Question 1

Will and Grace have adjoining unfenced back yards and each has just adopted a new puppy. Will values a fence between their yards at $250 and Grace values a fence between their yards at $200. The cost of building the fence is $300, which will be split equally if they both agree to build the fence. Therefore, their payoff matrix is as follows. If Will decides to build the fence, then Grace will earn a higher payoff by ________, and if Will decides to not build the fence, then Grace will earn a higher payoff by ________. 
A)not helping to build the fence; building the fence
B)helping to build the fence; also not building the fence
C)helping to build the fence; building the fence
D)not helping to build the fence; also not building the fence

Accepted Answer

Regardless of what Will does, Grace's payoffs are higher when she does not build the fence.

Question 2

The presence of an unregulated negative externality means that the unregulated market equilibrium quantity is:
A)efficient.
B)smaller than is optimal.
C)larger than is optimal.
D)greater than demand.

Accepted Answer

In the presence of a negative externality, more than the socially optimal quantity is produced because not all of the cost of producing or consuming the product is reflected in the supply curve.

Question 3

Will and Grace have adjoining unfenced back yards and each has just adopted a new puppy. Will values a fence between their yards at $250 and Grace values a fence between their yards at $200. The cost of building the fence is $300, which will be split equally if they both agree to build the fence. Therefore, their payoff matrix is as follows.  
 In the Nash equilibrium of this game:
A)Will and Grace will both build the fence and split the cost.
B)Will will build the fence by himself.
C)the fence will be built, but it is uncertain who will build it.
D)no fence will be built.

Accepted Answer

Not building the fence is a dominant strategy for both Will and Grace, so in the Nash equilibrium of this game, no fence will be built.

Question 4

The government subsidizes education because:
A)it is a pure public good.
B)private firms will not provide education.
C)the government can provide a better education than can private firms.
D)education is thought to have positive externalities.

Accepted Answer

Since education entails positive externalities, market demand will not reflect all of the benefits of education.

Question 5

Beyond the provision of public goods, government exists to address:
A)national defense.
B)the problem of declining moral values.
C)limiting personal freedom.
D)externalities and property rights.

Accepted Answer

Governments can help regulate activities that generate externalities, and they can help enforce property rights.

Question 6

When a negative externality is present in a market, the government should:
A)always intervene.
B)intervene it if the public supports doing so.
C)never intervene.
D)intervene if the benefit of doing so exceeds the cost.

Accepted Answer

Since regulation entails costs, the government should only intervene if the benefit of doing so exceeds the cost.

Question 7

The most appropriate level of government to provide public goods is:
A)local.
B)state.
C)dependent on the specific public good in question.
D)federal.

Accepted Answer

The appropriate government level at which to provide public goods can vary with the specific goods at hand.

Question 8

Pork barrel programs are government programs that:
A)benefit agriculture.
B)increase total economic surplus but lack political support.
C)benefit industry.
D)benefit local areas but are of questionable value from a national perspective.

Accepted Answer

Pork barrel spending is a public expenditure that is larger than the total benefit it creates but that is favored by a legislator because it benefits his or her constituents by more than their share of the resulting increase in taxes.

Question 9

If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state, then:
A)the individual states can easily reach a solution to the problem.
B)the problem is best addressed through federal regulation.
C)state courts can provide adequate remedies.
D)the acid rain ceases to be an externality.

Accepted Answer

The problem of pollution is difficult to solve when the various sources of pollution (in this case, states)are not subject to regulatory control by a single government.

Question 10

One justification for the creation of a federal level of government is:
A)the ability to deficit spend.
B)economies of scale in the provision of military defense.
C)to encourage local diversity in the types of public goods provided.
D)greater responsiveness to the will of the voters.

Accepted Answer

To the extent that there are economies of scale in the provision of military defense, the federal government will be better able to deter aggression from other countries.

Question 11

There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  The marginal benefit of adding a third army base equals the local marginal benefit of $2 million plus the marginal benefit to Katlandia of ________.
A)$0
B)$1 million
C)$3 million
D)$22.5 million

Accepted Answer

From the graph, we can see that, in terms of increased security, the marginal benefit to Katlandia of a third army base is $3 million.

Question 12

There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  It is socially optimal for Katlandia to have:
A)one army base.
B)two army bases.
C)three army bases.
D)four army bases.

Accepted Answer

The marginal benefit of the second army base is $8 million ($2 million for the state in which it's built plus $6 million for Katlandia as a whole). The marginal cost of the second base is $8 million. Since the marginal benefit of the second base equals its marginal cost, two is the socially optimal number of army bases.

Question 13

There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  Taxes in Katlandia are:
A)regressive.
B)based on each resident's willingness to pay.
C)proportional.
D)progressive.

Accepted Answer

Each citizen pays the same amount of tax, making it a head tax. Head taxes are regressive.

Question 14

There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  Suppose the department of defense proposes to build a third base in the state of New Porkswick. Apart from the value of the additional security to the nation, the state economy will benefit by ________ per resident, and each resident's taxes will increase by ________.  
A)$200; $800
B)$20; $800
C)$200; $80
D)$20; $80

Accepted Answer

The added benefit to each resident of New Porkswick is $200 (= $2M/10,000), and each resident's taxes will increase by $80 (= $8M/100,000).

Question 15

There are ten states in the democratic nation of Katlandia, and each state has ten thousand residents. Although incomes vary, each Katlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country. Currently, two states each have one army base. An army base adds $2 million to a state's local economy each year. In addition, in terms of increased security, the annual marginal benefit to Katlandia of having an additional army base is shown below. The total cost of an army base is $8 million per year.  If Katlandia builds a third army base, the country will have:
A)the efficient number of bases.
B)more than the efficient number of bases.
C)fewer than the efficient number of bases.
D)more bases than they can afford.

Accepted Answer

The marginal benefit of the third army base is $5 million ($2 million for the state in which it's built plus $3 million for Katlandia as a whole). The marginal cost of the third base is $8 million. Thus, the marginal cost of the third base is greater than its marginal benefit, implying that three bases is more than is socially optimal.

Question 16

The problems of externalities and poorly formed property rights are:
A)minor in modern economies.
B)among several rationales for the existence of government.
C)better solved by private rather than government action.
D)the only two legitimate reasons for creating government.

Accepted Answer

Governments can help regulate activities that generate externalities, and they can help enforce property rights.

Question 17

Logrolling refers to:
A)legislation that affects the timber industry.
B)the practice whereby legislators support each other's pork barrel spending.
C)the practice of introducing many similar bills in hopes that one of the versions will pass.
D)the practice of attaching a controversial bill to a large appropriations bill.

Accepted Answer

Logrolling is the practice whereby legislators support one another's legislative proposals.

Question 18

Will and Grace have adjoining unfenced back yards and each has just adopted a new puppy. Will values a fence between their yards at $250 and Grace values a fence between their yards at $200. The cost of building the fence is $300, which will be split equally if they both agree to build the fence. Therefore, their payoff matrix is as follows.  
 This game is a(n)________ because ________.
A)tragedy of the commons; the backyard is treated as a common area by the puppies.
B)prisoner's dilemma; by playing their dominant strategy, both Will and Grace do worse than if they had both played their dominated strategy.
C)example of logrolling; both neighbors need to cooperate to provide the good.
D)inequitable situation; Grace does not value a fence as highly as does Will.

Accepted Answer

Both parties would be better off if they collectively built the fence, but their dominant strategies call for neither to build the fence.

Question 19

It will be difficult to find a solution to the problems caused by greenhouse gas emissions because:
A)the scientific evidence on the negative effects of greenhouse gas emissions is weak.
B)voters are not aware of the problems caused by greenhouse gas emissions.
C)an international political organization would be necessary to enforce a solution.
D)the technology to reduce greenhouse gas emissions is undeveloped.

Accepted Answer

To the extent that the problem of greenhouse gases is international in scope, an international organization would have to exist to enforce rules for dealing with the problem.

Question 20

Will and Grace have adjoining unfenced back yards and each has just adopted a new puppy. Will values a fence between their yards at $250 and Grace values a fence between their yards at $200. The cost of building the fence is $300, which will be split equally if they both agree to build the fence. Therefore, their payoff matrix is as follows.   
 Will's dominant strategy in this game is to:
A)build the fence.
B)help build the fence if he sees Grace building the fence.
C)not build the fence.
D)alternate between building the fence and not building the fence.

Accepted Answer

Regardless of what Grace does, Will's payoffs are higher when he does not build the fence.

Quiz 14: Public Goods and Tax Policy

The presence of an unregulated negative externality means that the unregulated market equilibrium quantity is:

The government subsidizes education because:

Beyond the provision of public goods, government exists to address:

When a negative externality is present in a market, the government should:

The most appropriate level of government to provide public goods is:

Pork barrel programs are government programs that:

If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state, then:

One justification for the creation of a federal level of government is:

The problems of externalities and poorly formed property rights are:

Logrolling refers to:

It will be difficult to find a solution to the problems caused by greenhouse gas emissions because: