Deck 18: Assymmetric Information, the Rules of the Game, and Externalities

Question 1

Public goods:

A)refer to the goods flowing to the public.
B)refer to symmetric information.
C)are not related to transaction costs.
D)are a special case of externality.

Answer 1

are a special case of externality.

Question 2

Property rights are limited:

A)by people's ignorance.
B)in order to insure fairness.
C)by a variety of factors but not by the law.
D)because it is costly to enforce them.

Answer 2

because it is costly to enforce them.

Question 3

According to Coase, the allocation of resources is independent of the distribution of property rights when:

A)the allocation is Pareto- optimal.
B)information is free.
C)property rights are incomplete.
D)transaction costs are high.

Answer 3

information is free.

Question 4

According to the Coase theorem part 1:

A)property rights are irrelevant.
B)when information is free, the allocation is Pareto- optimal.
C)all allocations are Pareto- optimal.
D)the information is always free.

Question 5

Nonprofit firms:

A)have no residual claimants.
B)cannot be analyzed using economic principles.
C)fit into a special method of organizing production.
D)operate at a loss.

Question 6

In the presence of externalities of any sort:

A)competitive general equilibrium is inefficient.
B)competitive general equilibrium does not exist.
C)competitive general equilibrium is efficient.
D)government regulation is necessary.

Question 7

Better defined property rights are always preferred to less defined ones. The reason why property rights are not perfectly defined:

A)is due to the presence of fairness issues.
B)is the absence of transaction costs.
C)is the result of an optimization process.
D)is that a large share of voters are ideologically opposed to it.

Question 8

Holding property rights means that:

A)an individual does not have to incur transaction costs anymore.
B)governments can guarantee an individual's ability to make choices.
C)one is able to do whatever he pleases with the assets in question.
D)there are limits on an individual's ability to derive income from or transfer a good.

Question 9

The cost- benefit analysis is fraught with difficulty:

A)the best policy is no policy.
B)because economist have a hard time modelling individuals' behaviour.
C)externalities cannot be appropriately dealt with in this framework.
D)because the necessary information is prohibitively costly.

Question 10

Positive externalities are created when:

A)farmers spray pesticide in their fields and it washes into the local river.
B)your neighbor plants beautiful flowers in her yard and you enjoy looking at them.
C)you purchase the "Mona Lisa" and lock it in a vault.
D)other consumer reduce their demand for coffee and price thereby declines.

Question 11

According to the Coase theorem part I, no fault divorce should have:

A)not changes the divorce rate but made women better off.
B)not changed the divorce rate, and not made anyone better or worse off.
C)changed the divorce rate, but made men better off.
D)not changed the divorce rate, but made women worse off.

Question 12

Market demand for a public good is:

A)obtained by vertically summing individual demands.
B)always perfectly elastic.
C)obtained by horizontally summing individual demands.
D)always perfectly inelastic.

Question 13

The Coase theorem does not hold when:

A)distortionary taxes are present
B)income effects are positive.
C)transaction costs are positive.
D)information costs are zero.

Question 14

Private provision of goods can be efficient when the goods are:

A)non- rivalrous
B)non- excludable
C)non- durable
D)not scarce

Question 15

Transaction costs:

A)are information costs, but information costs are not all transaction costs.
B)are always variable costs, but may not be sunk costs.
C)are production costs.
D)are always sunk costs.

Question 16

The presence of negative externalities:

A)does not create allocational distortions.
B)resources are overallocated.
C)is encountered only between firms.
D)resources are underallocated.

Question 17

An economic property right and a legal property right:

A)are different because all economic rights are legal rights, but not all legal rights are economic rights.
B)overlap, but are different.
C)are the same thing.
D)are different because all legal rights are economic rights, but not all economic rights are legal rights.

Question 18

The fundamental reason for the existence of transaction costs is:

A)the absence of perfect property rights.
B)the sheer number of transactions in an economy.
C)the fact that information is costly.
D)the fact that all economic agents have the same information.

Question 19

Suppose you live on the main floor of a house. The person who lives upstairs performs aerobic exercises every night during your favorite T.V. program. Which of the following behaviours does not represent a Pareto- improvement?

A)You tape the program and watch it later.
B)Your neighbor pays you $20 to miss your program.
C)Your neighbor accepts $20 to exercise while you are out.
D)You complain to the manager, who evicts your neighbor.

Question 20

Better- defined property rights are preferred:

A)because ownership of assets leads to wealth.
B)as long as their marginal value is larger than their marginal cost.
C)due to the existence of high transaction costs.
D)because certainty is valuable.

Question 21

Public regulation is often an effective means of dealing with an externality when

A)property rights are not well- defined
B)transaction costs of private contracts are high
C)private contracts are not Pareto optimal
D)Government officials have superior knowledge

Question 22

Externalities occur because:

A)there is idle capital.
B)there are chronic shortages.
C)people are greedy.
D)there are no property rights.

Question 23

Coase theorem part 2 says that:

A)economic decisions are made so that transaction costs are minimized.
B)transaction costs are zero.
C)economic activities are organized to maximize the gains from trade net of transaction costs.
D)private solutions will be found regardless of the level of transaction costs.

Question 24

Non- zero transaction costs are a result of

A)gambling by risk lovers
B)asymmetric information
C)the Nash equilibrium
D)high wages paid to lawyers

Question 25

Pure public goods are:

A)completely nonrivalrous and excludable.
B)rivalrous and excludable.
C)rivalrous and nonexcludable.
D)completely nonrivalrous and nonexcludable.

Question 26

In the market for a public good, the equilibrium quantity of the good produced is too low because:

A)society does not want more to be produced.
B)a public good is an example of a negative externality.
C)the benefits of the good are not fully internalized by the producer.
D)a public good is a good consumed by the government.

Question 27

Which of the following is a Pareto- improving solution for an externality?

A)private bargaining
B)property condemnation
C)increased taxation
D)assigning property rights

Question 28

Which of the following is false?

A)Carbon emissions caused by automobiles are a negative externality.
B)Public goods are negative externalities.
C)National Public Radio is an example of a public good.
D)Externalities can be both positive (good)and negative (bad).

Question 29

When transaction costs are positive:

A)property rights are absent.
B)the marginal value of rights is equal to their marginal costs in equilibrium.
C)property rights are fully defined.
D)the marginal value of rights is larger than to their marginal costs in equilibrium.

Question 30

The marginal social value curve for a public good is the:

A)MC of producing the good.
B)total benefit society derives from consuming the good.
C)horizontal summation of individual demand curves for the good.
D)vertical summation of individual demand curves for the good.

Question 31

Which of the following is not a problem when measuring transaction costs?

A)transaction costs are net of trade benefits
B)transaction costs reduce the volume of trade
C)transaction costs are difficult to observe
D)transaction costs are normally opportunity costs

Question 32

When externalities are present the assigning of property rights

A)interferes with the Nash equilibrium
B)impedance the efficiency of markets
C)is not a Pareto improvement
D)reduces overall wealth

Question 33

Internalizing an externality:

A)is solely in the purview of governments.
B)entails a solution that provides incentives to private actors to act efficiently.
C)means exacerbating the external effect.
D)does not involve minimizing the impact of free riders.

Question 34

A nonrivalrous good is:

A)one produced by a monopolist.
B)one that individuals only want one of.
C)one that only one person wants.
D)one where the consumption by one person does not effect the consumption by others.

Question 35

The fact that thieves are able to break into houses:

A)means that the thieves have legal property rights.
B)means the police is powerless.
C)means that the the thieves have economic property rights.
D)means that economic property rights are not circumscribed.

Question 36

Wealth is maximized when:

A)economic property rights are perfect.
B)people are not allowed to smoke.
C)there are legal restrictions on other people.
D)there are positive transactions costs.

Question 37

A good is said to be non- rivalrous if:

A)its consumption does not affect the amount available to others.
B)its production imposes only indirect effects on other economic agents.
C)no externalities are associated with its production or consumption.
D)net benefits to consumers outweigh the opportunity costs of those excluded.

Question 38

Which of the following does not apply in the world of zero transaction costs?

A)Information is costly.
B)Coase theorem predicts a Pareto- optimal outcome.
C)Coase theorem predicts that allocation of resources is independent of property rights.
D)Property rights are perfectly defined.

Question 39

Jim the welder likes to smoke cigars, but Dennis, his assistant cannot stand them. The optimal solution to their disagreement is to:

A)find a rule that allows Jim to smoke occasionally.
B)impose a no- smoking rule.
C)let Jim smoke when he wants.
D)break- up the welding team.

Question 40

When the recipient of an externality pays its producer to reduce production, the externality has been solved by:

A)internalization.
B)assigning property rights.
C)negotiation.
D)regulation.

Question 41

Cobs bakery outlets are usually located in close proximity to Starbucks. This may be an example of

A)collusion
B)a negative externality
C)ill- defined property rights
D)the free rider problem

Question 42

Which of the following is not a valid response to the presence of externalities?

A)internalization
B)do nothing
C)deregulation
D)assigning property rights

Question 43

An externality is said to exist when:

A)the market allocation of resources is not Pareto- optimal.
B)an agent's consumption affects the prices paid by the agent.
C)an economic agent directly affects another economic agent or agents.
D)an economic activity indirectly affects others through prices.

Question 44

A nonexcludable good is:

A)an essential good.
B)one whose opportunity cost of production is zero.
C)one which any individual can consume.
D)a public good.

Question 45

Attempts to implement legislation to reduce carbon dioxide emissions have thus far not been successful on a global scale. One reason for this may be that

A)the science of climate change is not widely accepted
B)internalizing an externality is never successful
C)the domestic cost exceeds the domestic benefit
D)the transaction costs are extremely high

Question 46

When a positive externality is present:

A)resources are underallocated to the source of externality.
B)transaction costs are positive.
C)there is no possibility to increase the gains from trade.
D)resources are overallocated to the source of externality.

Question 47

The neoclassical model of supply and demand:

A)cannot explain why the price mechanism does not work at times.
B)can explain a quite limited amount of observable phenomena.
C)is inconsistent and cannot be tested.
D)lacks a good definition of the concept of equilibrium.

Question 48

Property rights:

A)require resources in order to be effective.
B)are the same as legal rights.
C)apply only to inanimate objects.
D)are not human rights.

Question 49

National Defense is largely provided by public agencies because

A)technical changes have enhanced the public good characteristics
B)governments are afraid of being overthrown
C)the benefits are often small
D)private production leads to moral hazard problems

Question 50

The rules of the game refer to:

A)how prices are determined in markets.
B)the distribution of property rights.
C)the set of rules governing the way matches are played in professional sports.
D)a well- known feature of the neoclassical economic model.

Question 51

If transactions costs exist, then the following is definitely not true:

A)There are externalities.
B)Information is free.
C)Information is not perfect.
D)Property rights are not perfect.

Question 52

Which of the following is not a critique of the neoclassical model

A)rush- hour traffic is a form of excess demand
B)taxes are partially passed on to consumers
C)distribution of property rights is not determined
D)unemployment exists

Question 53

A major problem which plagues cost- benefit analysis is:

A)the existence of externalities.
B)the problem of conceptually defining benefits and costs.
C)the market power problem.
D)the revealed preference problem.

Question 54

The fact that stolen goods command lower prices on the market:

A)indicate that a reduction of property rights reduces wealth.
B)proves that markets are not efficient.
C)means that property rights are absolute.
D)shows thieves have poor judgment.

Question 55

Possible solutions to the misallocations created by externalities include:

A)private bargaining but not internalization.
B)internalization.
C)central planning.
D)internalization but not public regulation.

Question 56

When private solutions to externalities are not feasible:

A)public regulation is the remedy, since transaction costs in the public sector are always lower.
B)regulatory activity could represent a viable practical response.
C)the economic entities need to be subjected to public scrutiny.
D)public regulation is always called for.

Question 57

A rivalrous good is one for which:

A)consumption precludes anyone else from consuming it.
B)a negative externality is generated during its production.
C)producers of the good must compete for market share.
D)a negative externality is generated through its consumption.

Question 58

Which of the following solves an externality problem through internalization?

A)The state institutes mandatory safety checks for automobiles.
B)The municipal government imposes a height restriction on buildings.
C)Buying property to cut trees and improve the view.
D)The municipal government bans smoking in public buildings.

Question 59

Transaction costs exist because:

A)the information is costly.
B)the information is asymmetric.
C)we need to define property rights.
D)the information is asymmetric and costly to obtain.

Question 60

Transaction costs of private contracts are higher:

A)when direct contact between economic actors is frequent.
B)when the number of actors involved is relatively small.
C)when the economic actors involved are more homogenous.
D)when large specific investments have been made.

Question 61

When an economic agent affects the well being of another, for better or worse, the agent is:

A)imposing an externality.
B)learning from the other agent.
C)using noneconomic analysis.
D)acting as a psychologist.

Question 62

The switch in property rights from fault to no- fault divorce resulted in a situation where:

A)property rights are misallocated.
B)there were large negative externalities.
C)the property right is held by the spouse who least wants the divorce.
D)the property right is held by the spouse who most wants the divorce.

Question 63

Suppose that the economy is composed of two individuals, A and B. Their respective demand curves for a public good, y, are given by: y_A = 50 - p/2 and y_B = 25 - p. Suppose the MC of providing the public good is given by MC = 10 + 2y. A social optimum is achieved if:

A)y = 21.7.
B)y = 30.
C)y = 23.
D)y = 15.

Question 64

According to neoclassical economics:

A)all allocations are Pareto- optimal.
B)property rights over assets do not matter.
C)all allocations are obtained via perfectly competitive markets.
D)laws, customs, culture are important economic factors.

Question 65

When an individual has the economic property right over a resource they are:

A)constrained by the rules of the game.
B)faced with positive transactions costs.
C)able to act like monopolists.
D)able to exercise choices freely.

Question 66

Property rights are incomplete because:

A)the Coase theorem does not hold.
B)it would imply that wealth is not maximized.
C)transaction costs are not zero.
D)the distinction between economic and legal property rights is fuzzy.

Question 67

If a pure public good is produced in a competitive market, then:

A)too much or too little of the good will be produced.
B)too little of the good will be produced.
C)the socially optimal amount of the good is produced.
D)too much of the good will be produced.

Question 68

The price charged for a nonrivalrous good is socially optimal if:

A)the price is zero.
B)the price is just enough so that revenues equal the production costs.
C)the price is above zero but less than the marginal cost.
D)the price is equal to the MC of producing the good.

Question 69

Transactions costs are costs that violate:

A)the rules of market allocation.
B)the Coase theorem.
C)the rules of the game.
D)economic property rights.

Question 70

A good with a negative externality will be by an unregulated market. Public goods are typically due to there being a _ _.

A)oversupplied, undersupplied; free rider problem
B)undersupplied; oversupplied; negative externality
C)oversupplied; oversupplied; free rider problem
D)oversupplied; undersupplied; negative externality

Question 71

The assignment of property rights:

A)enhances the wealth of some parties, while lowering the wealth of others.
B)always enhances the the wealth of everybody involved.
C)leads frequently to a Pareto- improvement.
D)makes some parties better off while leaving all others as well of as before.

Question 72

Transactions costs are:

A)the costs of establishing and maintaining property rights.
B)the costs of exploiting economic resources for production.
C)very expensive.
D)caused when people impose externalities on others.

Question 73

Eliminating information asymmetry:

A)should be upheld by law.
B)may not be called for if done by eliminating specialization.
C)can be done costlessly.
D)is always desirable because it lowers transaction costs.

Question 74

Which of the following is a situation where property rights are complete?

A)Your neighbour is always disturbing you with loud music.
B)Your neighbour pays you a fee because his driveway crosses your property.
C)You always get seated too close to the smoking section in restaurants.
D)An individual owns a property but cannot mine it.

Question 75

Coase theorem:

A)invalidates all the results from neoclassical economic models.
B)states that information is free.
C)applies only to settings characterized by externalities.
D)explains the distribution of property rights.

Question 76

Why might a public regulation sometimes be a crude means of rectifying externalities?

A)It reduces productivity.
B)It restricts individual choice.
C)It often imposes a single solution on many different problems.
D)It is too costly.

Question 77

A nonexcludable good is necessarily:

A)one which will always be consumed by a utility- maximizing individual.
B)a pure public good.
C)one which will never be produced by a profit- maximizing firm.
D)a rivalrous good.

Question 78

The Coase theorem says that when information is free:

A)there will be more externalities.
B)the allocation of resources is Pareto- optimal.
C)people will over consume information.
D)there will be more free riders.

Question 79

The economic property rights:

A)exist only in market economies.
B)are not essential for the ability to trade with others.
C)are necessary for the existence and creation of wealth.
D)are identical with legal property rights.

Question 80

The practice of officers purchasing their commissions in the British Army was:

A)to aid the King in selecting good officers.
B)so only the rich could become officers.
C)because of generalized corruption.
D)to help raise funds for the Army.