Question 1

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

Accepted Answer

The grade for the project is a public good because it is non-excludable (everyone in the group receives the same grade) and non-rivalrous (one person's grade does not affect another person's grade). It is not a beneficial or detrimental externality because it is not an unintended side effect on a third party. It is also not a moral hazard, which occurs when individuals take risks because they know someone else will bear the cost if things go wrong.

Question 2

The cable and subscription TV business is plagued with the problem of "signal theft." People use illegal receivers to capture the company's signal without paying.Enforcement of the company's property right is very expensive.This problem emerges because TV signals are basically

Accepted Answer

TV signals are non-excludable and non-rival in consumption, which makes them a classic example of a public good. This means that once the signal is broadcasted, anyone can access it without reducing its availability for others, and it's difficult to exclude anyone from accessing it. This makes it challenging for cable and subscription TV companies to prevent signal theft since they cannot easily exclude non-paying customers from accessing the signal.

Question 3

The economic justification for public subsidies to university research is based on

Accepted Answer

The economic justification for public subsidies to university research is based on the external benefits of research and development to high rates of economic growth. University research can lead to technological advances, new discoveries, and innovations that benefit society and contribute to economic growth. These benefits are not always captured by the researchers or the university, but rather spill over to the wider community. Therefore, public subsidies are needed to ensure that this research can continue and contribute to the economic development of a country. The other options listed may have some impact, but they are not the main economic justification for public subsidies to university research.

Question 4

A true public good is characterized by

Accepted Answer

A true public good is non-excludable and non-rivalrous in consumption, which means it is neither depletable nor excludable. This is because everyone can benefit from it without reducing its availability for others and it is impossible to prevent anyone from benefiting from it.

Question 5

An appropriate government policy toward negative externalities is to

Accepted Answer

Imposing a tax or fine on the activity that creates the negative externality is the best choice. This will increase the cost of engaging in the activity, reducing the quantity demanded and leading to a decrease in the negative externality. Alternatively, the tax revenue can be used to fund initiatives that mitigate the damage caused by the externality.

Question 6

The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer.Many who attend make donations for symphony expenses, but the donation is not required.Some who attend make no contributions.Economists would

Accepted Answer

The noncontributors are benefiting from the concert without paying for it, which makes them free riders.

Question 7

Motorcycle helmet laws have been controversial in some states.Riders prefer the feel of the wind on their faces.Others, however, point out that riders without helmets are more likely to suffer severe injury and run up hospital bills at public expense.Which of the following would most likely reduce the incidence of high bills for helmetless riders?

Accepted Answer

Raising insurance rates for helmetless riders would serve as a financial incentive for them to wear helmets, which would reduce the incidence of severe injuries and subsequent high hospital bills at public expense. This would also promote personal responsibility among the riders. Lowering insurance rates for helmetless riders would have the opposite effect and therefore would not reduce the incidence of high bills. Publishing information on injury rates and subsidizing hospitals may increase awareness and accessibility of healthcare for helmetless riders but would not discourage them from riding without a helmet.

Question 8

Public goods are

Accepted Answer

Public goods possess all three characteristics: they are valuable socially, not depletable and not excludable, and subject to the "free rider" problem. Choice A is correct because public goods provide social benefits. Choice B is correct because public goods can be consumed by numerous individuals without being depleted, and exclusion of individuals from consuming public goods is difficult. Choice C is correct because if individuals are able to access public goods without paying for them, they may choose not to contribute to their provision or maintenance, thereby taking advantage of the resources provided by others.

Question 9

Producers of computer software are plagued with the problem of "pirating", that is, many people copy software legally purchased by others.The industry estimates that for each legal copy of a program, there are two pirated copies in use.The industry wants strict laws for the enforcement of its "intellectual property rights," but enforcement is obviously very difficult.Economists call this problem

Accepted Answer

The problem of pirating is an example of nonexcludability, where it is difficult to prevent non-purchasers from benefitting from the product. The fact that two pirated copies are in use for each legal copy further emphasizes the nonexcludable nature of the product. Depletability refers to a resource that can be exhausted, externality refers to a side effect of a transaction that affects a third party, and durability refers to the lifespan of a product.

Question 10

Because smoking causes illness and disability to smokers, society must maintain more health-service capacity than it would need in the absence of smoking.Since the cost of maintaining this capacity is covered to a substantial degree by health insurance, even nonsmokers must pay higher premiums.Also, smokers hurt nonsmokers as a result of "passive smoke." The Rand Corporation estimates these costs to be 29 cents per pack of cigarettes.Cigarette taxes average 37 cents per pack.Based on the economist's definition of efficiency, it follows that

Accepted Answer

The economist's definition of efficiency involves aligning costs with benefits. If the external costs (healthcare costs and passive smoke harm) are estimated at 29 cents per pack and the tax is 37 cents, the tax exceeds the external costs by 8 cents. This suggests that the tax is higher than necessary to cover the external costs, leading to a situation where cigarette production might be lower than the efficient amount because the tax reduces consumption more than is needed to account for the external costs.

Question 11

Governments can deal with externalities through the use of

Accepted Answer

Governments can use a combination of subsidies, taxes, and price controls to deal with externalities. Subsidies can be used to incentivize positive externalities, such as providing subsidies for the use of solar energy or public transportation. Taxes can be used to discourage negative externalities, such as a carbon tax to reduce pollution. Price controls can be used to ensure that the cost of a good or service takes into account its externalities, such as setting a minimum price for milk to account for the positive externalities of dairy farming. Therefore, all of the options are correct and can be used in varying degrees to deal with externalities.

Question 12

Governments can most effectively encourage a firm to produce the efficient level of output of a good whose production causes a beneficial externality by

Accepted Answer

When there is a beneficial externality associated with the production of a good, the market fails to produce the efficient level of output as the social benefit exceeds the private benefit. To correct this market failure, the government can provide a subsidy to the producer. This will increase the private benefit of production and encourage the producer to increase output to the socially optimal level.

Question 13

There is much world concern over the deteriorating condition of the Pyramids and other historical structures in Egypt.While people of all nations enjoy visiting these structures, there has been little financial support for preservation coming from within Egypt or from elsewhere.Economists would describe this as an example of

Accepted Answer

This is an example of a free rider problem, as many people benefit from the preservation of these historical structures, but there is little financial support coming from within Egypt or elsewhere. This creates a situation where some individuals are "free riders" who benefit from the preservation efforts without contributing to the costs.

Question 14

A public good is

Accepted Answer

A public good is a good that is nonexcludable and nondepletable. Nonexcludable means that it is difficult or impossible to exclude anyone from enjoying the benefits of the good, and nondepletable means that the consumption of the good by one person does not limit its availability to others. Therefore, option D, "never depletable and always nonexcludable" is the correct choice.

Question 15

The "free rider" problem occurs when a good is

Accepted Answer

The "free rider" problem occurs with goods that are not excludable, meaning that it is difficult or impossible to prevent people from consuming the good even if they do not contribute to its production or provision. In this case, some individuals can "free ride" on the contributions of others and still benefit from the good without having to pay for it themselves.

Question 16

National defense and coastal lighthouses are examples of

Accepted Answer

National defense and coastal lighthouses are public goods, meaning that they are non-excludable (people cannot be excluded from using them) and non-rival (one person's use of them does not diminish their availability to others). These goods are typically provided by the government because they would not be provided efficiently by the market due to the free-rider problem.

Question 17

Without government intervention, public goods would

Accepted Answer

Public goods are non-excludable and non-rivalrous, meaning once provided, they cannot be limited to only those who pay for them and can be consumed by multiple individuals without diminishing their availability. This creates a free-rider problem where individuals have an incentive to not pay for the good and still benefit from its provision. Without government intervention, there would be no incentive for private firms to produce public goods as they would not be able to effectively charge for them and recoup their costs, leading to a lack of provision of public goods.

Question 18

Effective methods of dealing with externalities would include

Accepted Answer

Giving a subsidy per unit equal to the difference between MSC and MPC to firms that generate beneficial externalities would encourage them to produce more of the product, creating a positive externality for society. This would create an incentive for firms to internalize the externality and produce the socially optimal level of output. Taxing or imposing fines on firms that generate beneficial externalities would discourage them from producing the product, leading to a reduction in the positive externality for society. Restricting the output of firms that generate beneficial externalities would also lead to a reduction in the positive externality for society.

Question 19

A public good is

Accepted Answer

A public good is characterized by its non-excludability, meaning its benefits cannot be restricted to a small group of people, and its non-rivalrous nature, where one person's consumption of the good does not reduce the amount available for others.

Question 20

Government often finds it difficult to cope with externalities because

Accepted Answer

Externalities are costs or benefits that spill over individuals or firms who are not directly involved in a market transaction. As a result, it is difficult to assess the true cost or benefit of externalities in monetary terms, as they are not reflected in market prices. This makes it hard for the government to regulate and intervene, as they are unsure of the optimal level of intervention needed to address the externality. On the other hand, taxes and subsidies may not always be effective, as their impact on the market may not be sufficient to account for the full cost or benefit of externalities.

Quiz 15: The Shortcomings of Free Markets

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

The cable and subscription TV business is plagued with the problem of "signal theft." People use illegal receivers to capture the company's signal without paying.Enforcement of the company's property right is very expensive.This problem emerges because TV signals are basically

The economic justification for public subsidies to university research is based on

A true public good is characterized by

An appropriate government policy toward negative externalities is to

The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer.Many who attend make donations for symphony expenses, but the donation is not required.Some who attend make no contributions.Economists would

Public goods are

Governments can deal with externalities through the use of

Governments can most effectively encourage a firm to produce the efficient level of output of a good whose production causes a beneficial externality by

A public good is

The "free rider" problem occurs when a good is

National defense and coastal lighthouses are examples of

Without government intervention, public goods would

Effective methods of dealing with externalities would include

A public good is

Government often finds it difficult to cope with externalities because