Deck 8: Government and Markets

Question 1

Proponents of incentive-based regulations for reducing acid rain maintain that they result in companies with the highest cost of decreasing acid rain being the ones to make relatively large cutbacks.

Answer 1

False

Question 2

Among the sources of market failure are competitive markets, private goods, and economic equality.

Answer 2

False

Question 3

A monopoly results in market failure because it uses too few resources to produce goods at an artificially high price.

Answer 3

True

Question 4

Antitrust policy is the attempt to promote a market environment that results in increased competition and a reduction in anti-competitive behavior that harms consumers.

Question 5

According to the Clayton Act, every contract, combination in the form of a trust, or conspiracy in restraint of trade is illegal.

Question 6

Among the business practices outlawed by the Clayton Act are interlocking directorates, price discrimination, mergers, and tying contracts that substantially lessen competition.

Question 7

All industries in the United States are subject to the provisions of the Sherman Act and Clayton Act.

Question 8

Social regulation controls the prices, wages, conditions of entry, and standards of service of particular industries.

Question 9

During the 1970s, the federal government initiated steps to dismantle economic regulations in industries where they had outlived their usefulness-telecommunications, railroads, energy, airlines, and trucking.

Question 10

The traditional reason for allowing a public utility to operate as a monopoly, subject to regulation of price and output policies, is that the firm is a natural monopoly.

Question 11

According to the fair-return principle of regulation, a firm can charge a price high enough to allow it to realize an economic profit.

Question 12

Fair-return regulation tends to decrease the motivation for public utilities to reduce costs, because they can attain essentially the same profits irrespective of their cost-reducing efforts.

Question 13

When the production of a good entails spillover benefits, too much of it is produced and there is an over-allocation of resources to its use.

Question 14

When the production of a good entails spillover costs, too little of a good is produced and there is an under-allocation of resources to its use.

Question 15

To decrease pollution, the U.S. government relies primarily on command-and-control regulations, rather than incentive-based regulations.

Question 16

An example of an incentive-based regulation is the imposition of an excise tax on the production of chemicals to encourage chemical firms to reduce pollution.

Question 17

Whereas social regulation governs the conditions of doing business in a particular industry, economic regulation addresses the conditions under which goods are produced in a variety of industries.

Question 18

The Environmental Protection Agency, Consumer Production Safety Commission, and Occupational Safety and Health Administration are government agencies that engage in social regulation.

Question 19

Critics of the North American Free Trade Agreement have maintained that because environmental regulations in the United States are more stringent than those in Mexico, the competitiveness of U.S. firms may suffer.

Question 20

The international environmental policy of the United States and other industrial nations is founded on the polluter-pays principle.

Question 21

The market system fails by under-producing public goods.

Question 22

Because of the free-rider problem, government is looked upon to provide public goods through the use of tax financing.

Question 23

Public goods, such as lighthouses and highways, are produced and sold easily in small units and are not subject to the principle of rival consumption.

Question 24

When sellers or buyers have incomplete or inaccurate information about price and quality, markets will still result in efficient outcomes.

Question 25

To help correct for the problem of economic inequality, government provides people in need with transfer payments such as unemployment compensation, food stamps, and Aid to Families with Dependent Children.

Question 26

The Justice Department attempted to break up Microsoft Corp. because it felt the company had used its monopoly power to engage in anticompetitive business practices.

Question 27

The Federal Reserve Bank of Minneapolis has recommended that cities stop competing for professional sports teams.

Question 28

The power shortages that occurred in California in the mid to late 1990s were caused by the state's complete deregulation of electric utility companies in 1996.

Question 29

Under a system of peak-load pricing, customers are charged more for using electricity during the off-peak hours.

Question 30

If there are spillover benefits associated with individuals receiving their annual flu shots, then the government can improve the free market outcome by subsidizing the cost of flu shots to consumers.

Question 31

Command-and-control regulations impose restrictions on the amount of a polluting activity that is allowed to occur.

Question 32

Brookings Institution researchers have found that sports stadiums provide a big boost to employment and personal income to residents of local communities.

Question 33

Proponents of government subsidies for the building of sports stadiums argue that the presence of a professional sports team improves the quality of life in the community, even for those who do not attend games.

Question 34

When someone buys a used car and finds out later that it has defects that were not disclosed, this is a form of market failure.

Question 35

All of the following are sources of market failure except

A) private goods
B) public goods
C) spillover costs
D) spillover benefits

Question 36

All of the following are sources of market failure except

A) competitive markets
B) monopoly power
C) inadequate information
D) economic inequality

Question 37

All of the following are sources of market failure except

A) public goods
B) perfect information
C) spillover effects
D) monopoly power

Question 38

Given the same costs, a monopolist maximizes profit by selling a ______ output and charging a ______ price than would a competitive market.

A) smaller, higher
B) smaller, lower
C) larger, higher
D) larger, lower

Question 39

Given the same costs, a competitive market maximizes profit by selling a ______ output and charging a ______ price than would a monopolist.

A) larger, higher
B) larger, lower
C) smaller, higher
D) smaller, lower

Question 40

______ is the attempt to foster a market structure that will result in additional competition and less anti-competitive behavior that harms consumers.

A) Social regulation
B) Economic regulation
C) Fair return regulation
D) Antitrust policy

Question 41

During the late 1800s, large corporations formed ______, a nineteenth century name given to cartels and other business agreements intended to restrain competition.

A) mergers
B) acquisitions
C) consolidations
D) trusts

Question 42

According to the ______, every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor.

A) Clayton Act
B) Walter Act
C) Nixon Act
D) Sherman Act

Question 43

The ______ broadened the Sherman Act and outlawed specific business practices that resulted in a substantial lessening of competition-price discrimination, mergers, tying contracts, and interlocking directorates

A) Wilson Act
B) McKinley Act
C) Clayton Act
D) Nelson Act

Question 44

Which of the following is not a potential violation of the Clayton Act?

A) interlocking directorates
B) price discrimination
C) tying contracts
D) fair-return pricing

Question 45

All of the following are potential violations of the Clayton Act except

A) anti-competitive mergers
B) average-cost pricing
C) tying contracts
D) interlocking directorates

Question 46

The federal antitrust laws are enforced primarily by the

A) Securities and Exchange Commission
B) Justice Department and the Federal Trade Commission
C) Public Utilities Commission
D) Federal Bureau of Investigation

Question 47

To control the wages, prices, conditions of entry, and standards of service in a particular industry, the government has used

A) antitrust regulation
B) social regulation
C) spillover regulation
D) economic regulation

Question 48

In the past, economic regulation has been used to control the prices, standards of service, and conditions of entry in all of the following industries except

A) automobiles
B) railroads
C) communications
D) trucking

Question 49

In the past, economic regulation has been used to control the prices, standards of service, and conditions of entry in all of the following industries except

A) energy
B) airlines
C) trucking
D) computers

Question 50

In response to the problems of economic regulation, the federal government dismantled economic regulations in the 1970s and 1980s in all of the following industries except

A) trucking
B) railroads
C) health care
D) telecommunications

Question 51

The purpose of the deregulation movement of the 1970s and 1980s was to

A) increase competition and provide incentives for firms to introduce new products
B) prevent destructive competition from driving inefficient firms out of industries
C) provide stable markets so firms could realize of economies of scale
D) provide an orderly transition as industries evolve from infancy to maturity

Question 52

The purpose of the deregulation movement of the 1970s and 1980s was to dismantle many ______ that had outlived their usefulness.

A) social regulations
B) economic regulations
C) antitrust laws
D) environmental regulations

Question 53

U.S. public policy toward public utilities, such as gas and electric companies, has generally allowed them to operate as

A) private monopolies without government regulation of price and output
B) private monopolies subject to government regulation of price and output
C) firms owned and operated by the federal government
D) firms owned and operated by state governments

Question 54

Concerning public utilities, legislatures have traditionally allowed a regulated firm to receive a price that

A) provides an economic profit of 25 percent of invested capital
B) provides an economic profit of 15 percent of invested capital
C) covers average variable cost, but not average total cost
D) covers average fixed cost plus average variable cost

Question 55

When the legislature allows a public utility to receive a fair-return price, the firm can charge a price high enough to cover

A) average total cost
B) average variable cost
C) average fixed cost
D) marginal cost

Question 56

______ tends to reduce the incentives for public utilities to contain costs, because the firm realizes essentially the same profits regardless of its efforts.

A) Marginal cost pricing
B) Monopoly pricing
C) Fair-return pricing
D) Cartel pricing

Question 57

Critics of fair-return regulation, as applied to public utilities, maintain that it

A) results in cutthroat competition that drives inefficient producers out of business
B) results in a price that exceeds average total cost
C) does not allow firms to realize economies of large-scale production
D) reduces incentives for public utilities to innovate and to contain costs

Question 58

During the 1990s, a number of legislatures were deregulating former public utilities such as electricity and cable television companies. Such deregulation was due to an awareness that

A) the regulated firms were not profit-maximizing monopolies
B) the regulated firms were not natural monopolies
C) fair-return regulation could not limit economic profits
D) fair-return regulation only allowed a firm to realize a normal profit

Question 59

When the production of a good results in spillover costs, the market system fails by producing ______ of it and ______ resources to its use.

A) too little, under-allocating
B) too little, over-allocating
C) too much, over-allocating
D) too much, under-allocating

Question 60

When the production of a good results in spillover benefits, the market system fails by producing ______ of it and ______ resources to its use.

A) too little, under-allocating
B) too little, over-allocating
C) too much, over-allocating
D) too much, under-allocating

Question 61

To force the market to decrease its pollution, government imposes command-and-control regulations on producers. Such regulations include all of the following except

A) restrictions on the amount of pollutants that a firm can place into the air
B) excise taxes imposed on the production of chemicals
C) legislation that specifies procedures for the disposal of contaminated soils
D) legislation that specifies dump sites for the disposal of contaminated solvents

Question 62

Concerning governmental regulation of pollution, command-and-control regulations suffer from all of the following problems except

A) assigning the proper excise tax to discourage pollution
B) being subject to enforcement procedures that are costly for the taxpayer
C) regulators not having detailed knowledge of production facilities and processes
D) regulators not being aware of alternative methods of pollution abatement

Question 63

______ regulation is intended to correct a variety of undesirable side effects in a market economy that relate to the environment, safety, and health.

A) Antitrust
B) Antimonopoly
C) Economic
D) Social

Question 64

Which of the following is an example of social regulation in the U.S.?

A) automobiles have seat belts
B) a cat does not eat chocolate
C) books have numbered pages
D) a child wears boots when it rains

Question 65

All of the following statements are true characteristics of private goods except

A) they come in units small enough that they can be purchased by individuals
B) only those who have the ability to pay can purchase the good
C) when one individual consumes a good, another cannot consume the same one
D) they are the same as public goods

Question 66

Jen puts out holiday decorations in her front yard in December and many passers-by enjoy the display. This is an example of a

A) spillover benefit
B) spillover cost
C) social regulation
D) fair-return price

Question 67

Public goods include all of the following except a(n)

A) Big Mac hamburger
B) lighthouse
C) highway
D) air traffic control system

Question 68

The U.S. government has relied primarily on ______ to force firms to decrease their pollution.

A) incentive-based regulations
B) command-and-control regulations
C) free-rider regulations
D) fair-return regulations

Question 69

If the Florida Power Co. is a natural monopoly, government policies that break it up would

A) limit the ability of the firm to realize economies of large-scale production
B) force the firm to realize diseconomies of large-scale production
C) ensure that the firm would realize economic profits
D) prevent the firm from realizing economic profits

Question 70

Market failure occurs when ABC Chemical Co. does not take into account spillover costs. Therefore, the firm produces

A) too little output and charges too low a price
B) too little output and charges too high a price
C) too much output and charges too low a price
D) too much output and charges too nigh a price

Question 71

To help clear the skies of acid rain, the U.S. government allows the trading of emission certificates. Such a program is an example of

A) command-and-control regulation
B) incentive-based regulation
C) fair-return regulation
D) social-benefit regulation

Question 72

To help clear the skies of acid rain, the U.S. government allows the trading of emission certificates. If the price of a certificate is $25,000, then acid rain will be decreased by companies that can do so at a cost of

A) less than $25,000
B) exactly $25,000
C) greater than $25,000
D) any amount

Question 73

Proponents of incentive-based regulations for reducing pollution maintain that they result in firms with

A) the lowest cost of decreasing pollution to make relatively large reductions
B) the highest cost of decreasing pollution to make relatively large reductions
C) substantial economic profits making relatively large reductions
D) substantial economic losses making relatively large reductions

Question 74

Industries have been made subject to economic regulations for all the following reasons except

A) large economies of scale
B) fear of destructive competition
C) extending the scope of service
D) corruption of government officials

Question 75

Suppose that Rebecca throws her Coke bottle out the car window and it smashes on the road. Jim drives over the broken glass and gets a flat tire. Rebecca's Coke consumption has resulted in a spillover

A) production of Coke
B) benefit
C) cost
D) natural monopoly

Question 76

Figure 7.1 Market Failure


-Refer to Figure 7.1. The market failure depicted is

A) a spillover cost
B) a spillover benefit
C) income inequality
D) a public good

Question 77

Figure 7.1 Market Failure


-Refer to Figure 7.1. Without any government intervention, the free market results in price equal to ______ and quantity equal to ______.

A) $90; 100
B) $75; 140
C) $90; 140
D) $75; 100

Question 78

Figure 7.1 Market Failure


-Refer to Figure 7.1. The government could make the firm move from S₀ to S₁ by requiring the firm to

A) take spillover benefits into account
B) sell more output
C) lower its price
D) install pollution-control equipment

Question 79

Education is an activity that is considered to

A) have spillover costs
B) have spillover benefits
C) be a private good
D) be required under the Sherman Act

Question 80

Sources of market failure include all of the following except

A) externalities
B) economic inequality
C) perfect competition
D) inadequate information