Question 1

Many external costs occur because

Accepted Answer

External costs occur when people or companies do not pay the true cost of using a resource, meaning they do not take into account the negative impacts on society or the environment. This results in a misallocation of resources and can lead to negative consequences for society as a whole.

Question 2

In a market that lacks sufficient competition,

Accepted Answer

The answer of In a market that lacks sufficient competition,
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Question 3

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the

Accepted Answer

The protective function of government involves maintaining security and order through the establishment and enforcement of rules that protect people's person and property. This function includes the provision of police and military services, as well as the creation and enforcement of laws and regulations. The productive function of government involves promoting economic growth and development, while the transfer function involves redistributing resources and income among individuals and groups. The illegitimate function of government refers to actions that violate people's rights or undermine the democratic process.

Question 4

When externalities are present,

Accepted Answer

When externalities are present, there are costs or benefits associated with a transaction that are not directly borne by the buyer or seller. This means that the market outcomes will not align with ideal economic efficiency, as the market fails to take into account the full costs or benefits of the transaction. Therefore, the presence of externalities often requires government intervention to achieve a socially optimal outcome.

Question 5

A market transaction causes an externality if someone

Accepted Answer

An externality occurs when the consequences of a market transaction affect individuals who are not directly involved in the transaction, and these effects are not reflected in the market price. This can result in uncompensated costs (negative externality) or benefits (positive externality) for third parties. Therefore, option B is the correct answer. The other options are not related to the concept of externality.

Question 6

There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the

Accepted Answer

Scholars generally agree that protecting the rights of individuals to their person and property (including enforcing contracts, preventing theft, and providing a legal framework for markets to function) is a legitimate function of government. Additionally, providing goods that cannot easily be provided through markets such as public education, healthcare, and infrastructure are also seen as legitimate functions of government. The other choices listed (B, C, and D) do not reflect the commonly agreed upon legitimate functions of government.

Question 7

Which English philosopher argued that people own themselves and, as a result, own the fruits of their labor, and thus, the role of government is to protect these natural rights of individuals?

Accepted Answer

John Locke argued for the concept of natural rights, which include the right to property. He believed that people own themselves and their labor, and that the role of government is to protect these natural rights.

Question 8

Which of the following would be a protective function of government?

Accepted Answer

Providing national defense is a core function of government to protect the citizens and the country from external threats.

Question 9

Externalities

Accepted Answer

Externalities cause the price system to misallocate resources because they represent costs or benefits not reflected in market prices, leading to overproduction or underproduction.

Question 10

Relative to a competitive situation, if a market lacks competition, economic theory suggests that

Accepted Answer

When a market lacks competition, firms have the power to raise prices and restrict output to increase profits. This leads to higher prices for consumers and lower output levels. Thus, the correct choice is A.

Question 11

Which of these activities will most likely result in an external benefit?

Accepted Answer

Planting a flower garden on a vacant lot can have external benefits in the form of beautification of the neighborhood, improved air quality, and potential increase in property values for neighboring houses.

Question 12

Sellers have a strong incentive to lobby government for legal restrictions that would reduce the intensity of competition in their market because

Accepted Answer

Sellers have a strong incentive to lobby government for legal restrictions that would reduce the intensity of competition in their market because competition tends to result in lower prices and lower profits which is not favorable for sellers.

Question 13

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

Accepted Answer

If a group of sellers can restrict entry into a market, they gain market power and can charge a higher price. By reducing output, they can limit the supply of goods or services and increase their market power. This results in a higher price per unit and a higher profit margin. Therefore, Option A is the best choice.

Question 14

When competitive forces in an industry are weak,

Accepted Answer

When competitive forces in an industry are weak, firms may have the ability to charge higher prices and produce less than optimal levels due to the absence of competition. This can lead to a lack of incentives for firms to increase operational efficiency, resulting in less efficient production processes. Therefore, D is the best choice.

Question 15

Externalities cause the market mechanism to allocate goods and resources inefficiently because

Accepted Answer

Externalities cause the market mechanism to allocate goods and resources inefficiently because competitive markets fail to give producers and consumers correct price signals. This happens when the cost or benefit of a good or service is not reflected in its market price, leading to overconsumption or underproduction, which creates inefficiencies in the allocation of resources.

Question 16

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the

Accepted Answer

The productive function of government includes the provision of public goods and services that cannot be easily provided through markets due to the free rider problem or lack of a one-to-one link between payment and consumption. Examples include national defense, law enforcement, and public infrastructure. The other options listed (B, C, D) do not accurately describe this function of government.

Question 17

Markets fail to allocate resources efficiently when

Accepted Answer

When property rights are poorly enforced or not established, it becomes difficult for buyers and sellers to agree on a fair price for goods and services. This can lead to market inefficiencies such as overproduction, underproduction, or the misallocation of resources. Prices may not accurately reflect the true cost of production, which can discourage innovation and investment in certain industries. In extreme cases, it may even lead to situations where some people are excluded from participating in the market altogether.

Question 18

The spillover effects of actions that affect the well-being of nonconsenting third parties are called

Accepted Answer

The definition provided in the question matches the definition of externalities - the indirect consequences of an action affecting third parties without their consent. Option A, side components, is not a relevant term in this context. Option C, free riders, refers to individuals who benefit from a public good without contributing to its provision. Option D, internalizations, refers to the process of bringing a function or activity under the control of a single entity.

Question 19

The key explanation for the prevalence of waterway pollution is

Accepted Answer

Waterways are often an open access, commonly owned resource, meaning that no one has sole ownership over them and they are free for anyone to use. This results in a tragedy of the commons, where individuals may use the waterway for their own benefit without taking into account the negative externalities, or costs to society, such as pollution. Without regulation or enforcement, there is no incentive for individuals to limit their pollution, leading to the prevalence of waterway pollution.

Question 20

Which of the following is most likely to lead to the underpricing and overuse of an economic resource?

Accepted Answer

The absence of an enforceable property right often leads to the tragedy of the commons, where individuals overuse and deplete a shared resource because they do not bear the full cost of their actions. This often leads to underpricing and overuse of the resource. Human greed and selfishness (A) and capital markets (B) may also play a role in the overuse of resources, but the absence of enforceable property rights is a more direct cause. Lack of understanding of pollution and its effects (D) is not directly related to the underpricing and overuse of economic resources.

Quiz 5: Difficult Cases for the Market, and the Role of Government