoted to its production.
C)the optimal amount of resources devoted to its production.
D)abnormally high profits earned by producers of the good.

Question 60

Markets fail when externalities are present

A)because all of the costs and benefits of producing a good are reflected in the market price.
B)because some of the costs and benefits of producing a good are not reflected in the market price.
C)only if they are negative; positive externalities are not market failures.
D)because profits are not maximized.
E)if the positive externalities are less than the negative externalities.

Question 61

What are the two distinguishing characteristics of a public good?

A)nonrivalry in consumption and nonexcludability
B)indivisibility in production and excludability of nonpaying customers
C)provision by government and funding through taxation
D)mass production and comparative advantage

Question 62

In a competitive market, if the production process involves an external benefit, the market will

A)produce the economically efficient outcome.
B)result in a market price that is higher than the efficient one.
C)result in a market price that is lower than the efficient one.
D)result in too much of the good being produced compared to the ideal efficient outcome.

Question 63

Compared to ideal economic efficiency, when the production of a good generates external benefits, competitive markets will likely result in an output that is too

A)large and a price that is too high.
B)large and a price that is too low.
C)small and a price that is too high.
D)small and a price that is too low.

Question 64

When external costs are present in a market,

A)less of the good will be produced than the amount consistent with economic efficiency.
B)more of the good will be produced than the amount consistent with economic efficiency.
C)the amount of the good produced will be equal to the amount consistent with economic efficiency.
D)corresponding external benefits are always generated.

Question 65

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

A)long distance telephone service
B)national defense
C)an amusement park
D)the electric service of a public utility

Question 66

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?

A)The price would be too low, and the output would be too large.
B)The price would be too high, and the output would be too large.
C)The price would be too low, and the output would be too small.
D)The price would be too high, and the output would be too small.

Question 67

A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a

A)public good.
B)joint good.
C)excludable good.
D)national good.

Question 68

When production of a good generates external benefits, the

A)demand curve for the good will overstate the true social benefits from consumption of the good.
B)demand curve for the good will understate the true social benefits from consumption of the good.
C)supply curve for the good will overstate the true social cost of producing the good.
D)supply curve for the good will understate the true social cost of producing the good.

Question 69

Students in a class are assigned to groups to work on a project. A grade will be given for each project, and everyone in the group will receive that grade. For the members of a particular group, the grade is a

A)external benefit.
B)public good.
C)external cost.
D)repeat purchase item.

Question 70

Compared to ideal economic efficiency, when the production of a good generates external costs, competitive markets will likely result in an output that is too

A)large and a price that is too high.
B)large and a price that is too low.
C)small and a price that is too high.
D)small and a price that is too low.

Question 71

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

A)a rock concert at an indoor arena
B)a laptop computer
C)a television broadcast signal
D)an economics textbook

Question 72

Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome would

A)result in output that is lower than the efficient output for both goods.
B)result in output that is higher than the efficient output for both goods.
C)result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.
D)result in output that is higher than the efficient output for the good with an external benefit and output that is lower than the efficient output for the good with an external cost.

Question 73

A good that is both nonexcludable and nonrival-in-consumption is called a

A)common good.
B)external good.
C)public good.
D)private good.

Question 74

In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will

A)produce the economically efficient outcome.
B)result in a market price that is higher than the efficient one.
C)register a price that is lower than the efficient one.
D)result in too little of the good being produced compared to the ideal efficient outcome.

Question 75

A good is considered to be a public good if it

A)is a good produced by the government sector.
B)is both nonrival-in-consumption and nonexcludable.
C)benefits only a small group of consumers but is very costly to produce.
D)is a good whose production is financed by tax revenue.

Question 76

Suppose external benefits are present in a market which results in the actual market price of $62 and market output of 3,000 units. How does this outcome compare to the efficient, ideal equilibrium?

A)The efficient price would be higher than $62.
B)The efficient price would be lower than $62.
C)The efficient price would also be $62.
D)The efficient output would be less than 3,000 units.

Question 77

Suppose external costs are present in a market which results in the actual market price of $84 and market output of 320 units. How does this outcome compare to the efficient, ideal equilibrium?

A)The efficient price would be higher than $84.
B)The efficient price would be lower than $84.
C)The efficient price would also be $84.
D)The efficient output would be greater than 320 units.

Question 78

When external benefits are present in a market,

A)less of the good will be produced than the amount consistent with economic efficiency.
B)more of the good will be produced than the amount consistent with economic efficiency.
C)the amount of the good produced will be equal to the amount consistent with economic efficiency.
D)corresponding external costs are always generated.

Question 79

Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce

A)too much of both goods.
B)too little of both goods.
C)too much of the good that generates external benefits and too little of the good that generates external costs.
D)too little of the good that generates external benefits and too much of the good that generates external costs.

Question 80

When the consumption of a good generates an external benefit,

A)the private benefit consumers receive from the good will be higher than the true social benefit.
B)too much of the good will tend to be produced from the viewpoint of economic efficiency.
C)the community generally suffers an exactly offsetting external cost from the production of the good.
D)the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.