Question 1

When competitive forces in an industry are weak,

Accepted Answer

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

Question 2

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

Accepted Answer

When a market lacks competition, there are fewer players competing for the business, allowing them to charge higher prices. The absence of competition also reduces the incentive for firms to increase output, as they do not need to lower prices to attract customers. Therefore, the outcome is lower output and higher price in such a market.

Question 3

Markets fail to allocate resources efficiently when

Accepted Answer

Markets depend on property rights to function efficiently. When property rights are not well established or poorly enforced, resources may not be allocated efficiently. Prices fluctuating and people abusing their privileges are potential problems, but they are more likely to be symptoms of weak property rights than causes of market failure. The government may be able to intervene to improve market outcomes, but this does not mean that the lack of government intervention is the cause of market failure.

Question 4

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

Accepted Answer

Most scholars agree that one legitimate function of government is to protect the rights of individuals to their person and property. This includes providing a legal system to enforce contracts and punish those who violate the rights of others. The second function is to provide goods that cannot easily be provided through markets, such as national defense, infrastructure, and public goods like parks or clean air.

Question 5

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 labor and that government's role is to protect their natural rights. Karl Marx believed in collective ownership and Immanuel Kant focused on moral philosophy, while Ralph Nader is an American consumer advocate and political activist.

Question 6

A market transaction causes an externality if someone

Accepted Answer

An externality occurs when someone who is not directly involved in a market transaction receives uncompensated benefits or costs from it. This can happen, for example, when a factory pollutes a river and affects the health of people downstream who did not participate in the transaction. The costs of the pollution are not borne by the factory and the buyers and sellers of its products, but by others who have no say in the transaction.

Question 7

Many external costs occur because

Accepted Answer

External costs occur when the true cost of using a resource, such as environmental or health costs, are not included in its market price. Thus, people do not pay the true cost of using a resource, leading to external costs.

Question 8

In a market that lacks sufficient competition,

Accepted Answer

The answer of In a market that lacks sufficient competition,
...

Question 9

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

Accepted Answer

Providing national defense is a key protective function of government, as it ensures the safety and security of the nation and its citizens. Income redistribution, providing national parks, and monopolizing mail delivery are not necessarily protective functions, although they may be important government functions in terms of promoting public welfare or managing the economy.

Question 10

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

Accepted Answer

Strong competition in a market tends to result in lower prices and lower profits for the firms. Therefore, sellers have a strong incentive to lobby for legal restrictions that would reduce the intensity of competition in their market, in order to increase their profits.

Question 11

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

Accepted Answer

Externalities cause a divergence between private costs and social costs or private benefits and social benefits, meaning that producers and consumers who do not fully account for the external effects will not make decisions that are in the best interest of society as a whole. This leads to market failure, where the market mechanism fails to allocate goods and resources efficiently. Competitive markets fail to give producers and consumers correct price signals because they do not take into account the external costs or benefits. Therefore, the best answer is D - competitive markets fail to give producers and consumers correct price signals.

Question 12

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 sellers can restrict entry into a market, they have a higher degree of market power, which means they can raise prices without losing too many customers to competitors. By reducing output, they can create scarcity and further increase the price, leading to higher profits. Expanding output would negate the effect of restricting entry and increase competition, lowering their profits. Lowering price and leaving output unchanged would also decrease profits.

Question 13

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

Accepted Answer

Planting a flower garden on a vacant lot next to her house will create a positive externality by providing a more attractive view and potentially increasing property values for those living in the area. The other activities do not result in external benefits.

Question 14

The key explanation for the prevalence of waterway pollution is

Accepted Answer

Waterways being an open access commonly owned resource means that no one person or entity has ownership or responsibility for their upkeep, leading to a lack of incentives for individuals to take care of them. This results in the tragedy of the commons, where everyone using the resource has an individual incentive to use it but no one has an incentive to preserve it, leading to overuse and pollution.

Question 15

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 to protect individuals from harm and ensure they are secure in their person and property. The productive function involves promoting economic growth and development, transfer function involves redistributing resources, and illegitimate function refers to government actions that infringe on individual rights or go beyond the legitimate functions of government.

Question 16

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 as it allows individuals to use the resource without considering its true value or the potential negative impact on others.

Question 17

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

Accepted Answer

The spillover effects of actions that affect the well-being of nonconsenting third parties are called externalities. Choices A, C, and D are not relevant to the concept of externalities.

Question 18

Externalities

Accepted Answer

Externalities can either be positive or negative in their effects on third parties who are not involved in the production or consumption of a good or service. When the price system does not take into account the social costs or benefits associated with a market transaction, it can lead to misallocation of resources, either overproducing or underproducing goods and services that result in negative externalities (e.g. pollution) or positive externalities (e.g. education).

Question 19

When externalities are present,

Accepted Answer

Externalities are costs or benefits that are not reflected in the market price of a good or service. When externalities are present, they can result in market outcomes that are inconsistent with ideal economic efficiency. In such situations, the market may not take into account the full social cost or benefit of a transaction, leading to overproduction or underproduction of the good. This implies that competitive markets may not achieve ideal efficiency.

Question 20

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 providing goods and services that cannot easily be provided through markets, such as national defense or public education. These goods and services often have public goods characteristics, such as non-excludability and non-rivalry, which make it difficult for private markets to provide them efficiently. The other options listed, protective function, construction function, and income redistribution function, do not specifically involve the provision of goods and services that cannot easily be provided through markets.

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