Question 1

Market failure can occur even when the price signals are accurate.
The market may fail even when the price signals are accurate.The response to price signals,rather than the signals themselves,may be flawed.For example,there may be externalities present.

Accepted Answer

Accurate price signals may not always lead to efficient outcomes if there are externalities present, such as pollution or congestion. In these cases, the response to price signals may be flawed, leading to market failure.

Question 2

If you burn garbage in your backyard and the smoke damages a neighbor's house,the damage is considered an externality.
The externality is the cost of the house damage paid by the neighbor (third party).

Accepted Answer

An externality is a cost or benefit that is not reflected in the market price of a good or service and is incurred by a third party. In this case, the neighbor is the third party who is incurring the cost of the damage caused by the smoke from burning garbage. Therefore, the damage is considered an externality and the statement is true.

Question 3

Monopolies will tend to overproduce goods and charge a higher price than the competitive price.
Monopolies will tend to underproduce goods and charge a higher price than the competitive price.

Accepted Answer

Monopolies have the ability to control prices since they are the sole supplier of a particular good or service. They can choose to charge a higher price than the competitive price to maximize profits. However, since they do not face competition, they may not have the same incentive to produce at the most efficient level or to invest in innovation, which may result in underproduction.

Question 4

The difference between public goods and private goods rests on technical considerations of exclusion of use and not political philosophy.
The central question between public goods and private goods is whether we have the technical capability to exclude nonpayers.

Accepted Answer

The difference between public goods and private goods is based on the technical ability to exclude nonpayers. Public goods are non-excludable, meaning it is difficult or impossible to exclude someone from using them, while private goods are excludable, meaning access can be restricted to those who have paid for them. This distinction is not based on political philosophy but rather on economic and technical considerations.

Question 5

Sometimes the response to price signals,rather than the signals themselves,may be flawed.
The market may fail even when the price signals are accurate.The response to price signals,rather than the signals themselves,may be flawed.For example,there may be externalities present.

Accepted Answer

This statement is true. Even if the price signals accurately reflect supply and demand, the market may still fail due to externalities or flawed responses to price signals.

Question 6

The market mechanism leads to underproduction of public goods because the supply of public goods is hidden.
The market mechanism leads to underproduction of public goods because everyone would wait for someone else to pay.

Accepted Answer

The answer of The market mechanism leads to underproduction of...

Question 7

The largest source of federal revenue is the corporate income tax.
The largest source of federal revenue is the individual income tax.

Accepted Answer

The largest source of federal revenue is the individual income tax. According to the Congressional Budget Office, in 2019, the individual income tax accounted for 50% of all federal revenue, while the corporate income tax accounted for only 7%. Other sources of federal revenue include social insurance taxes (such as payroll taxes for Social Security and Medicare) and excise taxes.

Question 8

Market power creates a flawed response to an accurate price signal.
Market power refers to the ability of a single consumer or producer to alter the market price of a good or service.Producers will keep prices high without the threat of competition entering the market.

Accepted Answer

When a producer has market power, they can keep prices high without the threat of competitors entering the market. This means that the price signal, which is supposed to reflect the fair value of a good or service based on supply and demand, becomes distorted. As a result, the response to the price signal is flawed and leads to an inefficient allocation of resources.

Question 9

Markets will underproduce goods that yield external benefits and overproduce those that generate external costs.
The market fails by overproducing goods that have external costs and underproducing goods that have external benefits.

Accepted Answer

This is a well-known market failure called the "externality problem". Externalities refer to the costs or benefits incurred by individuals who are not directly involved in the production or consumption of a good. When external benefits (such as education or healthcare) are not reflected in market prices, firms and individuals may underproduce them. On the other hand, when external costs (such as pollution or congestion) are not fully borne by producers or consumers, they will tend to overproduce those goods. As a result, government intervention is often necessary to correct these externalities and ensure that goods are produced at socially optimal levels.

Question 10

Social demand equals market demand plus externalities when there are positive external benefits.
If a product yields external benefits,the social demand is greater than the market demand by the amount of the externality.

Accepted Answer

When a product provides positive external benefits, such as reducing pollution or improving public health, the social demand for the product will be higher than the market demand alone because society as a whole benefits from these externalities. Therefore, the formula for calculating social demand includes market demand plus the value of the external benefits, or externality.

Question 11

Transfer payments are payments to individuals for which nothing is currently rendered in return.
Transfer payments are payments to individuals for which nothing is currently rendered in return.

Accepted Answer

Transfer payments are payments made by the government to individuals or groups for which no goods or services are exchanged, such as social security benefits or welfare payments. The recipient receives the payment, but nothing is currently rendered in return.

Question 12

State governments receive half of their tax revenue from property taxes.
State governments rely heavily on sales taxes,while cities depend heavily on property taxes.

Accepted Answer

State governments typically rely more on sales and income taxes, while local governments, such as cities, depend more on property taxes for their revenue.

Question 13

If your neighbors remove the weeds in their yard and this activity prevents weed seeds from blowing into your yard,the benefit you receive is a public good.
If your neighbors remove the weeds in their yard and this activity prevents weed seeds from blowing into your yard,the benefit you receive is an externality.

Accepted Answer

The benefit you receive is an externality, not a public good. An externality is a side effect or consequence of an activity that affects other parties without being reflected in the cost of the goods or services involved. A public good is non-excludable and non-rivalrous, which is not the case here.

Question 14

Fire protection and police protection can be produced more efficiently by the private sector than by the public sector.
Fire and police protection are public goods; therefore,the private sector will underproduce these services.

Accepted Answer

The answer of Fire protection and police protection can be...

Question 15

Micro and macro failures of the marketplace never justify government intervention.
The potential micro and macro failures of the marketplace provide specific justification for government intervention.

Accepted Answer

Micro and macro failures, such as market inefficiencies, externalities, and economic instability, can justify government intervention to correct these issues and promote economic welfare.

Question 16

The market tends to underproduce public goods.
The market mechanism leads to underproduction of public goods because everyone would wait for someone else to pay.

Accepted Answer

Public goods are non-excludable and non-rivalrous, meaning that once they are provided, everyone can benefit from them at no additional cost, and their consumption by one person does not diminish their availability for others. This creates a free-rider problem, where individuals may be incentivized to not contribute to the provision of public goods because they can still benefit from them without paying. As a result, the market may fail to provide an efficient level of public goods without government intervention.

Question 17

The federal personal income tax system is regressive.
The federal income tax system is progressive.

Accepted Answer

The federal personal income tax system is progressive, meaning that tax rates increase as income increases.

Question 18

Social demand equals market demand minus externalities when there are external benefits.
Social demand equals market demand minus externalities when there are external costs.

Accepted Answer

Social demand equals market demand plus externalities when there are external benefits, and it equals market demand minus externalities when there are external costs.

Question 19

The free-rider dilemma occurs in the provision of public goods because an individual can realize the benefits of someone else's purchase (consumption)of a public good.
A free rider is an individual who reaps direct benefits from someone else's purchase (consumption)of a public good.

Accepted Answer

This is a correct definition of the free-rider dilemma and a free rider.

Question 20

A progressive tax system is one in which tax rates rise as incomes rise.
A progressive tax system is one in which tax rates rise as incomes rise.

Accepted Answer

In a progressive tax system, those with higher incomes are expected to pay a higher proportion of their income in taxes. This is achieved through a graduated tax rate, whereby the tax rate increases as the income level increases.

Quiz 4: The Role of Government

Market failure can occur even when the price signals are accurate. The market may fail even when the price signals are accurate.The response to price signals,rather than the signals themselves,may be flawed.For example,there may be externalities present.

If you burn garbage in your backyard and the smoke damages a neighbor's house,the damage is considered an externality. The externality is the cost of the house damage paid by the neighbor (third party).

Monopolies will tend to overproduce goods and charge a higher price than the competitive price. Monopolies will tend to underproduce goods and charge a higher price than the competitive price.

The difference between public goods and private goods rests on technical considerations of exclusion of use and not political philosophy. The central question between public goods and private goods is whether we have the technical capability to exclude nonpayers.

Sometimes the response to price signals,rather than the signals themselves,may be flawed. The market may fail even when the price signals are accurate.The response to price signals,rather than the signals themselves,may be flawed.For example,there may be externalities present.

The market mechanism leads to underproduction of public goods because the supply of public goods is hidden. The market mechanism leads to underproduction of public goods because everyone would wait for someone else to pay.

The largest source of federal revenue is the corporate income tax. The largest source of federal revenue is the individual income tax.

Market power creates a flawed response to an accurate price signal. Market power refers to the ability of a single consumer or producer to alter the market price of a good or service.Producers will keep prices high without the threat of competition entering the market.

Markets will underproduce goods that yield external benefits and overproduce those that generate external costs. The market fails by overproducing goods that have external costs and underproducing goods that have external benefits.

Social demand equals market demand plus externalities when there are positive external benefits. If a product yields external benefits,the social demand is greater than the market demand by the amount of the externality.

Transfer payments are payments to individuals for which nothing is currently rendered in return. Transfer payments are payments to individuals for which nothing is currently rendered in return.

State governments receive half of their tax revenue from property taxes. State governments rely heavily on sales taxes,while cities depend heavily on property taxes.

Fire protection and police protection can be produced more efficiently by the private sector than by the public sector. Fire and police protection are public goods; therefore,the private sector will underproduce these services.

Micro and macro failures of the marketplace never justify government intervention. The potential micro and macro failures of the marketplace provide specific justification for government intervention.

The market tends to underproduce public goods. The market mechanism leads to underproduction of public goods because everyone would wait for someone else to pay.

The federal personal income tax system is regressive. The federal income tax system is progressive.

Social demand equals market demand minus externalities when there are external benefits. Social demand equals market demand minus externalities when there are external costs.

The free-rider dilemma occurs in the provision of public goods because an individual can realize the benefits of someone else's purchase (consumption)of a public good. A free rider is an individual who reaps direct benefits from someone else's purchase (consumption)of a public good.

A progressive tax system is one in which tax rates rise as incomes rise. A progressive tax system is one in which tax rates rise as incomes rise.