Deck 15: Public Finance and Public Choice

Question 1

An example of a transfer payment is:

A)expenditure on national defense.
B)a Social Security payment to the disabled.
C)expenditure on public school education.
D)purchasing a new city police car.

Answer 1

B

Question 2

A condition necessary for a market to achieve economic efficiency is that the market:

A)demand curve must include the willingness to pay of all members of society who benefit from the good.
B)demand curve must exclude the willingness to pay of all members of society who benefit from the good.
C)demand curve must include all opportunity costs imposed on society for producing the good.
D)supply curve must include the willingness to pay of all members of society who benefit from the good.

Answer 2

A

Question 3

Markets _______ in the _______ of resources.

A)usually result; equal distribution
B)never fail; efficient allocation
C)sometimes result; inefficient allocation
D)can never be counted on; efficient

Answer 3

C

Question 4

Transfer payments represent:

A)government expenditures.
B)government purchases.
C)payments made to the government by individuals.
D)government tax receipts.

Question 5

Purchases or the production of goods or services by government agencies are called:

A)government purchases.
B)government transfers.
C)transfer payments.
D)public taxes.

Question 6

An example of a government purchase is:

A)a Social Security payment to the elderly.
B)a Social Security payment to the disabled.
C)public school education.
D)expenditure on an unemployment compensation payment.

Question 7

Social Security payments to retired persons is an example of:

A)government spending shortages, and they always lead to deficits.
B)a government purchase.
C)a transfer payment.
D)income measured by using the value-added approach.

Question 8

Governments engage in transfer payments in order to:

A)buy things.
B)spend tax revenues.
C)reduce their expenditures.
D)redistribute income.

Question 9

Since the 1950s, total government expenditures generally have:

A)been less than total government receipts.
B)been equal to total government receipts.
C)increased more slowly than government purchases.
D)increased more rapidly than government purchases.

Question 10

A condition necessary for a market to achieve economic efficiency is that the market:

A)demand curve must include all opportunity costs imposed on society of producing the good.
B)demand curve must exclude the willingness to pay of all members of society who benefit from the good.
C)supply curve must include the willingness to pay of all members of society who benefit from the good.
D)supply curve must include all opportunity costs imposed on society of producing the good.

Question 11

Government payments to individuals in the form of grants rather than as payments for labor or other services are:

A)government spending.
B)government purchases.
C)government transfers.
D)transfer payments.

Question 12

The primary source of the difference between government purchases and government expenditures is:

A)the government deficit.
B)the government surplus.
C)transfer payments.
D)the revenue gap.

Question 13

A public good is a good:

A)for which exclusion is prohibitively costly.
B)for which the marginal cost of adding another consumer is high.
C)that the market will usually provide efficiently.
D)for which exclusion is possible.

Question 14

The difference between government purchases and government expenditures is largely due to:

A)taxes.
B)public finance.
C)merit goods.
D)transfer payments.

Question 15

Which of the following statements is true?

A)Government purchases fell dramatically during World War II.
B)Government purchases rose during the Korean War and did not drop very far back afterward.
C)Government purchases have remained at about 30 percent of GDP since the Korean War.
D)Government purchases have remained at about 40 percent of GDP since World War II.

Question 16

The study of government expenditure and tax policy and the impacts of these policies on the economy is called:

A)federal choice.
B)federal deficit.
C)public finance.
D)public debt.

Question 17

Government activities include(s):

A)responding to market failure.
B)redistribution of incomes.
C)activities that encourage or discourage the consumption of some goods and services.
D)all of the above.

Question 18

All spending by government agencies is called:

A)government expenditures.
B)government purchases.
C)government services.
D)government revenues.

Question 19

Which of the following statements is true?

A)U.S.government agencies produce or purchase nearly 40 percent of all goods and services produced in the nation each year.
B)The federal government is the largest single purchaser of goods and services in the world.
C)Public finance is involved with how individuals in the public sector make choices that maximize their utility.
D)In the United States, government purchases exceed government expenditures.

Question 20

During the 1980s, total government expenditures generally:

A)were greater than total government receipts.
B)were equal to total government receipts.
C)increased more slowly than government purchases.
D)increased at the same rate as government purchases.

Question 21

The tendency of people to avoid paying for a good's benefits when the benefits can be obtained free is the:

A)free-cost problem.
B)free-rider problem.
C)free-goods problem.
D)free-market problem.

Question 22

When an action by one agent harms another outside of any market exchange, there is a(n):

A)public choice.
B)tax incidence.
C)transfer payment.
D)external cost.

Question 23

The best example of a good for which exclusion is not prohibitively costly is:

A)a park.
B)an ocean.
C)a bicycle.
D)national defense.

Question 24

The free-rider problem is most important for:

A)public goods.
B)private goods.
C)market goods.
D)both private and public goods.

Question 25

In the case of an external cost:

A)the agent responsible for the cost must pay for the cost.
B)the government will always pay the cost.
C)the agent responsible for the external cost will produce too much of the good or service involved.
D)there is generally an offsetting social benefit.

Question 26

The best example of a good for which exclusion is prohibitively costly is:

A)a yard.
B)a house.
C)a bicycle.
D)national defense.

Question 27

Suppose that in the production of peanut butter, Peanuts 'R' Us discards broken peanut shells onto an adjacent recreational area.This will most likely lead to the market failure of:

A)external cost.
B)deregulation.
C)imperfect information.
D)special interest groups.

Question 28

Suppose that Peanuts 'R' Us acquires ownership of all peanut butter processing plants in the country.This will most likely lead to the market failure of:

A)external costs.
B)deregulation.
C)imperfect information.
D)imperfect competition.

Question 29

If the benefits of a public good exceed its costs:

A)the market can still provide efficiently if the firm is a price setter.
B)government agencies may either produce the good themselves or pay private firms to produce it.
C)people really don't value the good.
D)the free-rider notion does not apply.

Question 30

A cost that is imposed when an action by one agent harms another, outside of any market exchange, is a(n):

A)regulation.
B)marginal cost.
C)market price.
D)external cost.

Question 31

The market failure of external cost is most likely to result if Peanuts 'R' Us:

A)keeps secret a discovery that excessive consumption of peanut butter causes nearsightedness.
B)discards broken peanut shells on to an adjacent recreational area in the production of peanut butter.
C)is subject to performance standard regulations by the PBRC (Peanut Butter Regulatory Commission).
D)develops a new peanut butter processing machine that enhances competition.

Question 32

For a public good, nonpayers _______ excluded from obtaining the benefits of the good.

A)can be
B)are automatically
C)usually are
D)cannot be

Question 33

A public good is one for which:

A)consumers who don't pay for the good can be excluded from its use.
B)the marginal cost of adding another consumer is zero.
C)the good is divisable and measurable.
D)there are no external costs.

Question 34

In the case of a public good:

A)a consumer could be a free rider.
B)firms get a signal that fully reflects benefits received by consumers.
C)firms will get signals to produce more than is economically efficient.
D)it is quite costly to add consumers.

Question 35

Public goods are efficiently provided if the price that consumers pay is:

A)zero.
B)less than zero.
C)greater than zero but less than the marginal cost of production.
D)greater than the marginal cost of production.

Question 36

A distinguishing feature of public goods is that:

A)the exclusion of consumers who don't pay for the goods is not possible.
B)the exclusion of consumers who don't pay for the goods is possible.
C)they create external benefits.
D)they may create external costs.

Question 37

Public goods may be efficiently provided if they are financed through:

A)license fees.
B)user charges.
C)government tax revenues.
D)market exchange.

Question 38

The market failure of imperfect competition is most likely to result if Peanuts 'R' Us:

A)keeps secret a discovery that excessive consumption of peanut butter causes nearsightedness.
B)discards broken peanut shells on to an adjacent recreational area in the production of peanut butter.
C)is subject to performance standard regulations by the PBRC (Peanut Butter Regulatory Commission).
D)acquires ownership of all peanut butter processing plants in the country.

Question 39

The best example of a good that has zero marginal cost to add another consumer is:

A)clothing.
B)ice cream.
C)a fishery in the ocean.
D)national defense.

Question 40

In the case of public goods:

A)the role of government is to stay out of the picture and let the market provide them.
B)government could produce the goods.
C)government would never pay private firms to produce them.
D)there is no incentive to be a free rider.

Question 41

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved, as illustrated in the exhibit.If the government intervenes to correct for the external cost, the new _______ will now reflect _______ and _______ cost.

A)supply curve S₁; private; external
B)supply curve S₂; private; no external
C)supply curve S₂; private; external
D)demand curve (not shown); external; no private

Question 42

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved as illustrated in the Exhibit.When the government intervenes to correct for the external cost, the output will _______ from _______ to _______ .

A)fall; W; R
B)increase; W; R
C)fall; R; W
D)fall; W; 0

Question 43

Reference: 15165
(Exhibit: Market Failure)A competitive market, free of market failures, will achieve the equilibrium point:

A)H.
B)I.
C)J.
D)K.

Question 44

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved, as illustrated in the exhibit.If the government intervenes to correct for the external cost, there will be a(n)________ in _______ of _______ .

A)decrease; benefit; WTVR
B)increase; cost; WTUR
C)decrease; net benefit; TUV
D)increase; deadweight loss; TUV

Question 45

Reference: 15147
(Exhibit: Correcting for Market Failure: A Public Good)A private market produces R units of output of a public good.If the government intervenes to correct for market failure to provide the efficient level of a public good, the additional total cost is:

A)RTVW.
B)RUVW.
C)WVKX.
D)TUV.

Question 46

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved, as illustrated in the exhibit.If the government intervenes to correct for the external cost, there will be a reduction in cost of :

A)WTUR.
B)WTVR.
C)TUV
D)UV

Question 47

Reference: 15147
(Exhibit: Correcting for Market Failure: A Public Good)A private market produces R units of output of a public good.The efficient price would be _______ and the efficient output would be _______ , which suggests the implementation of a government _______ .

A)lower; greater; tax
B)P₁; W; subsidy
C)higher; greater; subsidy
D)P₂; Q; subsidy

Question 48

If the marginal benefit received from a good is equal to the marginal opportunity cost of production, then:

A)society's well-being can be improved if production increases.
B)society's well-being can be improved if production decreases.
C)society's well-being cannot be improved by changing production.
D)the market is producing too much of the good.

Question 49

In the case of a coal-burning plant that generates pollutants:

A)the firm would consider the cost of this pollution in its production decisions even in the absence of regulation.
B)consumers are faced with prices that reflect the full cost of production.
C)government agencies may seek to limit the emission of pollution through regulation.
D)the people who buy the output of the plant have to pay the costs of pollution abatement.

Question 50

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved, as illustrated in the exhibit.Economists argue that in an unregulated private market _______ is produced and the supply curve (S₁)reflects ________ cost.

A)too little; private
B)too much; private
C)too much; external
D)too little; external and private

Question 51

Reference: 15147
(Exhibit: Correcting for Market Failure: A Public Good)A private market produces R units of output of a public good.By imposing taxes to finance the public good, the government could move the production from R to the efficient level of production of :

A)Q.
B)U.
C)W.
D)X.

Question 52

If the marginal benefit received from a good is greater than the marginal opportunity cost of production, then:

A)society's well-being can be improved if production increases.
B)society's well-being can be improved if production decreases.
C)society's well-being cannot be improved by changing production.
D)the market is producing too much of the good.

Question 53

If the marginal benefit received from a good is greater than the marginal opportunity cost of production, then:

A)society's well-being can be improved if production decreases.
B)society's well-being cannot be improved by changing production.
C)the market is producing too much of the good.
D)the market is producing too little of the good.

Question 54

If the marginal benefit received from a good is less than the marginal opportunity cost of production, then:

A)society's well-being can be improved if production increases.
B)society's well-being can be improved if production decreases.
C)society's well-being cannot be improved by changing production.
D)the market is producing too little of the good.

Question 55

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved, as illustrated in the exhibit.If the government sector forces the private sector firms to face the external cost, the supply curve _______ from _______ to ________ .

A)shifts right; S₂; S₁
B)shifts left; S₁; S₂
C)remains unchanged; S₁; S₁
D)remains unchanged; S₂; S₂

Question 56

Reference: 15147
(Exhibit: Correcting for Market Failure: A Public Good)A private market produces R units of output of a public good.If the government intervenes to correct for market failure to provide the efficient level of a public good, the government will generate increased benefits of:

A)RUVW.
B)RTVW.
C)WVKX.
D)TUV.

Question 57

If the marginal benefit received from a good is equal to the marginal opportunity cost of production, then:

A)society's well-being can be improved if production increases.
B)society's well-being can be improved if production decreases.
C)the market is producing too much of the good.
D)the market is producing an efficient quantity.

Question 58

Reference: 1552
(Exhibit: Correcting for Market Failure: External Cost)Assume that there is an external cost involved, as illustrated in the exhibit.If the government intervenes to correct for the external cost, there will be a ________ of _______ .

A)net gain; WTUR
B)net cost; TUV
C)net gain; TUV
D)net gain; WTVR

Question 59

If the marginal benefit received from a good is less than the marginal opportunity cost of production, then:

A)society's well-being can be improved if production increases.
B)society's well-being cannot be improved by changing production.
C)the market is producing too much of the good.
D)the market is producing too little of the good.

Question 60

Reference: 15147
(Exhibit: Correcting for Market Failure: A Public Good)A private market produces R units of output of a public good.If the government intervenes to provide the efficient level of a public good, the net gain will be:

A)KVO
B)TUV
C)RUVW minus RTVW
D)B and C are both correct.

Question 61

Reference: 15165
(Exhibit: Market Failure)If the market produces quantity F, then:

A)marginal benefit is equal to marginal cost.
B)marginal benefit is less than marginal cost.
C)marginal benefit is greater than marginal cost.
D)price is equal to marginal cost and greater than marginal benefit.

Question 62

An example of a _______ good would be _______ , and an example of a ________ good would be ________ .

A)Mary Poppins; symphony concerts; demerit; education
B)merit; education; demerit; alcohol
C)demerit; public parks; merit; cigarettes
D)None of the above are true.

Question 63

The best example of a merit good in the United States is:

A)education.
B)clothing.
C)automobiles.
D)ocean resources.

Question 64

A good whose consumption the public sector encourages on grounds that individuals don't adequately weigh its benefits is a:

A)private good.
B)public good.
C)demerit good.
D)merit good.

Question 65

Reference: 15165
(Exhibit: Market Failure)If the market produces quantity E, then:

A)marginal benefit is equal to marginal cost.
B)marginal benefit is less than marginal cost.
C)marginal benefit is greater than marginal cost.
D)price is equal to marginal cost and greater than marginal benefit.

Question 66

In order for government intervention in a situation of market failure to result in improved resource allocation, the government:

A)needs the relevant information.
B)must have the proper goals.
C)may have to resist serious lobbying efforts.
D)All of the above are true.

Question 67

Goods whose consumption the public sector promotes are called _______ goods, and goods whose consumption the public sector discourages are called _______ goods.

A)Mary Poppins; sumptuary
B)demerit; merit
C)public; private
D)merit; demerit

Question 68

A good whose consumption the public sector discourages on grounds that individuals don't adequately weigh its costs is a:

A)private good.
B)public good.
C)demerit good.
D)merit good.

Question 69

Reference: 1570
(Exhibit: Correcting for Market Failure: Imperfect Competition)In this exhibit showing market failure, there is a(n)_______ competitive firm producing an output of ________.

A)perfectly; W
B)imperfectly; W
C)imperfectly; R
D)perfectly; R

Question 70

Reference: 1570
(Exhibit: Correcting for Market Failure: Imperfect Competition)If the government intervenes to induce the imperfectly competitive firm shown in this exhibit to produce at the efficient level of output, the net gain will be area:

A)RUVW minus VNM.
B)TUV.
C)NVM.
D)WVMZ.

Question 71

Reference: 15165
(Exhibit: Market Failure)If the market produces quantity G, then:

A)marginal benefit is less than marginal cost.
B)marginal benefit is equal to marginal cost.
C)marginal benefit is greater than marginal cost.
D)price is equal to marginal cost and less than marginal benefit.

Question 72

The models of market failure suggest that government intervention may ________ resource allocation but that the result _______ .

A)improve; will clearly be achieved
B)improve; may not be achieved
C)diminish; cannot be achieved
D)diminish; may not be achieved

Question 73

According to the text, a private economy may generate a distribution of income that is not considered to be satisfactory because:

A)workers get paid their marginal products.
B)there is an unequal distribution of talent.
C)the government will take care of people who suffer handicaps.
D)perfectly competitive labor markets misallocate resources.

Question 74

Reference: 1570
(Exhibit: Correcting for Market Failure: Imperfect Competition)If the government intervenes to induce the imperfectly competitive firm shown in this exhibit to produce at the efficient level of output of ________ , the change in output would be _______ .

A)W; RW
B)W; WZ
C)Z; RZ
D)Z; WZ

Question 75

A fundamental reason for concern about the distribution of income, according to the text, is that:

A)the efficiency argument is the most important criterion in this regard.
B)people care about the welfare of others.
C)people with higher incomes often desire to hurt those with lower incomes.
D)most people think private charity efficiently handles cases of poverty.

Question 76

Reference: 1570
(Exhibit: Correcting for Market Failure: Imperfect Competition)If the government intervenes to induce the imperfectly competitive firm shown in this exhibit to produce at the efficient level of output, the gain will be the _______ under the _______ curve between ________ .

A)area; supply; R and W
B)area; demand; R and W
C)vertical distance; demand; V and W
D)vertical distance; supply ; V and W

Question 77

Reference: 1570
(Exhibit: Correcting for Market Failure: Imperfect Competition)Before any attempt to intervene to reduce the inefficiency associated with the imperfectly competitive market shown in this exhibit, the equilibrium price is _______ and the equilibrium output is ________ .

A)P_v; W
B)P_u; R
C)P_u; W
D)P_v; R

Question 78

The best example of a demerit good in the United States is:

A)clothing.
B)education.
C)automobiles.
D)narcotics.

Question 79

Reference: 1570
(Exhibit: Correcting for Market Failure: Imperfect Competition)If the government intervenes to induce the imperfectly competitive firm shown in this exhibit to produce at the efficient level of output, the gain will be _______ and the cost will be ________.

A)RUVW; RTVW
B)RTVW; RUVW
C)RW; VW
D)UT; RT

Question 80

Reference: 15165
(Exhibit: Market Failure)A competitive market, free of market failures, will achieve an equilibrium price _______ and an equilibrium quantity _______ .

A)A; E
B)A; G
C)B; F
D)C; E