Deck 5: Public Spending and Public Choice

Question 1

Market failure occurs when

A)a good is too expensive for the market to provide.
B)an unrestrained market economy leads to too few or too many resources going to a specific economic activity.
C)one good is superior to another and drives it out of the market.
D)the stock market experiences a very large loss.

Answer 1

an unrestrained market economy leads to too few or too many resources going to a specific economic activity.

Question 2

Market failures include all of the following EXCEPT

A)equalization of quantity supplied and quantity demanded.
B)public goods.
C)positive externalities.
D)negative externalities.

Answer 2

equalization of quantity supplied and quantity demanded.

Question 3

A situation in which a market economy leads to too few or too many resources going to a particular economic activity is known as

A)competition.
B)excessive competition.
C)destructive competition.
D)a market failure.

Answer 3

a market failure.

Question 4

A price system is considered to be efficient when

A)it fails to have the goods that consumers want.
B)an underground market develops.
C)all resources are allocated to the highest-valued uses.
D)firms produce more than what consumers want.

Question 5

A situation in which a benefit or a cost associated with an economic activity spills over to third parties is called

A)a public good.
B)a merit good.
C)an externality.
D)the free-rider problem.

Question 6

When market failures occur

A)the invisible hand will correct for the market failures.
B)the price system will correct the market failures.
C)people will reduce their consumption.
D)the government can step in to correct the market failure.

Question 7

An example of a market failure is

A)a firm is dumping toxic waste that is making people sick.
B)when not everyone who wants to see a major league football game can.
C)when there is an increase in demand and a shortage develops.
D)unemployment.

Question 8

In its most ideal form, a price system allows

A)firms to act in such a way that they eliminate scarcity.
B)consumers to satisfy all their wants.
C)resources to move from lower-valued uses to higher-valued uses through voluntary exchange.
D)government policy makers to allocate resources to the uses which they consider to be in the best interests of society.

Question 9

Which of the following statements is NOT true about the price system?

A)The price system allows resources to flow from low-valued uses to high-valued uses.
B)Firms have total control over what consumers can buy.
C)Individuals have freedom to purchase what they want.
D)The price system allows for economic efficiency.

Question 10

When misallocation of resources for production of a good results in spillover effects on third parties, there is a

A)market failure.
B)government failure.
C)legislative failure.
D)productive failure.

Question 11

Which of the following terms describes the situation in which all resources are able to move to to highest-valued uses via voluntary exchange?

A)government intervention
B)a market failure
C)economic efficiency
D)an externality

Question 12

When there are too few or too many resources going to an economic activity

A)a public good exists.
B)a market failure exists.
C)consumer sovereignty exists.
D)a free-rider problem exists.

Question 13

Market failures occur when

A)externalities exist.
B)economic efficiency increases.
C)there is an increase in demand.
D)there is a change in quantity demanded.

Question 14

Market failures

A)are usually caused by government interference in the economy.
B)prevent the price system from attaining economic efficiency.
C)encourage people to purchase more of a good than they really want.
D)encourage businesses to produce more of a good than they really want to.

Question 15

Market failure occurs when

A)the price system fails to generate an efficient allocation of resources.
B)the price system fails to generate an equal distribution of income.
C)the price system fails to generate an equal distribution of wealth.
D)the price system allows consumers to make their own decisions.

Question 16

Consumers are sovereign when

A)prices are decided by sellers.
B)a few consumers exercise coercion on sellers and other consumers.
C)they can prevent market failure.
D)they have the freedom to decide what they wish to purchase.

Question 17

The price system allocates resources efficiently EXCEPT when

A)consumers decide they want more of a good.
B)resources are utilized to produce the highest-valued goods and services.
C)voluntary exchange exists.
D)the production of a good affects parties other than its buyers and sellers.

Question 18

When the price system fails to generate an efficient allocation of resources

A)the market will always correct it.
B)consumers will spend less.
C)business will produce more.
D)too few or too many goods will be produced.

Question 19

Market failures

A)prevent the price system from attaining economic efficiency.
B)result in quantities and prices that are socially desirable.
C)strengthen economic efficiency by forcing unprofitable firms to close.
D)weaken the argument for government intervention in the economy.

Question 20

Which of the following is a benefit of the price system?

A)the existence of positive externalities
B)the production of public goods
C)Consumers have what they want since politicians and business managers decide what is to be produced.
D)the freedom of consumers to decide what they want to purchase

Question 21

If production of an item results in negative external costs, then

A)the market price is below the socially preferred price that reflects the external costs.
B)the market price is above the socially preferred price that reflects the external costs.
C)market forces will always correct the problem.
D)the market quantity is too low from society's point of view.

Question 22

When an external cost exists in the production of a good, firms tend to

A)under-produce the good since society pays these costs.
B)over-produce the good.
C)keep production constant throughout the year.
D)under-allocate resources to the production of the good.

Question 23

An external cost, such as the cost generated by pollution, is

A)a cost paid by consumers of the product.
B)a cost paid by producers of the product.
C)a cost paid by a third party or by society at large.
D)not a true opportunity cost of production.

Question 24

Pollution is caused by a market failure, in an industry in which there is

A)unemployment.
B)an over-allocation of resources in production.
C)excess demand.
D)excessive cost borne by the firm.

Question 25

An externality exists when

A)goods are sold in specific geographic locations.
B)some of the benefits or costs associated with a good are borne by third parties.
C)the government taxes a good.
D)the government subsidizes a good.

Question 26

Suppose that one firm produces a product that results in negative external costs to society. This information suggests that

A)resources are under-allocated to the firm.
B)the equilibrium market price of the product includes the external costs borne by society.
C)resources are over-allocated to the firm.
D)at the market price, quantity demanded is less than quantity supplied.

Question 27

When a good causes positive external benefits to accrue to third parties, an unfettered market will

A)under-allocate resources to the good causing the benefit.
B)over-allocate resources to the good causing the benefit.
C)cause the equilibrium quantity, established before the benefit is taken into account, to be produced more efficiently.
D)eliminate such goods.

Question 28

Which of the following often involves positive external benefits?

A)water pollution
B)drunken driving
C)inoculation programs
D)tobacco smoking

Question 29

A result of a positive externality in the production of a good is that

A)the price system will over-allocate resources to the production of that good or service.
B)the price system will under-allocate resources to the production of that good or service.
C)the market supply will be too high.
D)the market demand will be too high.

Question 30

All of the following illustrate how government can correct for positive externalities EXCEPT

A)subsidies.
B)regulation.
C)government financing and production.
D)charging effluent fees.

Question 31

Which of the following leads to an underallocation of resources to a specific economic activity?

A)external costs
B)external benefits
C)marginal costs
D)effluent benefits

Question 32

Which of the following will LEAST likely generate positive external effects to society?

A)education
B)fast food services
C)health care
D)requiring drivers to undergo periodic eye examinations

Question 33

Society is likely to over-allocate resources to produce goods that

A)are public goods.
B)are merit goods.
C)generate positive externalities.
D)generate negative externalities.

Question 34

A negative externality is a situation in which

A)there is a spillover of benefits.
B)a cost associated with an economic activity is borne by a third party.
C)a firm is paying in excess of the total costs of producing a good.
D)none of the above.

Question 35

A negative externality such as pollution can be corrected by

A)a subsidy to producers.
B)a tax on producers.
C)a subsidy to consumers.
D)a stimulus to production.

Question 36

Suppose that the market price of good X equals the firm's cost of producing that good, but it does not reflect any costs imposed on society. Which of the following is FALSE?

A)The good is priced too low.
B)An external benefit is associated with good X.
C)Resources are over-allocated in the production of good X.
D)Too much of good X is being produced.

Question 37

An example of third parties in the market of automobiles is

A)a pedestrian that is affected by the polluted air from automobiles.
B)a producer of automobiles.
C)a consumer of automobiles.
D)None of the above belongs to third parties.

Question 38

Which of the following is an example of a negative externality?

A)There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.
B)The opening of a new shopping mall increases the business of nearby restaurants.
C)A consumer pays a higher price than another consumer does for the same product.
D)Consumers pay a sales tax in addition to the price of a product.

Question 39

When a paper producer pollutes the air, economists argue that there is

A)efficiency, if production is at its maximum level.
B)a positive externality.
C)an external cost.
D)a cost paid solely by the firm.

Question 40

An externality can best be defined as

A)a party not directly involved in a transaction.
B)a consequence of a transaction that spills over to affect third parties.
C)a right of an owner to use and exchange property.
D)a cost associated with the production of one more unit of output.

Question 41

The Do-Good Company produces goods that provide benefits to society-at-large. If consumers of Do-Good's products fail to take external benefits into account

A)the demand curve will be too far to the left.
B)the supply curve will be too far to the left.
C)the demand curve will be too far to the right.
D)the supply curve will be too far to the right.

Question 42

According to the above figure, if steel mills are charged an effluent fee in order to bear the cost of pollution, what happens to the equilibrium price and equilibrium quantity?

A)They are unchanged.
B)They change from P₁ and Q₁ to P₂ and Q₂.
C)They change from P₂ and Q₂ to P₁ and Q₁.
D)The equilibrium price increases from P₁ and P₂, but the equilibrium quantity is unchanged.

Question 43

Government can correct for negative externalities by

A)decreasing taxes.
B)increasing taxes or regulation.
C)allowing the market system to correct the problem.
D)decreasing the costs to those responsible for the externality.

Question 44

In graphical form,the effect of imposing a tax on a good is shown as

A)a leftward shift of the market supply curve.
B)a rightward shift of the market supply curve.
C)a downward movement along the market supply curve.
D)no change to the market supply curve.

Question 45

According to the above figure, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be

A)Q₁.
B)Q₂.
C)Q₂ - Q₁.
D)none of the above.

Question 46

When costs spill over to third parties, there is a(n)

A)cost overrun.
B)excessive competition.
C)negative externality.
D)government subsidy.

Question 47

Which of the following is an example of a positive externality?

A)something obtainable at a zero price
B)a lower crime rate for a community in which residents receive more education
C)increased purchases of landscaping services by a homeowner that boost a neighbor's property value
D)a discount for consumers buying in large quantity

Question 48

A government subsidy is typically used

A)to correct a negative externality.
B)to provide a government-inhibited good.
C)to reduce inflation.
D)to correct a positive externality.

Question 49

If the production of a product results in significant external costs, an appropriate government policy might be to

A)subsidize the production of the good.
B)tax producers and thus shift the supply curve to the left.
C)tax consumers' incomes and thus shift the demand curve to the left.
D)subsidize consumers since the good is being under-consumed.

Question 50

A subsidy is sometimes used by the government to correct the problems associated with

A)negative externalities.
B)positive externalities.
C)public goods.
D)monopolies.

Question 51

Which of the following is an example of a positive externality?

A)a neighbor's flower garden that you enjoy seeing
B)traffic congestion
C)an increased supply of chocolate lowers chocolate prices for all consumers
D)pollution

Question 52

When the production of one good spills benefits over to third parties, the government should consider all of the following EXCEPT

A)subsidizing the consumption of the good.
B)subsidizing the production of the good.
C)creating tax incentives to encourage more consumption.
D)taxing the production or consumption of the good.

Question 53

An effluent fee

A)is a reward to companies using production methods that create positive externalities.
B)is also called a pollution subsidy.
C)gives a firm the right to pollute if it pays a tax on what it discharges.
D)is intended to influence the market by increasing supply and decreasing price.

Question 54

A government action that can help correct positive externalities is

A)a tax on producers of the good that provides external benefits.
B)a subsidy to consumers of the good that provides external benefits.
C)an effluent fee charged to producers of the good that provides external benefits.
D)regulations aimed at reduced production by sellers of the good that provides external benefits.

Question 55

Which of the following is NOT an example of a negative externality?

A)inoculation against disease
B)pollution
C)playing a boom box loudly in a crowded park
D)rush hour traffic

Question 56

Assume the production of a good gives rise to external benefits. The government may increase efficiency by

A)subsidizing consumption of the good.
B)requiring all producers of the good to be licensed.
C)taxing production of the good.
D)imposing taxes on the good.

Question 57

A paint firm has just announced that it will be building a new plant in a small town that is currently experiencing a high level of unemployment. The new plant will create 500 new jobs in the area and will occupy unused land at the edge of town. The plant will also dump some harmful chemicals into the town's river. From an economic standpoint this dumping of chemicals

A)is unimportant since the firm is reducing the unemployment in the region.
B)creates a negative externality.
C)is the production of a public good.
D)creates a positive externality.

Question 58

To correct for the underproduction of products with positive externalities, the government must

A)provide the incentives for the private sector to produce and consume the good.
B)provide tougher regulations on the industry.
C)increase taxes on the industry.
D)fine the industry.

Question 59

Suppose that a per-unit subsidy is granted to each individual who consumes a product providing external benefits to society at large. Each individuals demand curve will shift ________, and the market demand curve for the product will shift ________.

A)to the right; to the right
B)to the right; to the left
C)to the left; to the left
D)to the left; to the right

Question 60

According to the above figure, then the supply curve will

A)shift from S₁ to S₂.
B)shift from S₂ to S₁.
C)remain at S₁.
D)shift either to the left or the right, but it is impossible to say without more information.

Question 61

Which of the following is an example of a negative externality?

A)A person buys a car that is a lemon.
B)A worker is injured on the job.
C)A new restaurant's success causes another to go out of business.
D)A new hotel ruins the view of the ocean for a few homeowners.

Question 62

Which of the following statements is TRUE of external costs?

A)External costs should not be corrected since people will bear the costs whether they are corrected or not.
B)There are no good ways to correct for the external costs.
C)When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources.
D)External costs should only be corrected for if the correction will not increase the market price.

Question 63

My brother decides to leave his empty soda can on someone's lawn. This is an example of a

A)public good.
B)positive externality.
C)neutral externality.
D)negative externality.

Question 64

The funds that polluters pay that gives them the right to discharge into the air or water a certain amount of pollution are

A)special subsidies.
B)regulation fees.
C)external costs.
D)effluent fees.

Question 65

Which of the following is NOT an example of an externality?

A)A bread company emits a wonderful aroma in the air that makes people smile.
B)The neighbor's wind chimes interfere with your sleep.
C)A firm fires 500 people.
D)Cancer-causing chemicals are dumped into the drinking water supply of a city.

Question 66

When negative externalities exist, the private market equilibrium represents a

A)market price which is too low and a market quantity which is too low.
B)market price which is too low and a market quantity which is too high.
C)market price which is too high and a market quantity which is too low.
D)market price which is too high and a market quantity which is too high.

Question 67

Safe Bank has an outside display which has the time and temperature that is always correct. This is an example of

A)an interference in the workings of the price system.
B)a breakdown in communication between the bank and its customers.
C)a negative externality.
D)a positive externality.

Question 68

A tax is sometimes used by government to correct the problems associated with

A)negative externalities.
B)positive externalities.
C)internal benefits.
D)external benefits.

Question 69

The purpose of an effluent fee imposed on a firm is

A)to increase output of its product by increasing the resources allocated to production.
B)to increase output of its product by reducing the resources allocated to production.
C)to reduce output by increasing production costs thereby reducing resources used.
D)none of the above

Question 70

Markets tend to overallocate resources to the production of a good when

A)there are negative externalities.
B)there are positive externalities.
C)there are public goods produced.
D)equilibrium occurs.

Question 71

To correct for positive externalities the government

A)should allow the price system to do the correction.
B)can impose a tax.
C)can give a subsidy.
D)should create a public good.

Question 72

An effluent fee is a

A)subsidy given to the producer of a positive externality.
B)charge to a polluter that gives the right to discharge pollution into the air.
C)fine imposed on a polluter for dumping illegal pollution.
D)charge for a public good.

Question 73

Markets tend to underallocate resources to the production of a good when

A)there are negative externalities.
B)there are positive externalities.
C)there are public goods produced.
D)equilibrium occurs.

Question 74

A subsidy is sometimes used by government to correct the problems associated with

A)negative externalities.
B)positive externalities.
C)internal benefits.
D)external benefits.

Question 75

When positive externalities exist, the private market equilibrium represents a

A)market price which is too low and a market quantity which is too low.
B)market price which is too low and a market quantity which is too high.
C)market price which is too high and a market quantity which is too low.
D)market price which is too high and a market quantity which is too high.

Question 76

An effluent fee is more effective when imposed on

A)the firm or producer of the product which generates pollution.
B)the consumer of the product.
C)neither the producer nor the consumer of the product.
D)the supplier of the raw material used by the firm.

Question 77

Which of the following statements is NOT true of external benefits?

A)External benefits lead to an underallocation of resources to the production of the good that has the external benefit.
B)External benefits lead to a price in the market that is too high.
C)External benefits lead to too few of the goods that have the external benefit being produced.
D)External benefits are a good thing for the allocation of resources because people are getting something at no cost.

Question 78

To correct for negative externalities, the government

A)should allow the price system do the correction.
B)can impose a tax.
C)can provide a subsidy to consumers.
D)should create a public good.

Question 79

Orchards provide services to beekeepers because the bees use the pollen to make honey. This is an example of

A)a positive externality, and too many orchards exist in society.
B)a positive externality, and too few orchards exist in society.
C)a negative externality, and too many orchards exist in society.
D)a negative externality, and too few orchards exist in society.

Question 80

The purpose of an effluent fee is to

A)reduce the amount produced of a good and to raise the market price.
B)correct for pollution while keeping the price of the good the same as before the correction.
C)reward people producing externalities.
D)encourage producers to keep the quantity produced the same while lowering the price.