Deck 15: The Shortcomings of Free Markets

Question 1

An unregulated market economy provides material wealth, but does not generate effective control of environmental damage.

Answer 1

True

Question 2

When MSC > MPC there are detrimental externalities.

Answer 2

True

Question 3

An efficient allocation of resources requires each product's price to equal its marginal cost.

Answer 3

True

Question 4

If a commodity's price is above its marginal cost, the market will tend to produce too much of the good.

Question 5

Efficient resource allocation is defined as MC = AC.

Question 6

Market economies produce only a few relatively minor defects.

Question 7

A production possibilities frontier indicates the most efficient combinations of goods.

Question 8

Activities that indiscriminately impose costs on others are externalities.

Question 9

A monopoly price reflects a good's marginal utility.

Question 10

The pollution emitted by a power plant is an example of a detrimental externality.

Question 11

Society would be better off with more products that create beneficial externalities.

Question 12

An efficient allocation of resources requires that a product's price equal its average cost.

Question 13

A market economy provides solutions to almost all social ills such as poverty and environmental damage.

Question 14

If polluters are forced to pay for their pollution, they will reduce pollution toward a socially optimal amount.

Question 15

Beneficial externalities would be removed if the recipients of the benefit paid the producer of the externality.

Question 16

As long as the market sets prices above marginal costs, production will be efficient.

Question 17

Marginal social costs are the sum of marginal private costs and incidental costs.

Question 18

Externalities can be either detrimental or beneficial to others.

Question 19

Marginal social cost is made up of marginal private cost and incidental cost.

Question 20

If the market mechanism is efficient, the marginal cost accurately measures the opportunity cost of a good or service.

Question 21

Private goods are not excludable.

Question 22

The market mechanism is more efficient in allocating resources between time periods than it is in allocating resources among different industries.

Question 23

Education is subsidized because it generates beneficial externalities.

Question 24

If a firm's activities generate detrimental externalities, the marginal social cost will be less than the marginal private cost.

Question 25

Examples of public goods include national defense, police, and the U.S.Postal Service.

Question 26

Most Americans would voluntarily support defense without required taxation.

Question 27

An industry that generates detrimental externalities will have a marginal social cost higher than the marginal private cost to the industry.

Question 28

A public good has the quality of excludability but not the quality of depletability.

Question 29

All externalities are detrimental.

Question 30

Imposing fines on companies that contribute heavily to air and water pollution is an attempt to bring marginal private costs in line with marginal social costs.

Question 31

The marginal cost of serving an additional user of a public good is zero.

Question 32

Low interest rates will persuade corporations to invest more right now.

Question 33

Public goods could effectively be provided by private markets, but we choose to provide them through government.

Question 34

It is possible to charge a price for a pure public good.

Question 35

Private ownership of rivers and lakes will halt all water pollution.

Question 36

Government gives subsidies to encourage production of products with beneficial externalities.

Question 37

A private good is characterized by excludability and depletability.

Question 38

There is no way that externalities can be corrected.

Question 39

A free rider is one who enjoys the benefits of a public good without paying for it.

Question 40

Government can deal with externalities through the use of taxes and subsidies.

Question 41

If both a buyer and a seller have the same information, they are said to have symmetric information.

Question 42

Asymmetric information generally leads to efficient resource allocation.

Question 43

Rent seeking refers to unproductive activity in the pursuit of profit.

Question 44

An increase in wages in the public sector is always accompanied by an increase in labor productivity.

Question 45

As manufacturing becomes more efficient, services can be expected to become more costly.

Question 46

The cost of trash removal goes up, in part at least, because labor productivity in auto manufacturing goes up.

Question 47

Monopolists usually earn economic rent.

Question 48

Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.

Question 49

Symmetric information generally leads to efficient allocations of resources.

Question 50

Many economists argue that there is imperfect information in the market and that this is a failure of the market mechanism.

Question 51

The cost disease of services explains the problems surrounding the health care crisis.

Question 52

Rent seeking is a way of earning profit without adding to the product's value.

Question 53

The opportunity cost of postponing income to some future time depends on the interest rate.

Question 54

Markets can efficiently handle irreversible decisions without involvement of government.

Question 55

An increase in wages in the public sector is caused solely by increased labor productivity in that sector.

Question 56

Due to Pigou's "defective telescopic faculty," a market economy is inefficient in allocating resources between the present and the future.

Question 57

Moral hazard encourages people to take risks.

Question 58

As productivity in the manufacturing sector increases, the service sector must keep pace or it will become more expensive in the long run.

Question 59

Government action can usually perfectly correct the market's shortcomings.

Question 60

The interest rate is determined purely by market forces, and not by government involvement.

Question 61

The factor that most often leads to under pricing and overuse of an economic resource is human greed.

Question 62

In an ideal competitive market economy

A)resources are allocated according to a person's needs.
B)resources are allocated according to ability to pay.
C)social and individual needs are met by the market.
D)All of the above are true.

Question 63

For most industrial nations, health-care costs have increased faster than the rate of inflation.

Question 64

In a properly functioning free market

A)the price of any good reflects its marginal utility to consumers.
B)price will equal marginal cost.
C)the invisible hand will assure that society's resources are used efficiently.
D)All of the above are correct.

Question 65

The construct used to demonstrate efficient use of society's resources is the

A)production possibilities frontier.
B)payoff matrix.
C)input-output table.
D)cost-benefit table.

Question 66

In an ideal free unregulated market

A)supply curves reflect all negative externalities.
B)external benefits are abundant.
C)all individual and social needs are met by the market.
D)optimal quantities of all goods and services are produced.

Question 67

Is increased production of a good beneficial to society?

A)Yes, because scarcity is such an overriding concern.
B)Yes, because more is always better.
C)Maybe, it depends on what is foregone.
D)No, because increased production does not increase utility.

Question 68

Because technology has automated so many functions, personal services have become cheaper in order to compete.

Question 69

As wages for manufacturing workers rise, wages for service workers will stay the same.

Question 70

On balance, markets do some things very well, and some things poorly.

Question 71

Which of the following observations is true?

A)A market produced with allocative efficiency if a monopoly exists.
B)A market can provide "public goods."
C)A market makes public and personal services inexpensive.
D)A market distributes income equally.

Question 72

Producing more cabbage is efficient if

A)cabbage production can be increased without reducing production of other goods.
B)the opportunity cost of more cabbage is less than its marginal utility.
C)society values the additional cabbage more highly than the lettuce it must give up to produce the extra cabbage.
D)All of the above are correct.

Question 73

Markets will always create more efficient outcomes without government intervention.

Question 74

In the event of a detrimental externality which affects the public interest, government action is the only solution.

Question 75

Productivity growth tends to affect all industries to the same degree.

Question 76

Markets are primarily responsible for the rapid rise in productivity during the twentieth century.

Question 77

If the price of a commodity is above marginal cost, then the economy will tend to

A)overproduce the item.
B)underproduce the item.
C)produce the optimal amount of the item.
D)overproduce and underproduce the item cyclically.

Question 78

What rule must be followed to obtain an efficient allocation of resources?

A)P = AC.
B)P = MC.
C)P = AR.
D)MR = AC.

Question 79

Which of the following is an imperfection of market economies?

A)They produce inexpensive services but expensive manufactured goods.
B)They place undue importance on the needs of future generations.
C)They cannot provide certain goods such as national defense.
D)They distribute income too unequally.

Question 80

Productivity in manufacturing sectors has risen faster than in service sectors.