Deck 15: The Shortcomings of Free Markets

Question 1

When MSC > MPC, there are detrimental externalities.

Answer 1

True

Question 2

Competitive markets tend to produce an inefficiently large amount of beneficial externalities.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

The production possibilities frontier shows the feasible combinations of production without waste.

Question 5

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

Question 6

Market economies produce only a few relatively minor defects.

Question 7

Efficient resource allocation is defined as MC = AC.

Question 8

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

Question 9

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

Question 10

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

Question 11

A monopoly price reflects a good's marginal utility.

Question 12

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

Question 13

When General Motors pays an outside vendor for auto parts, this is an external cost.

Question 14

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

Question 15

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

Question 16

Externalities can be either detrimental or beneficial to others.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

Private goods are not excludable.

Question 26

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

Question 27

There is no way that externalities can be corrected.

Question 28

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

Question 29

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

Question 30

All externalities are detrimental.

Question 31

A private good is characterized by excludability and depletability.

Question 32

Most Americans would voluntarily support defense without required taxation.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Education is subsidized because it generates beneficial externalities.

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

A market will be efficient even if there is imperfect information as long as the market is competitive.

Question 45

Markets can efficiently handle irreversible decisions without involvement of government.

Question 46

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

Question 47

Moral hazard encourages people to take risks.

Question 48

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

Question 49

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

Question 50

Rent seeking creates incentives for firms to use resources efficiently.

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

A potential cause of competitive market failure is symmetric information.

Question 56

Asymmetric information generally leads to efficient resource allocation.

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Markets are primarily responsible for the rapid rise in productivity during the 20th century.

Question 62

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

Question 63

In an efficient market without externalities,

A)price equals marginal private cost and is below marginal social cost.
B)price equals marginal private cost and marginal social cost.
C)price equals marginal private value and is below marginal external value.
D)price equals marginal private value and marginal external value.

Question 64

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

Question 65

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

Question 66

In an ideal competitive market,

A)excludable goods are minimized.
B)there are no depleteable goods.
C)external benefits are maximized.
D)social surplus is maximized.

Question 67

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

Question 68

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 69

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 70

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 71

Which of the following observations is true?

A)The cost disease is most prevalent in low income countries.
B)The cost disease affects public goods but not private goods.
C)The cost disease is most prevalent in commodity markets.
D)The cost disease occurs as the opportunity cost of labor increases.

Question 72

Markets will always create more efficient outcomes without government intervention.

Question 73

Producing more cabbage will be inefficient if

A)the marginal opportunity cost of cabbage is less than the marginal value.
B)cabbage production can be increased without reducing production of other goods.
C)the marginal value of forgone lettuce is greater than the marginal value of cabbage.
D)the marginal value of forgone lettuce is less than the marginal value of cabbage.

Question 74

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 75

Which of the following does not cause competitive market failure?

A)Detrimental externalities
B)Beneficial externalities
C)Poorly defined property rights
D)The cost disease

Question 76

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

Question 77

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

Question 78

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

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.