Deck 5: Market Failure and Public Choice

Question 1

Moral hazard occurs when an informed party benefits in an exchange by taking advantage of knowing more than the other party.

Answer 1

False

Question 2

Competition is preset in the private sector but not in the public sector.

Answer 2

False

Question 3

Adverse selection occurs when a fully insured person fails to take as many precautions against risk as he or she would take if uninsured.

Answer 3

False

Question 4

People can consume some private goods without paying for them.

Question 5

The median voter model predicts a strong tendency for both candidates to choose a position away from the middle of the distribution.

Question 6

As it is difficult to establish and enforce ownership rights over air, people have less incentive to preserve air quality than if its ownership was clearly defined.

Question 7

If mining companies are able to shift some of their production costs to outside parties, the actual output is likely to fall short of the social optimum.

Question 8

I like the phone and packing but the battery is not worth and is getting drain soon.

Question 9

Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded.

Question 10

Education generates negative externalities.

Question 11

A free rider is someone who does not contribute toward covering the cost of a desired good but he or she cannot be excluded from receiving the benefits of the good.

Question 12

Inoculation against communicable diseases is an example of an activity that generates positive externalities.

Question 13

The individual consumption-payment link often breaks down for political goods.

Question 14

When decisions are made by majority rule, the individual consumption-payment link is broken.

Question 15

The self-interest assumption is central to the analysis of behavior in both private and public sectors.

Question 16

Comparing the consumers' willingness to pay with the cost of production of a good is a part of hypothesis testing.

Question 17

Positive externalities include benefits received by a seller but not benefits received by a buyer.

Question 18

The overhunting of U.S. buffalo that nearly caused their extinction would be an example of the tragedy of the commons.

Question 19

The failure of private incentives to provide adequate maintenance of public resources leads to the tragedy of the commons.

Question 20

One way to overcome an adverse selection problem when buying a used car is to hire an independent mechanic to inspect the car before making a purchase.

Question 21

Which of the following is an example of an external benefit?

A)The benefit to a consumer from watching a film on DVD
B)The improvement in air quality resulting from industrial development in an urban area
C)The increase in the value of a property belonging to a neighbor when you hire a landscaper to beautify your front yard
D)The reduction in property values when a new airport is built in a neighborhood, increasing the connectivity of the area with other cities
E)The increase in the demand for a good when the price of its substitute good increases

Question 22

Suppose firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. Which of the following is likely to be true in this case?

A)Price will be too low and output will be too large compared to the efficient equilibrium.
B)Price will be high and output will be large compared to the efficient equilibrium.
C)Price will be too low and output will be too small compared to the efficient equilibrium.
D)Price will be high and output will be small compared to the efficient equilibrium.
E)Both price and output will be the same as the efficient equilibrium.

Question 23

Private costs are borne by:

A)the government.
B)the producer of a good.
C)the consumer of a good.
D)outside parties who are affected by a negative externality.
E)outside parties who benefit from a positive externality.

Question 24

A tax on firms that emit pollutants equal to the external cost would:

A)provide firms with an incentive to increase the level of the activity that creates pollution.
B)provide firms with an incentive to decrease the level of the activity that creates pollution.
C)provide firms with little incentive to search for production methods that are less environmentally damaging.
D)not reduce pollution levels at all.
E)reduce pollution levels to zero.

Question 25

If a positive externality results from higher education, _____.

A)the marginal benefit students receive from education equals the marginal social benefit
B)the marginal benefit students receive from education is less than the marginal social benefit
C)the private cost of education exceeds the social cost
D)the marginal benefit students receive from education exceeds the marginal social benefit
E)the private cost of education is less than the social cost

Question 26

An example of a positive externality is:

A)congestion on a freeway.
B)pollution in a lake.
C)a politician campaigning before an election.
D)the planting of trees on a property along a freeway.
E)the provision of warranties by the sellers of consumer durables.

Question 27

The social cost of production is:

A)the sum of private costs and private benefits.
B)the difference between private benefits and private costs.
C)the sum of private costs and external costs.
D)the difference between private costs and external costs.
E)the sum of fixed costs and variable costs.

Question 28

Which of the following activities represents an external cost?

A)The reduction in the incidence of chicken pox after children are inoculated against the disease
B)The damage to a person's health from secondhand smoke
C)The increase in local property values after a park is built in a city
D)The price paid for the prime rib that is consumed at a local restaurant
E)The monthly rent paid by a manufacturer on a factory building

Question 29

An example of a negative externality is:

A)the benefit received when a neighbor installs a smoke detector.
B)the reduction in the profits of a company when there is a decrease in the demand for a product.
C)the loss of sleep when a neighbor throws a loud party on a weekend.
D)the change in the property values of neighbors' homes when the front yard of a house is landscaped.
E)the decrease in the demand for an inferior good when consumer income increases.

Question 30

The presence of negative externalities in the production of a good leads to a misallocation of societal resources because:

A)people can enjoy the benefits of the good without paying for it, thereby reducing the profit margin of producers.
B)too little of the good than is ideal for society is produced.
C)there are some costs associated with production that the producer fails to take into consideration.
D)the government always intervenes in markets when negative externalities are present, resulting in inefficiency.
E)too low a price is charged by the producers of the good, thereby reducing the profit margin of the producers.

Question 31

The motivation for an individual citizen to spend the necessary time and effort to resist an interest group is minimal, even if he or she had a guarantee that the resistance would be effective.

Question 32

If negative externalities are generated in the production of a good, then society will:

A)produce too much of the good because the private cost of production is greater than the social cost of production.
B)produce too little of the good because the private cost of production is less than the social cost of production.
C)produce too much of the good because the private cost of production is less than the social cost of production.
D)produce too little of the good because the private cost of production is greater than the social cost of production.
E)produce too little of the good because the private cost of production is less than the private benefit from the good.

Question 33

A corrective tax on polluting firms equal to the external cost imposed on third parties will:

A)eliminate pollution totally.
B)increase the level of pollution.
C)force polluters to internalize the external cost resulting from their actions.
D)usually have no impact on pollution levels, but will generate tax revenue for the government.
E)create the free-rider problem.

Question 34

In the presence of a negative production externality, _____.

A)the private cost of a good exceeds the private marginal benefit from the good
B)the private benefit from a good exceeds the private marginal cost of the good
C)the social cost exceeds the private cost of a good
D)the social marginal cost is less than the private marginal cost of a good
E)the private cost of a good is less than the private marginal benefit from the good

Question 35

Suppose the government required car makers to install costly but effective emission control devices on cars. This will:

A)increase the price of cars and the quantity of cars sold.
B)increase the price of cars and decrease the quantity of cars sold.
C)decrease the price of cars and increase the quantity of cars sold.
D)decrease the price of cars but not change the quantity sold.
E)not change the price of cars but lower the quantity sold.

Question 36

In a market in which firms are able to reduce their private costs by shifting costs onto others, _____.

A)there will be underproduction of a good
B)there will be positive externalities in production
C)the market prices of goods produced by firms will be too low relative to the social optimum
D)output of the good being produced will be too high relative to the social optimum
E)the intersection of the demand curve and the social cost of production curve will determine the equilibrium quantity

Question 37

An externality occurs when:

A)people other than those making the demand and the supply decisions share the benefits or the costs of an activity.
B)people enjoy the benefits of a good or a service without paying for it.
C)the private cost of production equals the social cost associated with the production of a good.
D)a firm is unable to lower its average cost of production by expanding its output level.
E)the government intervenes in the production and the distribution of a good and does not allow the market forces to perform efficiently.

Question 38

Which of the following is most likely to generate positive externalities?

A)Selling hot dogs
B)Public education
C)An automobile
D)A steel mill
E)Selling used cars

Question 39

If a negative externality results from the refining of petroleum, in the eyes of the oil refinery the cost of production:

A)does not include external costs.
B)includes external costs.
C)does not include fixed costs.
D)includes external benefits.
E)does not include variable costs.

Question 40

To internalize a negative externality, _____.

A)a producer's costs should be reduced by an amount equal to the external cost resulting from the production of a good
B)a producer's costs should be increased by an amount equal to the external cost resulting from the production of a good
C)a producer should receive a subsidy equal to the external cost resulting from the production of a good
D)the government should take over the production of a good
E)the government should sell a good only to those who are willing to bear the burden of the externality in the form of high prices

Question 41

Which of the following good is least likely to be provided by the private sector?

A)A good that is nonrival but excludable
B)A good that is nonrival and nonexcludable
C)A good that is rival and excludable
D)A good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good
E)A good for which the marginal private benefit to an individual is less than the marginal cost of producing the good

Question 42

Public goods:​

A)suffer from the free-rider problem.
B)suffer from the tragedy of the commons.
C)are high priced and available only to the rich.
D)are low priced and available only to the poor.
E)act as a safety net for the unemployed people.

Question 43

An economist would be most likely to argue that the U.S. national defense should be funded through tax revenues because:

A)U.S. citizens are not likely to voluntarily pay for it.
B)the government is always a more efficient provider of goods than the private market.
C)the government always seeks to act benevolently on behalf of its citizens.
D)individuals who refuse to contribute cannot be excluded from benefiting from national defense.
E)defense equipment and machinery is very costly and huge amounts of tax revenues are required for it.

Question 44

The determination of which goods are public goods depends on:

A)public laws.
B)normative considerations.
C)whether the goods are produced directly by the government or produced by a private-sector firm.
D)whether it is possible to exclude users from consuming the goods if they do not pay for the goods.
E)marginal analysis.

Question 45

National defense is commonly provided by the government, but food is not, because:

A)food is too essential for survival to be provided by a bureaucratic organization.
B)food suppliers have successfully lobbied the government to stay out of the food industry.
C)food can be easily withheld from those who refuse to pay for it.
D)the distribution of food is subject to the free-rider problem.
E)food is available at low prices and government undertakes the supply of only expensive goods.

Question 46

As an additional consumer obtains the benefits of a public good, the benefits to existing consumers:

A)decrease.
B)increase.
C)increase in the short run but decrease in the long run.
D)do not change.
E)decrease in the short run but increase in the long run.

Question 47

Which of the following is true of public goods?

A)Consumption by one individual reduces the availability of the goods for others.
B)It is extremely difficult to limit the benefits to just the people who pay for them.
C)They are free whenever the government produces them.
D)From an efficiency standpoint, a market economy will generally supply too much of them.
E)Only tax-paying people can enjoy the benefits of these goods.

Question 48

The free-rider problem arises whenever:

A)goods cannot be provided exclusively to those who pay for them.
B)the price of a good is very low.
C)the government provides goods or services.
D)there is an excess demand for a good.
E)the price of a good is very high.

Question 49

Suppose the production of a good involves significant external benefits. To force the externality to be internalized, the government can:

A)impose a tax on the production of the good in order to increase its production.
B)impose a tax on the production of the good in order to decrease its production.
C)offer a subsidy on the production of the good in order to increase its production.
D)offer a subsidy on the production of the good in order to decrease its production.
E)regulate the supply of the good by preventing the producers from producing too much of the good.

Question 50

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

A)Health care
B)Amusement parks
C)Street lights
D)Telephone service
E)Social Security payments

Question 51

A positive externality will cause a market to:

A)produce more than the efficient equilibrium output level.
B)produce less than the efficient equilibrium output level.
C)produce the efficient equilibrium output level.
D)charge the socially optimal price.
E)charge a price above the socially optimal price.

Question 52

If positive externalities are present in the production of a good, society will:

A)produce too much of the good because the marginal private benefit to consumers is less than the marginal social benefit.
B)produce too little of the good because the marginal private benefit to consumers is greater than the marginal social benefit.
C)produce too much of the good because the marginal private benefit to consumers is greater than the marginal social benefit.
D)produce too little of the good because the marginal private benefit to consumers is less than the marginal social benefit.
E)produce too much of the good because of the free-rider problem.

Question 53

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

A)Telephone service
B)National defense
C)A city-owned bus service
D)Electricity
E)Education

Question 54

Public goods are:

A)any goods that several members of the public produce.
B)those goods for which natural monopolies exist.
C)goods that cannot be successfully financed by private firms.
D)goods that cannot be easily produced through the market system.
E)those goods that generate externalities in production and consumption.

Question 55

A public good is:

A)a good or service for which it is relatively easy to exclude nonpaying customers from consumption.
B)a good or service that can be consumed by both the paying and the nonpaying customers.
C)any good or service that is produced by the government.
D)any good or service that is consumed by private individuals and financed by private contributions.
E)a good or a service that is produced by public sector companies.

Question 56

The market system fails to provide the efficient output of public goods because:

A)people do not value public goods.
B)private firms cannot restrict the benefits from those goods to consumers who pay for them.
C)public enterprises can produce those goods at a lower cost than private firms.
D)public goods create widespread spillover costs.
E)public goods generate positive externalities and markets tend to underproduce such goods.

Question 57

Consider a good that generates external benefits and another that generates external costs. A competitive market economy would tend to produce:

A)too much of both the goods relative to the social optimum of each good.
B)too little of both the goods relative to the social optimum of each good.
C)too much of the good that generates external benefits and too little of the good that generates external costs relative to the social optimum of each good.
D)too little of the good that generates external benefits and too much of the good that generates external costs relative to the social optimum of each good.
E)the same amount of both the goods as the social optimum of each good.

Question 58

Which of the following best illustrates the free-rider problem?

A)A tollbooth is constructed at the entrance of a privately funded highway.
B)Individuals contribute toward a national defense program by paying taxes to the government.
C)Some homeowners in a mountain area refuse to contribute toward paving the area's access road.
D)You erect a fence around your swimming pool to keep out unsupervised children.
E)A steel mill does not consider the social cost of production while calculating its total cost of production.

Question 59

When a good is nonrival in consumption, then:

A)consumption by an additional individual will significantly reduce the benefits derived by others.
B)individuals who refuse to pay for the good cannot be excluded from benefiting from it.
C)consumption by an additional individual does not prevent others from benefiting from the good.
D)individuals who refuse to pay for the good can be excluded from benefiting from it.
E)the consumption of the good by an individual generates negative externalities.

Question 60

Which of the following is rival and excludable?

A)A public good
B)An externality
C)A private good
D)A common resource
E)A tariff

Question 61

If the rivers and lakes in the United States could all be privately owned, then:

A)pollution would be less.
B)costs of production for many firms would decrease.
C)negative externalities would be generated.
D)these resources would be overused.
E)people would not have any incentive to preserve them.

Question 62

The practice of potential buyers offering lower prices for a product of uncertain quality than they would for a product of certain quality is known as:​

A)the lemon problem.
B)moral hazard.
C)the winner's curse.
D)the free-rider problem.
E)skimming.

Question 63

Which of the following is an example of moral hazard?

A)A car salesman earns a commission of 10 percent on every car sold.
B)An individual who eats well and exercises regularly chooses not to purchase health insurance.
C)An individual drives less cautiously after obtaining automobile insurance.
D)A car salesman offers a full warranty on a used car for 90 days.
E)A person brings a mechanic to check a used car before buying it.

Question 64

The government should produce a good only if:

A)the expected marginal benefits from the good are less than the expected marginal costs.
B)the social cost of production exceeds the private cost of production of the good.
C)the expected marginal benefits from the good exceed the expected marginal costs.
D)the social cost of production is equal to the private cost of production of the good.
E)the marginal social benefit is lower than the marginal private benefit from the good.

Question 65

Public choice theory assumes that voters, politicians, and other political participants are largely motivated by:

A)personal self-interest.
B)altruism.
C)a desire to promote the general welfare.
D)a desire to promote economic efficiency.
E)a desire to promote allocative efficiency.

Question 66

If the quality-detection costs are very low, _____.

A)low-quality products will tend to be withdrawn from the market, and the average quality will improve
B)low-quality products will tend to be withdrawn from the market, and the average quality will decline
C)high-quality products will tend to be withdrawn from the market, and the average quality will improve
D)high-quality products will tend to be withdrawn from the market, and the average quality will decline
E)the problem of adverse selection cannot be overcome

Question 67

In the market for insurance, moral hazard leads to:

A)those who are the most likely to collect insurance buying it.
B)those who buy insurance taking fewer precautions to avoid the insured risk.
C)those with less insurance taking on more risk.
D)people with prior insurance claims being charged a lower premium.
E)those who are the most likely to avoid paying the premiums buying insurance.

Question 68

After buying a car with air bags, Maria starts to drive recklessly. This is an illustration of:

A)the moral hazard problem.
B)the free-rider problem.
C)the adverse selection problem.
D)the lemon problem.
E)the tragedy of the commons.

Question 69

Signaling is important because:

A)it increases social benefits associated with public goods.
B)it decreases external costs associated with externalities.
C)it reduces information costs associated with asymmetric information.
D)it helps to solve the free-rider problem associated with public goods.
E)it helps to prevent the overuse of common resources.

Question 70

Suppose the U.S. government announced a policy that it would bail out troubled financial institutions, and this resulted in an increase in the number of bank failures. This is an example of:

A)the moral hazard problem.
B)the free-rider problem.
C)the adverse selection problem.
D)the lemon problem.
E)the tragedy of the commons.

Question 71

Which of the following is an example of asymmetric information?

A)A beverage purchased from a vending machine
B)A car wash to benefit the local high school band
C)A collectible baseball card purchased on eBay
D)Cellular service that includes unlimited minutes and texting
E)A buy-one, get-one free offer on garments

Question 72

Consumers are generally willing to spend more time researching cars before making a purchase than researching paper towels because:

A)the cost of gathering information about paper towels is very low.
B)the cost of gathering information about cars is lower than the cost of gathering information about paper towels.
C)the cost of gathering information about cars is lower than the benefit that can be gained.
D)the net benefit from gathering additional information about paper towels is higher than the net benefit derived from gathering additional information about cars.
E)the cost of gathering information about cars is higher than the benefit that can be gained.

Question 73

The production of a public good is undertaken after:

A)calculating the extent of the free-rider problem.
B)conducting a cost-benefit analysis.
C)estimating the cost of positive externalities generated by the production of the good.
D)estimating the cost of negative externalities generated by the production of the good.
E)taking the opinion of the consumers with the largest purchasing power.

Question 74

Sellers may choose not to sell in certain markets if:

A)it is possible to practice price discrimination against customers.
B)buyers are unable to perceive the high quality of their goods.
C)the social cost of production exceeds the private cost of production.
D)the social cost of production is lower than the private cost of production.
E)there are technological spillovers in the production of a good.

Question 75

A warranty offered by a seller is one way to overcome:

A)a positive externality problem.
B)a negative externality problem.
C)an adverse selection problem.
D)the free-rider problem.
E)the tragedy of the commons.

Question 76

Public choice theory applies:

A)altruistic principles to politics.
B)the ceteris paribus principle to politics.
C)economic principles to politics.
D)the fallacy of composition principle to politics.
E)political science principles to economics.

Question 77

Which of the following is not true of adverse selection?

A)It can result when one of the parties in a transaction has little information about the quality of the goods involved.
B)It can cause the quality of the goods traded to decline if quality detection costs are high.
C)It can be a difficult problem to overcome because it is not individually rational for the party with more information to provide a truthful and complete disclosure.
D)It occurs in the used-car market but not in the market for insurance.
E)It drives out the high-quality products and only the low-quality products are left in a market.

Question 78

Public choice theory assumes that each voter will tend to favor the political candidate who offers:

A)programs with the largest social benefits.
B)equality of government-provided benefits across all citizens.
C)programs that will yield the greatest personal benefits net of personal cost.
D)a plan that requires the least amount of tax dollars, regardless of the level of benefits provided.
E)programs that cost the least to implement.

Question 79

Which of the following is a rival good that is nonexcludable?

A)A public good
B)A normal good
C)A common resource
D)An inferior good
E)A composite good

Question 80

The tendency of those who are insured to take more risks is a problem of:

A)free riding.
B)moral hazard.
C)adverse selection.
D)negative externalities.
E)common resources.