Deck 5: Market Failure and Public Choice

Question 1

Figure 6-F
When positive externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable.

Answer 1

True

Question 2

Figure 6-F
The failure of private incentives to provide adequate maintenance of public resources leads to the tragedy of the commons.

Answer 2

True

Question 3

Figure 6-F
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.

Answer 3

True

Question 4

Figure 6-F
Someone who does not contribute toward covering the cost of a good he desires, and yet he cannot be excluded from receiving the good, is called a free rider.

Question 5

Figure 6-F
A cost that spills over onto individuals not directly involved in an activity is called a positive externality.

Question 6

Figure 6-F
Adverse selection occurs when a fully insured person fails to take as many precautions against risk as she would if uninsured.

Question 7

Figure 6-F
A public good or service can be consumed by paying and nonpaying customers alike.

Question 8

Figure 6-F
If mining companies are able to shift some of their production costs onto outside parties, the actual output of mines is likely to fall short of society's ideal.

Question 9

Figure 6-F
Positive externalities include benefits received the seller but not benefits received by the buyer.

Question 10

Figure 6-F
If a negative externality results from the production of chemicals, an external cost is imposed on parties not directly involved in the market for the chemicals.

Question 11

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

Question 12

Figure 6-F
Moral hazard occurs when an informed party benefits in an exchange by taking advantage of knowing more than the other party.

Question 13

Figure 6-F
Since 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 14

Figure 6-F
An example of a public good is a flood control project that protects all the homes and properties near a river.

Question 15

Figure 6-F
The over hunting of U.S.buffalo that nearly caused their extinction would be an example of the tragedy of the commons.

Question 16

Figure 6-F
Inoculation against communicable diseases is an example of an activity that generates positive externalities.

Question 17

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

Question 18

Figure 6-F
A public good is nonrivalrous and excludable.

Question 19

Figure 6-F
When negative externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable.

Question 20

Figure 6-F
Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded.

Question 21

Which of the following is false?

A)Negative externalities are real costs, but, unlike the other resources a firm uses in production, no one owns the air, so a firm does not have to pay for its use.
B)In the case of external costs, firms tend to produce too much from society's standpoint, causing an efficiency loss due to an overallocation of scarce resources to the production of the good.
C)If government could impose a pollution tax equal to the exact size of the external costs imposed by a firm, then the firm would produce at the socially desired level of output.
D)Alternatives to pollution taxes include the government prohibiting certain types of activities causing pollution or forcing firms to clean up their emissions.
E)None of the above are false; all are true.

Question 22

The idea of rational ignorance implies that people are fully informed about their market purchases but uninformed about political issues.

Question 23

If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will:

A)not produce the product at all.
B)overproduce the product.
C)underproduce the product.
D)produce the optimal amount of the product.

Question 24

If a negative externality results from the refining of oil, the cost of production as seen by the oil refinery:

A)does not include the external cost.
B)includes the external cost.
C)does not include the external benefit.
D)includes the external benefit.
E)equals the social cost of oil refining.

Question 25

Which of the following activities, if any, represents an external cost?

A)The reduction in the incidence of chicken pox when children are inoculated against the disease.
B)The damage to a person's health from secondhand smoke.
C)The increase in local property values when the city creates a neighborhood park.
D)The price you pay for the prime rib that you consume at a local restaurant.

Question 26

Which of the following statements is true?

A)Externalities can never refer to costs borne by the seller.
B)Both external costs and external benefits can never exist for the same good.
C)Externalities can never lead to under-production of a specific good.
D)External benefits can never exceed external costs.

Question 27

The total social costs of production are:

A)private costs plus private benefits.
B)private benefits minus private costs.
C)private costs plus external costs.
D)private costs minus external costs.

Question 28

An externality occurs when:

A)people other than those making the demand and supply decisions share the benefits or the costs of an activity.
B)only the people making the demand and supply decisions share the benefits or the costs of an activity.
C)private costs of production equal the full social costs associated with production of a good.
D)private costs of production are ignored.

Question 29

If the government required car makers to install more costly and effective emission control devices on cars, it will lead to:

A)a higher price of cars and a larger quantity of cars sold.
B)a higher price of cars and a smaller quantity of cars sold.
C)a lower price of cars and a larger quantity of cars sold.
D)a lower price of cars and a smaller quantity of cars sold.

Question 30

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

Question 31

Which of the following activities, if any, represents an external cost?

A)The benefits that accrue to society when an individual receives a college education.
B)The increase in property values of vacant lots in an area near where a new amusement park is constructed.
C)The pollination of apple trees that occurs when a beekeeper locates next door to an apple orchard.
D)The price you pay for a slice of pizza.
E)None of the above

Question 32

Private costs are those borne by:

A)the government.
B)the producer of an item.
C)both an item's producer and outside parties affected by a negative externality.
D)outside parties affected by a negative externality.

Question 33

Which of the following provides an example of an externality?

A)The air pollution generated when you drive your car.
B)The view that passersby and neighbors enjoy when observing your rose garden.
C)The free concerts neighbors hear when an accomplished musician practices at home.
D)All of the above.

Question 34

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

Question 35

When the production or consumption of a good involves an externality:

A)resources are necessarily overallocated to the good.
B)resources are necessarily underallocated to the good.
C)someone not involved in buying or selling the good is affected.
D)the market will efficiently allocate resources to its production.
E)none of the above will be true.

Question 36

An example of a negative externality is:

A)the benefit you receive when your neighbor installs a smoke detector.
B)the reduction in profits for your company that occurs when there is a decrease in consumer demand for the product you manufacture.
C)the sleep you lose when your neighbor throws a loud party next door that keeps you awake.
D)the change in the property values of your neighbors' homes when you paint your house and landscape your front yard

Question 37

Negative externalities are:

A)costs incurred by buyers, sellers, and others.
B)costs incurred by individuals other than buyers.
C)cost incurred by individuals other than sellers.
D)costs incurred by individuals other than buyers and sellers.

Question 38

Assume that production of a good imposes external costs on others.The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

A)too high; too high.
B)too high; too low.
C)too low; too high.
D)too low; too low.

Question 39

Costs that accrue to the total population are called ____ costs.Costs incurred by the producer or consumer who makes the decision are called ____ costs.

A)negative; positive
B)social; private
C)private; social
D)positive; negative

Question 40

In a competitive market,

A)demand will always reflect all spillover costs.
B)demand will always reflect all spillover benefits.
C)supply will always reflect all spillover costs.
D)supply will always reflect all spillover benefits.
E)none of the above are true.

Question 41

If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be:

A)an increase in production.
B)a decrease in production.
C)a greater misallocation of resources.
D)a decrease in the market price of the product.

Question 42

Which of the following will most likely generate positive externalities?

A)a hot dog vendor
B)public education
C)an automobile
D)a city bus
E)a polluting factory

Question 43

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

A)produce too much of the good since the marginal private cost to firms is less than the marginal social cost.
B)produce too little of the good since the marginal private cost to firms is less than the marginal social cost.
C)produce too much of the good since the marginal private cost to firms is greater than the marginal social cost.
D)produce too little of the good since the marginal private cost to firms is greater than the marginal social cost.
E)always produce the most efficient quantity of output.

Question 44

Assume that production of a good generates external benefits for others.The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

A)too high; too high.
B)too high; too low.
C)too low; too high.
D)too low, too low.

Question 45

In a market where firms are able to reduce their private costs by shifting costs onto others, which of the following will not happen?

A)Inefficiencies will occur.
B)Negative externalities will be observed.
C)The market prices of products produced by firms will be too low relative to the social optimum.
D)Output of the good being produced will be too low.

Question 46

Which of the following would most likely include a positive externality?

A)gold earrings
B)platinum earrings
C)a hybrid automobile
D)a large SUV
E)none of the above

Question 47

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

A)Price is too low; output is too large.
B)Price is too high; output is too large.
C)Price is too low; output is too small.
D)Price is too high; output is too small.

Question 48

The presence of negative externalities leads to a misallocation of societal resources because:

A)whenever external costs are imposed on outside parties, the good should not be produced at all.
B)less 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, and the government is inherently inefficient.

Question 49

Which of the following activities, if any, represents an external benefit?

A)The benefit to a consumer from consuming a Caesar salad.
B)The damage to a person's health from secondhand smoke.
C)The reduction in tourist revenues at a beach resort caused by an oil spill.
D)The reduction in property values caused by the construction of a bar next to your home.
E)None of the above

Question 50

Golf course developers who buy the land around the golf course they build are attempting to:

A)impose external costs on non-consenting third parties.
B)internalize external benefits.
C)turn a private good into a public good.
D)internalize external costs.
E)avoid neighbor complaints about noise and traffic by preventing the construction of homes in the area.

Question 51

Suppose a product produces substantial spillover costs.If the government adopts a policy that forces producers to bear those costs:

A)the equilibrium quantity of the product exchanged will fall.
B)the initial misallocation of resources will be corrected.
C)the equilibrium price of the product will rise.
D)all of the above will be true.

Question 52

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

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

Question 53

An example of a positive externality is:

A)freeway congestion.
B)pollution in a resort lake.
C)airport noise.
D)beautiful trees on property along a parkway.

Question 54

Assume that production of a good imposes external costs on others.The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.

A)too high; too high.
B)too high; too low.
C)too low; too high.
D)too low, too low.

Question 55

To internalize a negative externality:

A)a producer's costs could be reduced by an amount equal to the external cost resulting from the production of a good.
B)a producer's costs could be increased by an amount equal to the external cost resulting from the production of a good.
C)a producer could receive a subsidy equal to the external cost resulting from the production of a good.
D)None of the above are correct.

Question 56

A corrective tax equal to the external cost imposed on third parties levied on polluters will:

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

Question 57

If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation.

A)overstates; increase
B)understates; increase
C)overstates; decrease
D)understates; decrease
E)overstates; remain the same

Question 58

If taxi cab drivers were no longer required to obtain one of a restricted number of licenses to operate, it is likely that:

A)cab fares would decrease and more taxis would be available.
B)cab fares would increase and fewer taxis would be available.
C)cab fares would not change but more taxis would be available.
D)cab fares would not change but fewer taxis would be available.
E)cab fares would increase and the same quantity of taxis would be available.

Question 59

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, relative to the social optimum.
B)too little of both goods, relative to the social optimum.
C)too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs.
D)too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs.

Question 60

If unregulated, the market for cigarettes would produce a quantity that is too ____ at a price that is too ____ when compared to the socially optimal results.

A)low; low
B)high; low
C)low; high
D)high; high

Question 61

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

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

Question 62

Assume that production of a good generates external benefits for others.The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

A)too high; too high.
B)too high; too low.
C)too low; too high.
D)too low; too low.

Question 63

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

A)telephone service
B)national defense
C)a city-owned bus
D)electricity generated by a city-owned public utility

Question 64

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

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

Question 65

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

A)produce too much of the good since the marginal private benefit to consumers is less than the marginal social benefit.
B)produce too little of the good since the marginal private benefit to consumers is greater than the marginal social benefit.
C)produce too much of the good since the marginal private benefit to consumers is greater than the marginal social benefit.
D)produce too little of the good since the marginal private benefit to consumers is less than the marginal social benefit.
E)always produce the efficient quantity of output.

Question 66

Which of the following may involve external benefits?

A)drunken driving.
B)smoking.
C)public education.
D)highway congestion.
E)None of the above.

Question 67

Which of the following would be an example of a nongovernmental solution to a problem associated with externalities?

A)society's preference to drive large cars and SUVs
B)a tax credit for the purchase of a hybrid auto
C)a moral code against using sprinklers during a drought
D)tax credits for the purchase of hybrid autos

Question 68

If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, other things being equal, there would probably be:

A)an increase in consumption.
B)a decrease in consumption.
C)a greater misallocation of resources.
D)a decrease in the market price of the product.

Question 69

If the production of a particular good involves significant external costs, to force the externality to be internalized the government might:

A)impose a tax on production of the good in order to increase production.
B)impose a tax on production of the good in order to decrease production.
C)offer a subsidy for production of the good in order to increase production.
D)offer a subsidy for production of the good in order to decrease production.

Question 70

If the production of a particular good involves significant external benefits, to force the externality to be internalized the government might:

A)impose a tax on production of the good in order to increase production.
B)impose a tax on production of the good in order to decrease production.
C)offer a subsidy for production of the good in order to increase production.
D)offer a subsidy for production of the good in order to decrease production.

Question 71

Medical research helps to develop better treatments for neuromuscular disease.Medical researchers are constantly in search of funds.Many in the public, however, are unwilling to contribute money toward neuromuscular disease research until a member of their own family suffers from a neuromuscular ailment.If left strictly to the private market, it is likely that there will be:

A)an overallocation of resources to neuromuscular disease research, relative to the efficient level.
B)an underallocation of resources to neuromuscular disease research, relative to the efficient level.
C)an efficient quantity of resources devoted to neuromuscular disease research.
D)zero dollars devoted to neuromuscular disease research.

Question 72

To internalize a positive externality:

A)the consumers of a good could receive a subsidy equal to the external benefit resulting from the production or consumption of the good.
B)a producer's costs could be increased by an amount equal to the external benefit resulting from the production of the good.
C)consumers of the good could pay a tax equal to the external benefit resulting from the production or consumption of the good.
D)None of the above are correct.

Question 73

Joe installs a rain water collection barrel system at the back of his house hidden behind a row of bushes.This is most likely an example of:

A)a public good consumed by a private citizen.
B)a private good consumed by the public sector.
C)creating a positive externality for others.
D)creating a negative externality for others.

Question 74

If there are important spillover benefits from consumption of a good,

A)government should prohibit its production.
B)taxes should be imposed on producers of the product.
C)the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production.
D)the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production.

Question 75

If the production of a good creates large spillover benefits on others, the government might correct for the:

A)overallocation of resources to its production by subsidizing it.
B)overallocation of resources to its production by imposing a tax on it.
C)underallocation of resources to its production by subsidizing it.
D)underallocation of resources to its production by imposing a tax on it.

Question 76

If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the efficient situation.

A)overstates; increase
B)understates; increase
C)overstates; decrease
D)understates; decrease
E)overstates; remain the same

Question 77

If a good that features a positive externality is produced in an unregulated free market, the good will be:

A)over-produced and over-valued.
B)over-produced and under-valued.
C)under-produced and over-valued.
D)under-produced and under-valued.
E)none of the above

Question 78

If a positive externality results from the consumption of higher education, then the marginal benefit students receive from education:

A)equals the marginal social benefit.
B)is less than the marginal social benefit.
C)includes the marginal external benefit.
D)exceeds the marginal social benefit.

Question 79

Which of the following activities, if any, represents an external benefit?

A)The benefit to a consumer from watching a film on DVD.
B)The reduction in air quality resulting from industrial development in an urban area.
C)The increase in the value of property belonging to your neighbors 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.

Question 80

Los Angeles Mayor James Hahn believes strongly that education provides great benefits to the community and urges the state government to provide the district with more money.An economist would say that this reflects Mayor Hahn's belief that:

A)since teachers are overpaid, the district needs more money to hire enough teachers for its classrooms.
B)there are positive external benefits associated with education.
C)there are nontrivial external costs associated with education.
D)public schools provide a higher quality education than private schools.