Deck 5: Governments Role and Government Failure

Question 1

Which of the following is a key difference between the economic activities of government and those of private firms?

A) Private firms face the constraint of scarcity;government does not.
B) Government focuses primarily on equity;private firms focus only on efficiency.
C) Private economic activities create externalities;government activities do not.
D) Government has the legal right to force people to do things;private firms do not.

Answer 1

Government has the legal right to force people to do things;private firms do not.

Question 2

Weak government enforcement of contracts and laws tends to:

A) increase economic efficiency by minimizing government interference.
B) stimulate innovation and investment.
C) discourage economic activity by encouraging private-sector coercion such as blackmail and extortion.
D) not affect economic activity,as incentives for theft and deception are low.

Answer 2

discourage economic activity by encouraging private-sector coercion such as blackmail and extortion.

Question 3

Which of the following is a source of government failure?

A) The invisible hand.
B) The lack of bureaucracy in government.
C) The enormous size and scope of government.
D) Excessive flexibility.

Answer 3

The enormous size and scope of government.

Question 4

The government's ability to coerce can enhance economic efficiency by:

A) eliminating income inequality.
B) correcting market failures.
C) preventing resources from going to their most valued uses.
D) restraining self-interest.

Question 5

Information problems create inefficient outcomes in:

A) the private sector but not the public sector.
B) the public sector but not the private sector.
C) neither the private nor the public sector.
D) both the private and the public sectors.

Question 6

In a market economy,the government's power to coerce can:

A) undermine economic efficiency by increasing private-sector risk.
B) improve economic efficiency by directing all resources to their most valued uses.
C) reduce private-sector risk and increase economic efficiency.
D) cause significant negative externalities.

Question 7

Government officials tend to make:

A) better economic decisions than private individuals because of the wealth of information at their disposal.
B) better economic decisions than private individuals because of the efficient processes and flexibility built into the government bureaucracy.
C) inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs.
D) inefficient choices because the invisible hand directs them away from the resource allocation where marginal benefits equal marginal costs.

Question 8

In corporations,owners are __________________ and managers are ________________.

A) agents;principals
B) stockholders;bondholders
C) agents;employees
D) principals;agents

Question 9

In representative democracy,voters are ____________ and politicians are ______________.

A) agents;principals
B) logrollers;principals
C) agents;employees
D) principals;agents

Question 10

Individual accountability within the government bureaucracy:

A) tends to be greater than in private firms,making government more efficient than private firms.
B) is not a problem because government bureaucrats are not affected by the self-interest that affects private sector individuals.
C) is easy to monitor because of the small size and scope of government.
D) tends to be lacking because of civil service protections and the complexity of government.

Question 11

As it relates to owners and managers,the principal-agent problem results from the:

A) separation of corporate ownership and control.
B) double taxation of corporate profit.
C) limited liability of corporate owners.
D) differing interests of corporate stockholders and bondholders.

Question 12

Vote for my special local project and I will vote for yours.This political technique:

A) illustrates the paradox of voting.
B) is called "logrolling."
C) illustrates the median voter model.
D) undermines the benefits-received principle.

Question 13

In what way,if any,does the invisible hand affect government resource allocation?

A) It enhances government efficiency by promoting competition for resources within government.
B) It does not help resource allocation,as there are no competitive forces within government that automatically direct resources to their best uses.
C) It rewards government bureaucrats who are most efficient at implementing public policies.
D) It reduces government efficiency by sending market signals that interfere with government decision making.

Question 14

Factors that impede the attainment of economic efficiency in the public sector are called:

A) market failures.
B) externalities.
C) government failures.
D) voting irregularities.

Question 15

The many layers of the federal government in Canada:

A) lead to economic inefficiencies because of difficulty aggregating and conveying information.
B) enhance government's ability make effective decisions quickly.
C) better allow the invisible hand to direct government resources to their best uses.
D) improve accountability of government officials,thus leading to more efficient policies.

Question 16

As it relates to the political process,the principal-agent problem results from the:

A) negative externalities that are created by some policy actions.
B) political rules that encourage elected officials to engage in unethical and illegal behavior.
C) inconsistency between voters' interest in programs and politicians' interest in reelection.
D) paradox of voting.

Question 17

As it relates to corporations,the principal-agent problem is that:

A) the goals of the corporate managers (the principals)may not match the goals of the corporate owners (the agents).
B) the goals of the corporate managers (the agents)may not match the goals of the corporate owners (the principals).
C) the federal government (the agent)taxes both corporate profits and the dividends paid to stockholders (the principals).
D) it is costly for the corporate owners (the principals)to obtain a corporate charter from government (the agent).

Question 18

How does government's power to coerce behavior tend to reduce private-sector risk?

A) By enforcing contracts and discouraging illegal behavior that threatens private property.
B) By guaranteeing that the government will financially cover any losses by private-sector firms.
C) By strictly regulating the allocation of most property resources in the economy.
D) The coercive power of government only increases private-sector risk.

Question 19

The government of Southland wants to improve resource allocation in the country.Which of the following actions by the Southland government is most likely to accomplish this?

A) Weakening enforcement of laws and contracts.
B) Promising to cover every risk of loss for private firms.
C) Coercing all firms to innovate and invest.
D) Taxing polluters and subsidizing firms that are creating significant positive externalities.

Question 20

Which of the following is an activity of government that is not an activity of private firms?

A) Enforcing involuntary transactions.
B) Paying equitable wages.
C) Creating positive externalities.
D) Pursuing economic efficiency.

Question 21

Economists call the pursuit of a transfer of wealth through government at someone else's expense:

A) the paradox of voting.
B) adverse selection.
C) rent-seeking behavior.
D) the benefits-received principle.

Question 22

Government's unfunded liabilities:

A) result from the political bias toward immediate benefits and deferred costs.
B) result in more efficient policies in an attempt to satisfy these liabilities.
C) are caused primarily by market failures.
D) only occur in democratically elected governments.

Question 23

Chronic budget deficits can be attributed to:

A) unfunded liabilities.
B) voters wanting government programs but not wanting to pay taxes.
C) inappropriate monetary policy.
D) state budget laws.

Question 24

Public choice theorists contend that:

A) government can efficiently correct instances of market system failure.
B) the existence of cost-benefit analysis has brought about the efficient use of resources in the public sector.
C) public bureaucracies are inherently more efficient than private enterprises.
D) public bureaucracies are inherently less efficient than private enterprises.

Question 25

Suppose Canadian winemakers convince the federal government to issue a directive to serve only domestically produced wine at government functions.This would be an example of:

A) moral hazard.
B) the principal-agent problem.
C) logrolling.
D) rent-seeking behavior.

Question 26

The Bank of Canada,U.S.Federal Reserve,the Bank of Japan,the Bank of England,and the European Central Bank are all in charge of what for the countries they represent?

A) Debt management.
B) Unfunded liabilities.
C) Monetary policy.
D) Fiscal policy.

Question 27

Public choice economists hold that politicians will:

A) favor programs entailing immediate and clear-cut costs and vaguely defined or deferred benefits.
B) follow policies leading to an optimal allocation of resources between public and private sectors.
C) favor programs entailing immediate and clear-cut benefits and vaguely defined or deferred costs.
D) objectively weigh the costs and benefits of various government programs and vote accordingly.

Question 28

The pursuit through government of a "transfer of wealth" at someone else's expense refers to:

A) logrolling.
B) rent-seeking behavior.
C) the paradox of voting.
D) the median-voter model.

Question 29

The political tendency to favor spending priorities with immediate benefits but deferred costs results in:

A) chronic budget deficits.
B) misdirection of stabilization policy.
C) unfunded liabilities.
D) all of these.

Question 30

To reduce politicization of policy making,many countries have given control of ________ to politically independent central banks.

A) fiscal policy
B) monetary policy
C) unfunded liabilities
D) budget deficits

Question 31

The idea of government failure includes all of the following except:

A) special-interest effect.
B) bureaucratic inefficiency.
C) pressure by special-interest groups.
D) extensive positive externalities from public and quasi-public goods.

Question 32

A special-interest issue is one whose passage yields:

A) private benefits equal to external benefits.
B) large external benefits compared to private benefits.
C) small economic losses to a small number of people and large economic losses to a large number of people.
D) large economic gains to a small number of people and small economic losses to a large number of people.

Question 33

Public choice economists contend public bureaucracies are inefficient primarily because:

A) the value of public goods is more easily measured than is the value of private goods.
B) of the absence of competitive market pressures.
C) public sector workers are more security-conscious than are private sector workers.
D) relatively low pay in government attracts workers of lesser quality.

Question 34

Public choice theorists point out that the political process:

A) differs from the marketplace in that voters and congressional representatives often face limited and bundled choices.
B) is less prone to failure than is the marketplace.
C) is a much fairer way to allocate society's scarce resources than is the impersonal marketplace,which is dominated by high-income consumers.
D) involves logrolling,which is always inefficient.

Question 35

When a nation is in a debt crisis,the government's level of debt is so high that:

A) monetary policy is ineffective.
B) the government is unable to find willing lenders so it can continue borrowing.
C) it can only be solved with a fiscal stimulus of lower taxes and more government spending.
D) other countries will be unwilling to buy goods and services from the nation.

Question 36

A government using fiscal policy in an attempt to stimulate the economy would do which of the following?

A) Raise taxes.
B) Raise interest rates.
C) Lower interest rates.
D) Raise government spending.

Question 37

Government fiscal policy involves changing which of the following?

A) Interest rates.
B) Taxes and government spending.
C) Regulations on business.
D) The amount of money in circulation.

Question 38

Government changes in interest rates to regulate the economy are part of:

A) monetary policy.
B) fiscal policy.
C) debt policy.
D) liability policy.

Question 39

Monetary stimulus is only helpful to an economy:

A) that is experiencing high inflation.
B) that is in recession.
C) experiencing significant negative externalities.
D) with few public goods.

Question 40

Which of the following impacts would economists expect to result from chronic budget deficits?

A) Greater economic efficiency resulting from the abundance of public goods produced.
B) Permanently high levels of output and continued economic growth.
C) Greater political control over monetary policy.
D) Government control of an inefficiently large share of the economy's resources.

Question 41

Proponents of deregulation point to all of the following industries as examples of successful deregulation except for:

A) airlines.
B) pharmaceuticals.
C) railroads.
D) interstate trucking.

Question 42

Which of the following is considered a potential solution to some regulatory capture?

A) Bringing industry experts into the regulatory process.
B) Creating a standard set of regulations for all industries.
C) Deregulation of the industry.
D) Government subsidies for firms in the industry.

Question 43

When congressional representatives vote on an appropriations bill,they must vote yea or nay,taking the bad with the good.This statement best reflects the:

A) paradox of voting.
B) regulatory capture effect.
C) benefits-received principle.
D) concept of limited and bundled choices.

Question 44

Suppose lawyers seek legislation to limit the use of computer software that enables people to use their personal computers to self-prepare their own wills,trusts,and other legal documents.This is an example of:

A) logrolling.
B) the principal-agent problem.
C) rent-seeking behavior.
D) limited and bundled choices.

Question 45

Regulatory capture often occurs because of which of the following?

A) Government officials want stronger control over industry regulation.
B) Nearly everyone with expertise works in the regulated industry.
C) Patent law allows firms to gain monopoly power easily and therefore control a market.
D) Consumer groups are effective at lobbying the government for industry regulation.

Question 46

Deregulation:

A) tends to improve outcomes in industries generating substantial negative externalities.
B) eliminates regulatory capture and can improve outcomes by increasing competition.
C) is most appropriate to undertake by government agencies responsible for human safety,financial regulation,and environmental protection.
D) always generates greater economic efficiency.

Question 47

Which of the following would be the best example of regulatory capture?

A) Starbucks buys up all the available supplies of coffee beans.
B) Nike executives influence the rules for track and field events.
C) Federal law makers write and pass legislation that protects domestic companies from foreign competition.
D) Executives from the Ford,General Motors,and Chrysler companies write the rules regulating automobile safety and fuel requirements.

Question 48

Which of the following will tend to socialize losses and privatize gains?

A) Lowering interest rates to encourage private borrowing and investment.
B) Government regulation to promote human safety and environmental protection.
C) Government creating projects rather than supporting private efforts.
D) Government guarantees to private investors that they will get their money back even if the company fails.

Question 49

The field of economics that analyzes government decision making,politics,and elections is called:

A) public finance.
B) public choice theory.
C) collective economics.
D) political economy.

Question 50

According to some economists,the private sector is more efficient than the public sector mainly because:

A) the private sector has a clear test of performance: profit and loss.
B) wages,salaries,and fringe benefits are higher in the private sector.
C) worker turnover is higher in the public sector.
D) of extensive negative externalities in the public sector.

Question 51

The unlawful misdirection of governmental resources for personal gain is known as:

A) political corruption.
B) logrolling.
C) adverse selection.
D) the special-interest effect.

Question 52

Under what circumstances would government loan guarantees be socially beneficial?

A) When the guarantees socialize losses and privatize gains.
B) When the guarantees stimulate production of goods generating significant spillover costs.
C) When the guarantees promote production of goods otherwise underproduced by the private sector.
D) When the guarantees increase company profits.

Question 53

What is the main problem with government guarantees that socialize losses and privatize gains?

A) They encourage overly risky investments by insulating private investors from any losses.
B) The investments that do occur never generate production of goods underproduced by the private sector.
C) They discourage private investment in worthwhile projects.
D) They tend to benefit foreign companies at the expense of domestic firms.

Question 54

Which of the following would best explain why regulatory capture is a problem?

A) The regulations implemented tend to reduce the profitability of the regulated industry and reduce global competitiveness.
B) Regulatory capture unduly increases the size and power of government,increasing costs for taxpayers.
C) Individuals implementing the regulations lack expertise about the industry and therefore make poor regulatory choices.
D) The regulations implemented serve the private interests of the regulated industry,rather than addressing social interests such as consumer safety and environmental protection.

Question 55

Government loan guarantees tend to have the effect of:

A) socializing losses and privatizing gains.
B) socializing gains and privatizing losses.
C) socializing both gains and losses.
D) privatizing both gains and losses.

Question 56

The Road Runner Club contributes money to Senator Sly's reelection campaign fund,and Senator Sly helps pass legislation to add more jogging paths across the state.From this we can definitively conclude:

A) that political corruption has occurred.
B) that logrolling has occurred.
C) that a principal-agent problem has occurred.
D) nothing;the Road Runner Club may have donated to Senator Sly because he already supported the jogging paths.

Question 57

Regulatory capture is said to have occurred when which of the following is true?

A) Rules and enforcement in an industry are heavily influenced by the industry being regulated.
B) One firm controls an entire market,having captured customers away from other firms.
C) Government imposes excessive regulations in an industry,resulting in inefficiencies.
D) Consumers make all the rules for an industry,forcing firms into inefficient production methods.

Question 58

In a sporting goods store,you can buy the equipment you want and forgo the rest.But in an election you "buy" the entire range of the candidate's positions,including some you may not agree with.This difference:

A) reflects limited and bundled choices in the public sector.
B) describes the paradox of voting.
C) describes the principal-agent problem in the public sector.
D) creates bureaucratic inefficiency in the public sector.

Question 59

Public choice economists:

A) analyze the incidence of taxes.
B) are also known as Keynesian economists.
C) use the tools of economics to analyze decision making,politics,and elections in the public sector.
D) are,by definition,economists employed by federal,state,and local governments.

Question 60

Political corruption occurs whenever:

A) logrolling is used to secure votes for controversial legislation.
B) government officials use unlawful misdirection of governmental resources for their own personal gain.
C) special interest groups contribute to elected officials,who in turn support legislation that benefits the special interest group.
D) there is pork barrel politics involved.

Question 61

Suppose that Steve and Susie each perceives $200 of marginal benefit from a proposed new park,whereas Elizabeth perceives $800.If the proposed tax levied on each for the park would be $300,a majority vote will:

A) defeat this project and resources will be underallocated to it.
B) defeat this project and resources will be efficiently allocated.
C) pass this project and resources will be underallocated to it.
D) pass this project and resources will be overallocated to it.

Question 62

The median-voter model implies that:

A) political voting will be as economically efficient as "dollar voting" in competitive markets.
B) all voters have about the same preferences for various public goods and services.
C) many people will be dissatisfied with the size of government in the economy.
D) with majority voting there can never be a consistent ordering of public good preferences.

Question 63

An economic analysis of the relationship between proposed legislation affecting major employers in each state and the voting patterns of senators and representatives in Congress on that legislation would fit within the subcategory of economics called:

A) the economics of fiscal policy.
B) public choice theory.
C) behavioral economics.
D) monetarism.

Question 64

Public choice theory focuses on the economics of:

A) fiscal and monetary policy.
B) the behavior of business firms.
C) antitrust and regulatory policy.
D) government decision making,politics,and elections.

Question 65

Which one of the following topics would be of the most interest to a public choice economist?

A) The theory of comparative advantage.
B) The law of increasing opportunity cost.
C) Inflation and unemployment.
D) Rent-seeking behavior.

Question 66

Senator A agrees to vote for Senator K's state project in exchange for Senator K voting for Senator A's state project.This is an example of:

A) logrolling.
B) the paradox of voting.
C) the principal-agent problem.
D) the median voter model.

Question 67

Suppose that Katie and Kelly each expects to receive $500 worth of marginal benefits from a proposed new recreation center,whereas Kerry expects to receive only $100 worth.If the proposed tax levied on each for the center would be $400,a majority vote will:

A) defeat this project and resources will be underallocated to it.
B) pass this project and resources will be efficiently allocated.
C) pass this project and resources will be underallocated to it.
D) pass this project and resources will be overallocated to it.

Question 68

The political technique called logrolling:

A) always increases economic efficiency.
B) always decreases economic efficiency.
C) involves trading votes to secure favorable outcomes that otherwise could be rejected.
D) is an example of the paradox of voting.

Question 69

Answer the question on the basis of this table showing the marginal benefit a particular public project will provide to each of the three members of a community.No vote trading is allowed.
If the tax cost of this proposed project is $600 per person,a majority vote will:

A) defeat this project and resources will be underallocated to it.
B) pass this project and resources will be allocated efficiently.
C) pass this project and resources will be overallocated to it.
D) pass this project and resources will be underallocated to it.

Question 70

According to the paradox of voting:

A) public goods that cost more than the total benefits they confer may get produced under majority voting.
B) trading of votes may either add to or subtract from economic efficiency.
C) the median voter decides what public goods all voters should have.
D) majority voting fails under some circumstances to make consistent choices that reflect the community's underlying preferences.

Question 71

Because majority voting fails to incorporate the strength of the preferences of individual voters,it:

A) creates negative externalities.
B) under some circumstances produces economically inefficient outcomes.
C) leads to market failure.
D) leads to politics dominated by special interest groups.

Question 72

The principle that under some circumstances majority voting fails to make consistent choices reflecting the community's underlying preference is best demonstrated by the:

A) paradox of voting.
B) concept of logrolling.
C) median-voter model.
D) Coase theorem.

Question 73

Answer the question on the basis of this table showing the marginal benefit that a particular public project will provide to each of the three members of a community.No vote trading is allowed.
If the tax cost of this proposed project is $300 per person,a majority vote will:

A) defeat this project and resources will be underallocated to it.
B) pass this project and resources will be allocated efficiently.
C) pass this project and resources will be underallocated to it.
D) defeat this project and resources will be overallocated to it.

Question 74

Answer the question on the basis of this table showing the marginal benefit that a particular public project will provide to each of the three members of a community.No vote trading is allowed.
If the tax cost of this proposed project is $600 per person,a majority vote will:

A) defeat this project and resources will be underallocated to it.
B) defeat this project and resources will be allocated efficiently.
C) pass this project and resources will be overallocated to it.
D) defeat this project and resources will be overallocated to it.

Question 75

Answer the question on the basis of the following table that shows the total costs and total benefits facing a city of five different potential baseball stadiums of increasing size.All figures are in millions of dollars.
Refer to the table.The marginal cost and marginal benefit of stadium B (relative to A)are:

A) $20 million and $50 million,respectively.
B) $100 million and $200 million,respectively.
C) $30 million and $50 million,respectively.
D) $20 million and $60 million,respectively.

Question 76

A situation in which society may not be able to rank its preferences consistently through paired-choice majority voting refers to:

A) logrolling.
B) the paradox of voting.
C) the median-voter model.
D) the special-interest effect.

Question 77

Suppose that in a series of paired-choice votes a new park is preferred to a new recreation center and a new recreation center is preferred to street widening.Also suppose that street widening is preferred to a new park.This set of votes is an example of the:

A) principal-agent problem.
B) benefits-received principle.
C) median-voter model.
D) paradox of voting.

Question 78

The trading of votes by elected officials to secure favorable outcomes is called:

A) splitting the difference.
B) social engineering.
C) logrolling.
D) grandstanding.

Question 79

Government failure is a prominent topic in:

A) public choice theory.
B) Keynesian economics.
C) socialist theory.
D) behavioral economics.

Question 80

The median-voter model implies that a political office seeker will:

A) adopt more extreme views when seeking his or her party's nomination than when running against the other party's opponent.
B) adopt less extreme views when seeking his or her party's nomination than when running against the other party's opponent.
C) favor extensive government spending because demand curves for public goods are added vertically rather than horizontally.
D) favor the private resolution of externality problems rather than governmental intervention.