Question 1

Discuss the role of trust as a critical piece of any principal-agent situation. In particular, what role did trust play in the recent stock market scandals?

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Question 2

The supply of public goods must be left to government and nonprofit institutions. Why?

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Question 3

During the 1992 presidential campaign, H. Ross Perot made much of the various "special interests" which lobby in Washington, D.C. How might an economist view this? Which specific market breakdown may occur if there is lobbying? Relate your answer to the study of monopoly and oligopoly.

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Question 4

What do you mean by Coase theorem?

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Question 5

Explain why government, rather than private firms, is required for efficient mosquito eradication programs.

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Question 6

Unscrupulous managers have learned ways to manipulate stock options and undermine their benefits to stockholders. Discuss some provisions that could be built into the process to curb such practices.

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Question 7

What are private goods? Mention two important attributes of private goods.

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Question 8

Give an appropriate remedy for correcting excessive pollution and note any difficulties in implementing it.

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Question 9

It was once common for people to have servants who helped with the cooking and cleaning. Use the cost disease of the personal services dilemma to explain why these services have declined, even though one would expect an increased use in this age of the two-worker household.

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Question 10

The interest rate is the opportunity cost of transferring spending power between time periods. However, the market mechanism may fail to provide adequately for future economic growth. List the reasons why a market might fail.

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Question 11

It has been said that well-educated citizens are necessary for democracy. Discuss this idea in economic terms. What market imperfection might occur and what are the appropriate government policies to correct it?

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Question 12

If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor? Why? 
a. prohibiting the activity 
b. charging fees for continuing the activity 
c. requiring that the public be informed of the activity 
d. government purchase of the item for the public

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Question 13

Some would cite the purchase of defective products and the rising cost of health care as market failures. Argue that these are not true market failures.

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Question 14

Explain how stock options can ensure compatibility between the interest of stockholders and managers.

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Question 15

Many cities have summer pops series in which the local orchestra performs light classical music in a public park. These performances are free in some areas. Apply the concept of a public good to pops performances and explain whether an admission charge is efficient.

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Question 16

Hostile takeovers of corporations have been in the business news for some time now. Several states have passed laws making it harder for out-of-state corporations to acquire firms headquartered in their states. Several corporations have established "golden parachutes" to give executives high payoffs in case of hostile takeover. What market imperfection is likely to be worsened by these actions? Explain.

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Question 17

Why do markets tend to underproduce public goods?

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Question 18

Are national forests public goods? Explain.

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Question 19

Suppose that the government decided to increase interest rates in order to encourage saving. Would this likely lead to an increase in investment and higher future economic growth rates? Explain.

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Quiz 15: The Shortcomings of Free Markets