Deck 5: Difficult Cases for the Market, and the Role of Government

Question 1

Because the benefits derived from an activity decline as it is expanded, it is generally

A) wise to undertake all actions that generate benefits.
B) efficient to stop well before perfection is achieved.
C) best to continue as long as it is possible to derive some additional benefits.
D) unwise to engage in activities for which the benefits decline as you do more of it.

Answer 1

efficient to stop well before perfection is achieved.

Question 2

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the

A) productive function of government.
B) protective function of government.
C) construction function of government.
D) income redistribution function of government.

Answer 2

productive function of government.

Question 3

Which of the following is most consistent with the idea that if it's worth doing, it's worth doing imperfectly?

A) When Mia cleaned her apartment, she didn't clean under the refrigerator.
B) Mason is so disorganized that he spends 15 minutes every day trying to find his glasses.
C) The senator stated, "No price is too high to save a life!"
D) Ford's new policy is to make every car completely safe.

Answer 3

When Mia cleaned her apartment, she didn't clean under the refrigerator.

Question 4

There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the

A) protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets.
B) redistribution of income from some individuals to others and the waging of war to expand the nation's territory.
C) production of postal services and cable television.
D) taxation of goods that are generally considered immoral or bad and the regulation of large corporations.

Question 5

If the construction of a new elementary school would create $5 million worth of benefits for citizens and cost $7 million to construct, then using the criterion of economic efficiency, the school

A) should be built.
B) should not be built.
C) results in a substantial improvement to the welfare of society.
D) should be built if it passes by a majority vote.

Question 6

As more and more resources are dedicated to an activity

A) the benefits will increase proportionately.
B) the benefits will become smaller and smaller while the costs will rise.
C) the demand for that activity will increase.
D) the costs will be offset by the benefits received from the activity.

Question 7

Many external costs occur because

A) people do not pay the true cost of using a resource.
B) people do not pay the private cost of using a resource.
C) companies do not pay the market price for natural resources.
D) companies pay more than the true cost of using a resource.

Question 8

Markets fail to allocate resources efficiently when

A) prices fluctuate.
B) people who have property rights abuse their privileges.
C) property rights are poorly enforced or not well established.
D) the government refuses to intervene in private markets.

Question 9

The idea that an action should be undertaken if and only if the benefits exceed the costs is known as the concept of

A) economic efficiency.
B) public welfare maximization.
C) marginal comparative advantage.
D) monetary construction of values.

Question 10

Which of the following best explains why making automobiles completely safe is not efficient?

A) After some level of safety is reached, making cars even safer will not be worth the additional cost.
B) Because human life is priceless, automobile safety generally doesn't matter.
C) The benefit from additional automobile safety will generally rise as automobiles are made safer, more than offsetting the opportunity cost involved.
D) Economic efficiency suggests that automobiles should be made as safe as humanly possible.

Question 11

When economists say that an activity meets the criterion for economic efficiency, they mean

A) a majority of citizens favor the activity.
B) the benefits that result from the activity exceed the costs.
C) the number of people who gain from the activity exceeds the number on whom costs are imposed.
D) the costs that result from the activity exceed the benefits.

Question 12

The key explanation for the prevalence of waterway pollution is

A) the inclusion in production of all costs involving use of the waterway.
B) that there are private costs but no costs to society.
C) that waterways are often an open access, commonly owned resource.
D) that waterways are subject to the market's normal control procedures.

Question 13

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the

A) productive function of government.
B) protective function of government.
C) transfer function of government.
D) illegitimate function of government.

Question 14

Which of the following best explains why making air travel completely safe is not efficient?

A) After some level of safety is reached, making airplanes even safer is not worth the opportunity cost that would be incurred.
B) Because one can't put a price on human life, airplane safety generally doesn't matter economically.
C) The benefit from additional airplane safety will generally rise as airplanes are made safer, more than offsetting the opportunity cost involved.
D) The question is misleading--making airplanes safer is always efficient.

Question 15

Economic efficiency indicates that

A) if something is worth doing, you should do it as well as humanly possible.
B) all pollution should be eliminated.
C) automobiles should be made as safe as possible
D) it nearly always makes sense to stop an activity well before perfection is achieved.

Question 16

The standard economists use to assess whether an activity should be undertaken is

A) majority vote
B) the marginal benefit assessment.
C) the gold standard
D) economic efficiency.

Question 17

Which of the following would be a protective function of government?

A) legal enforcement of contracts and rules against fraud
B) undertaking income redistribution
C) providing national parks
D) providing a stable monetary system

Question 18

If an economic action generates more costs than benefits, the action

A) by definition increases the nation's economic welfare.
B) should not be undertaken from an efficiency standpoint.
C) should be subsidized by the government in order to make sure that it is undertaken.
D) is desirable from a public welfare standpoint even though many individuals will be harmed.

Question 19

Because the benefits derived from an activity decline as it is expanded, it is generally wise to

A) undertake all actions that generate benefits.
B) expend the smallest possible amount of resources on this type of activity.
C) avoid any activity with this characteristic.
D) stop the activity before perfection is reached..

Question 20

A market transaction causes an externality if someone

A) directly involved in the transaction receives uncompensated benefits or costs from it.
B) not directly involved in the transaction receives uncompensated benefits or costs from it.
C) directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out.
D) not directly involved in the transaction interferes in it by imposing regulations or product standards.

Question 21

When a firm generates external benefits, a more efficient outcome would result if

A) the firm produced a larger output level.
B) the firm reduced its output level.
C) a tax were levied on the firm equal to the dollar amount of the externalities.
D) price were fixed below the firm's per-unit cost.

Question 22

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

A) The pollution will be created by those least willing and able to pay the damages.
B) The pollution will be created by those most willing and able to pay for the right to pollute.
C) The funds collected by the government will be enough to compensate any individuals harmed by the pollution.
D) Pollution will increase from zero to 1,000 units per day.
E) There will be no incentive for polluters to try to sneak emissions past government monitoring devices.

Question 23

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

A) The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
B) The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
C) The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
D) The tuition paid by the student would be exceed the efficient amount.

Question 24

Externalities cause the market mechanism to allocate goods and resources inefficiently because

A) nonconsenting third parties are generally not hurt by externalities.
B) producers and consumers ignore signals given by the competitive market.
C) prices are always higher than they should be.
D) competitive markets fail to give producers and consumers correct price signals.

Question 25

The spillover effects of actions that affect the well-being of nonconsenting third parties are called

A) side components.
B) externalities.
C) free riders.
D) internalizations.

Question 26

Externalities are fundamentally the result of

A) the absence of competition in a market.
B) the lack of well-defined or enforced property rights.
C) poor information on the part of consumers.
D) the presence of significant comparative advantages in production.

Question 27

When production of a good provides external benefits, there will be

A) too few resources devoted to its production.
B) too many resources devoted to its production.
C) the optimal amount of resources devoted to its production.
D) abnormally high profits earned by producers of the good.

Question 28

In a market that lacks sufficient competition,

A) output will generally be less than the output that is ideal from the standpoint of economic efficiency.
B) output will generally be greater than the output that is ideal from the standpoint of economic efficiency.
C) price will generally be less than the price that would result if the market was competitive.
D) profit rates will generally be so low that government subsidies will be necessary to ensure that the firms remain in business.

Question 29

Relative to a competitive situation, if a market lacks competition, economic theory suggests that

A) output will be lower and price higher.
B) output will be higher and price lower.
C) both output and price will be higher.
D) both output and price will be lower.

Question 30

If production of a good creates external benefits, a competitive market will likely produce

A) less output than would maximize profit.
B) more output than would maximize profit.
C) less output than is efficient.
D) more output than is efficient.

Question 31

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

A) pollution is not a serious problem in this industry.
B) the consumers of steel are unwilling to bear the costs of pollution generated from steel production.
C) pollution is an externality in this market, since producers and purchasers of steel do not bear the full costs of the pollution.
D) pollution creates an external benefit rather than an external cost in this case.

Question 32

When competitive forces in an industry are weak,

A) the absence of competition generally leads to overproduction.
B) prices may exceed the amount consumers are willing to pay.
C) the operational efficiency of private firms will be enhanced.
D) higher prices and less than optimal production may result.

Question 33

If education creates external benefits,

A) actual market outcomes provide less than the efficient quantity of education.
B) actual market outcomes provide more than the efficient quantity of education.
C) actual market outcomes provide a higher price than the efficient price of education.
D) the government should impose a depletion tax.

Question 34

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

A) not enough of the product is being produced.
B) the price charged for the good is too high.
C) the good produces a positive externality.
D) the good produces a negative externality.
E) the government should produce the good.

Question 35

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

A) firm's cost of producing electricity will be higher than the community's true opportunity cost.
B) firm will tend to produce too little electricity from the viewpoint of economic efficiency.
C) community generally receives an external benefit from the production of electricity.
D) firm's cost of producing electricity will be lower than the community's true opportunity cost.

Question 36

When externalities are present,

A) suppliers will refuse to produce desired goods and services.
B) this indicates that property rights are well-defined and enforced.
C) competitive market outcomes may be inconsistent with ideal economic efficiency.
D) competitive markets will generally achieve ideal economic efficiency.

Question 37

If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,

A) more education must be produced.
B) the same amount of education must be produced, and the price should be lower.
C) less education must be produced, and the price should be higher.
D) less education must be produced, and the price should be lower.
E) less education must be produced at the same price.

Question 38

Sellers have a strong incentive to lobby government for legal restrictions that would reduce the intensity of competition in their market because

A) the firms wish to be more efficient than competition will permit.
B) competition tends to result in lower prices and lower profits.
C) legal restrictions that lessen competition in a market generally benefit consumers.
D) the firms fear that intense competition will lead to higher profits that will attract additional rivals into the market.

Question 39

Markets fail when externalities are present

A) because all of the costs and benefits of producing a good are reflected in the market price.
B) because some of the costs and benefits of producing a good are not reflected in the market price.
C) only if they are negative; positive externalities are not market failures.
D) because profits are not maximized.
E) if the positive externalities are less than the negative externalities.

Question 40

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

A) raising price and reducing output.
B) raising price and expanding output.
C) lowering price and expanding output.
D) raising price and leaving output unchanged.

Question 41

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

A) The price would be too low, and the output would be too large.
B) The price would be too high, and the output would be too large.
C) The price would be too low, and the output would be too small.
D) The price would be too high, and the output would be too small.

Question 42

Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome would

A) result in output that is lower than the efficient output for both goods.
B) result in output that is higher than the efficient output for both goods.
C) result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.
D) result in output that is higher than the efficient output for the good with an external benefit and output that is lower than the efficient output for the good with an external cost.

Question 43

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient price would higher than $18 while the efficient output would be less than 400 units.
B) The efficient price would be higher than $18 while the efficient output would be greater than 400 units.
C) The efficient price would be lower than $18 while the efficient output would be less than 400 units.
D) The efficient price would be lower than $18 while the efficient output would be greater than 400 units.

Question 44

When external benefits are present in a market,

A) less of the good will be produced than the amount consistent with economic efficiency.
B) more of the good will be produced than the amount consistent with economic efficiency.
C) the amount of the good produced will be equal to the amount consistent with economic efficiency.
D) corresponding external costs are always generated.

Question 45

Students in a class are assigned to groups to work on a project. A grade will be given for each project, and everyone in the group will receive that grade. For the members of a particular group, the grade is a

A) external benefit.
B) public good.
C) external cost.
D) repeat purchase item.

Question 46

Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would

A) result in a price that is lower than the efficient price for both goods.
B) result in a price that is higher than the efficient price for both goods.
C) result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost.
D) result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost.

Question 47

As a general rule, if pollution costs are external, firms will produce

A) too little of a polluting good.
B) too much of a polluting good.
C) an optimal amount of a polluting good.
D) cannot be determined without additional information.

Question 48

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $30 and market output of 220 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient price would higher than $30 while the efficient output would be less than 220 units.
B) The efficient price would be higher than $30 while the efficient output would be greater than 220 units.
C) The efficient price would be lower than $30 while the efficient output would be less than 220 units.
D) The efficient price would be lower than $30 while the efficient output would be greater than 220 units.

Question 49

What are the two distinguishing characteristics of a public good?

A) nonrivalry in consumption and nonexcludability
B) indivisibility in production and excludability of nonpaying customers
C) provision by government and funding through taxation
D) mass production and comparative advantage

Question 50

Suppose external benefits are present in a market which results in the actual market price of $49 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient price would be higher than $49.
B) The efficient price would be lower than $49.
C) The efficient price would also be $49.
D) The efficient output would be less than 800 units.

Question 51

In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will

A) produce the economically efficient outcome.
B) result in a market price that is higher than the efficient one.
C) register a price that is lower than the efficient one.
D) result in too little of the good being produced compared to the ideal efficient outcome.

Question 52

A good is considered to be a public good if it

A) is a good produced by the government sector.
B) is both nonrival-in-consumption and nonexcludable.
C) benefits only a small group of consumers but is very costly to produce.
D) is a good whose production is financed by tax revenue.

Question 53

When external costs are present in a market,

A) less of the good will be produced than the amount consistent with economic efficiency.
B) more of the good will be produced than the amount consistent with economic efficiency.
C) the amount of the good produced will be equal to the amount consistent with economic efficiency.
D) corresponding external benefits are always generated.

Question 54

Suppose external costs are present in a market which results in the actual market price of $70 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient price would be higher than $70.
B) The efficient price would be lower than $70.
C) The efficient price would also be $70.
D) The efficient output would be greater than 150 units.

Question 55

In a competitive market, if the production process involves an external benefit, the market will

A) produce the economically efficient outcome.
B) result in a market price that is higher than the efficient one.
C) result in a market price that is lower than the efficient one.
D) result in too much of the good being produced compared to the ideal efficient outcome.

Question 56

Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient outcome would be greater than 325 units.
B) The efficient outcome would be less than 325 units.
C) The efficient outcome would also be 325 units.
D) The efficient price would be less than $24.

Question 57

If government taxes a firm which pollutes this will

A) increase the demand for the good produced.
B) decrease the supply of the good produced.
C) increase the equilibrium quantity of the good produced in the market.
D) decrease the equilibrium price of the good produced in the market.
E) all of the above.

Question 58

Suppose external benefits are present in a market which results in the actual market price of $14 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

A) The efficient outcome would be greater than 150 units.
B) The efficient outcome would be less than 150 units.
C) The efficient outcome would also be 150 units.
D) The efficient price would be less than $14.

Question 59

A good that is both nonexcludable and nonrival-in-consumption is called a

A) common good.
B) external good.
C) public good.
D) private good.

Question 60

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.
B) too little of both goods.
C) too much of the good that generates external benefits and too little of the good that generates external costs.
D) too little of the good that generates external benefits and too much of the good that generates external costs.

Question 61

A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a

A) public good.
B) joint good.
C) excludable good.
D) national good.

Question 62

A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should

A) always gather all available information about prices.
B) gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it.
C) gather information about prices only if it can be gathered without cost.
D) ignore information about prices because it is irrelevant to making an "optimally imperfect" decision.

Question 63

The government sometimes provides public goods because

A) private markets would not produce any of the goods.
B) private markets would not produce the efficient quantity of the goods.
C) private markets would charge too high a price for the goods.
D) the government produces public goods more efficiently than private markets can.

Question 64

If it is impossible or very costly to exclude nonpaying customers from receiving a good, the good is considered to be

A) freeware.
B) nonexcludable.
C) a common good.
D) a receiving good.

Question 65

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

A) durable.
B) nonrival-in-consumption.
C) a common good.
D) a natural resource.

Question 66

A good is considered nonrival-in-consumption if

A) many individuals can share in the consumption of the same unit of the good.
B) the consumption of the good by one individual lowers the amount available for others.
C) even nonpaying customers can receive the full benefit from the good.
D) its production is financed through tax revenue rather than market prices.

Question 67

People who receive the benefit of a good without contributing to its costs of production are called

A) contributors in kind.
B) free riders.
C) frequent flyers.
D) cost maximizers.

Question 68

How does an additional individual's consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers?

A) The amount available to others will decline.
B) The amount available to others will increase.
C) The amount available to others is unaffected.
D) The amount available to others is eliminated.

Question 69

From the standpoint of economic efficiency, markets tend to provide

A) less of a public good than would be efficient.
B) more of a public good than would be efficient.
C) exactly the amount of a public good that is efficient.
D) none of the above.

Question 70

When the free-rider problem exists,

A) the market will devote too few resources to the production of the good.
B) the cost of the good will always be more than the benefit of the good.
C) the good will not be produced.
D) entrepreneurs will eventually find a way to make free-riders pay their share.

Question 71

The government sometimes provides public goods because

A) private markets are incapable of producing public goods.
B) free-riders make it difficult for private markets to supply the efficient quantity.
C) markets are always better off with some government oversight.
D) external benefits will accrue to private producers.

Question 72

In economics, a free rider is the term used for a person who

A) receives the benefit of a good without contributing to its costs of production.
B) purchases an item during a "buy one, get one free" sale.
C) lives in a town in which the city provides free bus service.
D) pays for exactly what they receive.

Question 73

A market is unlikely to provide an efficient quantity of public goods because

A) only the government has the vast resources necessary to produce public goods.
B) the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers.
C) the technology involved in the production of public goods makes it difficult for private firms to produce them even though they could be produced efficiently.
D) private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders.

Question 74

A free-rider problem exists when a good that has the following characteristic?

A) Rivalry in consumption.
B) Elastic demand.
C) Inelastic demand.
D) Nonexcludable.

Question 75

Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services?

A) When the government provides economic goods, they are free; costs are only incurred when such goods are provided by private firms.
B) Voters tend to be better informed than market consumers.
C) Decision makers in the market are motivated by self-interest, whereas, political decision makers are primarily motivated by the desire to help others.
D) Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem.

Question 76

A good is considered nonexcludable if

A) many individuals can share in the consumption of the same unit of the good.
B) the consumption of the good by one individual lowers the amount available for others.
C) it is impossible or very costly to exclude nonpaying customers from receiving the good.
D) its production is financed through tax revenue rather than market prices.

Question 77

When a good is nonexcludable,

A) it is impossible or very costly to exclude nonpaying customers from receiving the good.
B) individuals will have an incentive to become free riders.
C) it will be difficult for a private firm producing the good to generate revenue sufficient to cover the cost of production.
D) all of the above are true.

Question 78

A college has found that during every home football game, a group of students sits on a hillside next to the stadium and watches the game without purchasing tickets. In economics, the problem that this college is facing is referred to as a

A) common good problem.
B) free rider problem.
C) onlooker problem.
D) deadweight loss problem.

Question 79

Because of the free-rider problem,

A) competitive markets will tend to undersupply public goods.
B) the federal government spends too much on national defense.
C) fireworks displays have become increasingly dangerous.
D) poverty has increased.

Question 80

Which of the following about public goods is true?

A) Consumption of a public good by one individual reduces the availability of the good for others.
B) It is extremely difficult to limit the benefits of a public good to only the people who pay for it.
C) Public goods are free to a society when they are produced by the government.
D) From an efficiency standpoint, a market will generally supply too much of a public good.