Question 1

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

Accepted Answer

The elderly woman planting a flower garden on a vacant lot next to her house will result in an external benefit. The beauty and pleasant scent of the flowers will enhance the aesthetics of the neighborhood and potentially increase property values. The other options do not result in any significant external benefits.

Question 2

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

By restricting entry into the market, the group of sellers can create a shortage of the product, which will allow them to raise the price and reduce the output. This will increase their total profit because they are able to capture a larger share of the market at a higher price. If they were to lower the price and expand output, they would increase their sales volume, but their profit margin may be lower in the long run. By raising price and leaving output unchanged, they may be able to capture some additional profits, but they risk losing market share to competitors who are able to enter the market.

Question 3

Externalities

Accepted Answer

Externalities can cause the price system to misallocate resources because the market price does not reflect the true social cost of production or consumption. This leads to an inefficient allocation of resources where either too much or too little of the good or service is produced, resulting in a net loss to society. While externalities can sometimes be beneficial, such as a positive technological spillover effect, they can also be detrimental, such as pollution or second-hand smoke. Including all costs, external and private, in production cost can help to internalize the externality and reduce its negative impact.

Question 4

When competitive forces in an industry are weak,

Accepted Answer

The answer of When competitive forces in an industry are...

Question 5

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 a framework of security and order through the establishment and enforcement of rules for the protection of individuals and their property. This includes maintaining law and order, protecting citizens from harm, and enforcing property rights.

Question 6

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 can lead to the underpricing and overuse of an economic resource because without clear ownership, individuals are less incentivized to conserve and use the resource efficiently. This can lead to overuse and depletion of the resource, as well as potential degradation of the surrounding environment.

Question 7

The key explanation for the prevalence of waterway pollution is

Accepted Answer

Waterways are often an open access, commonly owned resource, which means that there is no clear ownership or control over the use of the resource, and anyone can use it without paying for the costs of their actions. This results in a tragedy of the commons situation where individuals act in their own self-interest and exploit the resource, leading to pollution and degradation of the waterway.

Question 8

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

Accepted Answer

Competitive markets fail to give producers and consumers correct price signals when externalities are present. This occurs because external costs or benefits are not reflected in the market price, causing market participants to make decisions that do not account for these costs or benefits. This leads to an inefficient allocation of resources and goods.

Question 9

Markets fail to allocate resources efficiently when

Accepted Answer

When property rights are poorly enforced or not well established, it leads to a lack of clear ownership and control over resources, which makes it difficult for markets to allocate resources efficiently. This can lead to overuse or underuse of resources, as well as unequal distribution of benefits and costs. Prices fluctuating or people abusing their privileges can also lead to market inefficiencies, but these issues are often related to the weak enforcement of property rights. Not all market failures require government intervention, so D is not necessarily a correct choice.

Question 10

In a market that lacks sufficient competition,

Accepted Answer

The answer of In a market that lacks sufficient competition,
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Question 11

A market transaction causes an externality if someone

Accepted Answer

An externality occurs when a third party not directly involved in a market transaction receives uncompensated benefits or costs. This happens when the market fails to fully capture the social costs or benefits of a transaction. For example, pollution from a factory may harm individuals who live nearby but are not involved in the transaction between the factory and its buyers or suppliers.

Question 12

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

Accepted Answer

Providing national defense is a primary protective function of government as it ensures the safety and security of its citizens from external threats. Undertaking income redistribution, providing national parks, and monopolizing mail delivery are not necessarily protective functions of government, but rather serve other purposes such as promoting social welfare, preserving natural resources, and ensuring efficient communication systems.

Question 13

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 that people own themselves and their property, and that government's role is to protect these natural rights of individuals. This belief in individual rights and limited government influenced the development of modern liberalism and laid the groundwork for the American Revolution and the United States Constitution.

Question 14

Many external costs occur because

Accepted Answer

Many external costs occur because people do not pay the true cost of using a resource. External costs refer to the costs that are not borne by those who are involved in the production or consumption of a good or service, but are instead imposed on other individuals or society as a whole. These costs could be environmental damage, health problems, or social issues caused by the production or consumption of a particular good or service. When people do not pay the true cost of using a resource, they are not taking into account the external costs, and this leads to market failure.

Question 15

When externalities are present,

Accepted Answer

Externalities occur when the production or consumption of goods and services has an effect on third parties that is not reflected in the prices of those goods and services. This can lead to market outcomes that are inconsistent with ideal economic efficiency, as prices do not fully reflect the full social costs and benefits of production and consumption. This can lead to outcomes such as overproduction of goods with negative externalities and underproduction of goods with positive externalities. Therefore, C is the most appropriate choice.

Question 16

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

Accepted Answer

In the absence of competition, firms have more market power to set prices at a higher level, and produce a lower level of output. This leads to a situation where prices are higher and output is lower than it would be in a competitive market.

Question 17

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

Accepted Answer

Externalities are the spillover effects of actions that affect the well-being of nonconsenting third parties. Side components refer to other possible related factors, free riders are individuals who benefit from a public good without contributing to its production or maintenance, and internalizations refer to the process of bringing a previously external cost or benefit into a company's balance sheet.

Question 18

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

Accepted Answer

Protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets are widely recognized as legitimate functions of government. The protection of property rights provides incentives for people to work, invest, and create wealth, while the provision of public goods like infrastructure, education, and healthcare can have positive spillover effects that benefit society as a whole. Other functions of government like taxation, regulation, and redistribution are more controversial and subject to debate.

Question 19

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 involves the provision of public goods and services that cannot easily be provided through markets due to the difficulty of establishing a clear link between payment and consumption. Examples include national defense, public infrastructure, and basic scientific research. The protective function of government, on the other hand, involves the regulation and enforcement of laws to protect individuals and maintain order, while the construction function of government refers to the building and maintenance of public infrastructure. Income redistribution, meanwhile, involves the transfer of wealth or income from some individuals or groups to others in society.

Question 20

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. By reducing the intensity of competition, sellers can increase their profits.

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