Economics Chapter 5—Difficult Cases for the Market and the Role of Government
MULTIPLE CHOICE
1. Which of the following is the most fundamental function of government?
a.
protection of individuals and their property
b.
imposing progressive taxes to fund income-transfer programs
c.
regulating prices and wages
d.
provision of postal services and garbage collection
2. Economic efficiency requires that
a.
individuals produce at their maximum level.
b.
only long-lasting, high-quality products be produced without regard to cost.
c.
income be distributed equally among consumers.
d.
all economic activity generating more benefits than costs be undertaken.
3. When production of a good generates external costs, the
a.
demand curve for the good will overstate the true social benefits from consumption of the
good.
b.
demand curve for the good will understate the true social benefits from consumption of the
good.
c.
supply curve for the good will overstate the true social cost of producing the good.
d.
supply curve for the good will understate the true social cost of producing the good.
4. From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market
allocation will often lead to
a.
an output of the product that exceeds the amount consistent with ideal economic
efficiency.
b.
an output of the product that is less than the amount consistent with ideal economic
efficiency.
c.
an output of the product that equals the amount consistent with ideal economic efficiency.
d.
product prices that are below the cost of production.
5. Competitive markets generally give consumers and producers correct incentives when
a.
externalities are present in the market.
b.
property rights are well-defined and enforced.
c.
the good being produced and consumed is a pure public good.
d.
there is a substantial lack of information on the part of either buyers or sellers.
6. Which of the following correctly describes the external benefit resulting from an individual’s
purchase of a winter flu shot?
a.
The flu shot is cheaper than the cost of treatment when you get the flu.
b.
The income of doctors increases when you get the flu shot.
c.
The flu shot reduces the likelihood others will catch the flu.
d.
The flu shot reduces the likelihood you will miss work as the result of sickness; therefore,
you will earn more income.
7. Which of the following is the best example of a public good?
a.
a government-run health care system
b.
the Walt Disney World amusement park
c.
national defense
d.
long-distance telephone service
8. Markets may have difficulty providing the proper quantity of a public good because
a.
individuals will tend to become free riders, and private firms will have difficulty
generating enough revenue to produce an efficient quantity of the good.
b.
the good generally has a very large value to consumers relative to its cost of production.
c.
the good is one that tends to benefit a large number of people.
d.
the large profit involved in the production of a public good is generally too much for
private firms to effectively pay out to shareholders.
9. Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How
will the price and output of paper in a competitive market compare with their values under conditions
of ideal economic efficiency?
a.
The price will be too high, and the output will be too large.
b.
The price will be too low, and the output will be too large.
c.
The price will be too low, and the output will be too small.
d.
The price will be too high, and the output will be too small.
10. Which of the following is a source of information that helps consumers acquire information about the
quality of a good or service?
a.
brand names
b.
franchising
c.
consumer ratings magazines
d.
all of the above
11. The idea that an action should be undertaken if and only if the benefits exceed the costs is known as
the concept of
a.
economic efficiency.
b.
public welfare maximization.
c.
marginal comparative advantage.
d.
monetary construction of values.
12. When economists say that an activity meets the criterion for economic efficiency, they mean
a.
a majority of citizens favor the activity.
b.
the benefits that result from the activity exceed the costs.
c.
the number of people who gain from the activity exceeds the number on whom costs are
imposed.
d.
the costs that result from the activity exceed the benefits.
13. If an economic action generates more costs than benefits, the action
a.
by definition increases the nation’s economic welfare.
b.
should not be undertaken from an efficiency standpoint.
c.
should be subsidized by the government in order to make sure that it is undertaken.
d.
is desirable from a public welfare standpoint even though many individuals will be
harmed.
14. Because the benefits derived from an activity decline as it is expanded, it is generally
a.
wise to undertake all actions that generate benefits.
b.
efficient to stop well before perfection is achieved.
c.
best to continue as long as it is possible to derive some additional benefits.
d.
unwise to engage in activities for which the benefits decline as you do more of it.
15. Which of the following best explains why making automobiles completely safe is not efficient?
a.
After some level of safety is reached, making cars even safer will not be worth the
additional cost.
b.
Because human life is priceless, automobile safety generally doesn’t matter.
c.
The benefit from additional automobile safety will generally rise as automobiles are made
safer, more than offsetting the opportunity cost involved.
d.
Economic efficiency suggests that automobiles should be made as safe as humanly
possible.
16. Economic efficiency indicates that
a.
if something is worth doing, you should do it as well as humanly possible.
b.
all pollution should be eliminated.
c.
automobiles should be made as safe as possible
d.
it nearly always makes sense to stop an activity well before perfection is achieved.
17. There is substantial agreement among scholars that at least two functions of government are legitimate.
These two functions are the
a.
protection of the rights of individuals to their person and property and the provision of
goods that cannot easily be provided through markets.
b.
redistribution of income from some individuals to others and the waging of war to expand
the nation’s territory.
c.
production of postal services and cable television.
d.
taxation of goods that are generally considered immoral or bad and the regulation of large
corporations.
18. 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
a.
productive function of government.
b.
protective function of government.
c.
transfer function of government.
d.
illegitimate function of government.
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
a.
productive function of government.
b.
protective function of government.
c.
construction function of government.
d.
income redistribution function of government.
20. Markets fail to allocate resources efficiently when
a.
prices fluctuate.
b.
people who have property rights abuse their privileges.
c.
property rights are poorly enforced or not well established.
d.
the government refuses to intervene in private markets.
21. A market transaction causes an externality if someone
a.
directly involved in the transaction receives uncompensated benefits or costs from it.
b.
not directly involved in the transaction receives uncompensated benefits or costs from it.
c.
directly involved in the transaction seeks legal assistance to ensure that the transaction is
carried out.
d.
not directly involved in the transaction interferes in it by imposing regulations or product
standards.
22. Many external costs occur because
a.
people do not pay the true cost of using a resource.
b.
people do not pay the private cost of using a resource.
c.
companies do not pay the market price for natural resources.
d.
companies pay more than the true cost of using a resource.
23. The key explanation for the prevalence of waterway pollution is
a.
the inclusion in production of all costs involving use of the waterway.
b.
that there are private costs but no costs to society.
c.
that waterways are often an open access, commonly owned resource.
d.
that waterways are subject to the market’s normal control procedures.
24. Relative to a competitive situation, if a market lacks competition, economic theory suggests that
a.
output will be lower and price higher.
b.
output will be higher and price lower.
c.
both output and price will be higher.
d.
both output and price will be lower.
25. If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total
profit by
a.
raising price and reducing output.
b.
raising price and expanding output.
c.
lowering price and expanding output.
d.
raising price and leaving output unchanged.
26. When competitive forces in an industry are weak,
a.
the absence of competition generally leads to overproduction.
b.
prices may exceed the amount consumers are willing to pay.
c.
the operational efficiency of private firms will be enhanced.
d.
higher prices and less than optimal production may result.
27. In a market that lacks sufficient competition,
a.
output will generally be less than the output that is ideal from the standpoint of economic
efficiency.
b.
output will generally be greater than the output that is ideal from the standpoint of
economic efficiency.
c.
price will generally be less than the price that would result if the market was competitive.
d.
profit rates will generally be so low that government subsidies will be necessary to ensure
that the firms remain in business.
28. Sellers have a strong incentive to lobby government for legal restrictions that would reduce the
intensity of competition in their market because
a.
the firms wish to be more efficient than competition will permit.
b.
competition tends to result in lower prices and lower profits.
c.
legal restrictions that lessen competition in a market generally benefit consumers.
d.
the firms fear that intense competition will lead to higher profits that will attract additional
rivals into the market.
29. The spillover effects of actions that affect the well-being of nonconsenting third parties are called
a.
side components.
b.
externalities.
c.
free riders.
d.
internalizations.
30. When externalities are present,
a.
suppliers will refuse to produce desired goods and services.
b.
this indicates that property rights are well-defined and enforced.
c.
competitive market outcomes may be inconsistent with ideal economic efficiency.
d.
competitive markets will generally achieve ideal economic efficiency.
31. Externalities cause the market mechanism to allocate goods and resources inefficiently because
a.
nonconsenting third parties are generally not hurt by externalities.
b.
producers and consumers ignore signals given by the competitive market.
c.
prices are always higher than they should be.
d.
competitive markets fail to give producers and consumers correct price signals.
32. Externalities are fundamentally the result of
a.
the absence of competition in a market.
b.
the lack of well-defined or enforced property rights.
c.
poor information on the part of consumers.
d.
the presence of significant comparative advantages in production.
33. If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne
by these firms, you could conclude that
a.
pollution is not a serious problem in this industry.
b.
the consumers of steel are unwilling to bear the costs of pollution generated from steel
production.
c.
pollution is an externality in this market, since producers and purchasers of steel do not
bear the full costs of the pollution.
d.
pollution creates an external benefit rather than an external cost in this case.
34. Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by
the student in the form of higher wages. If the government offers subsidies for MBAs, then which of
the following statements is correct?
a.
The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
b.
The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
c.
The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
d.
The tuition paid by the student would be exceed the efficient amount.
35. When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a
recreational waterway lowering the value boaters receive from the waterway, the
a.
firm’s cost of producing electricity will be higher than the community’s true opportunity
cost.
b.
firm will tend to produce too little electricity from the viewpoint of economic efficiency.
c.
community generally receives an external benefit from the production of electricity.
d.
firm’s cost of producing electricity will be lower than the community’s true opportunity
cost.
36. If production of a good creates external benefits, a competitive market will likely produce
a.
less output than would maximize profit.
b.
more output than would maximize profit.
c.
less output than is efficient.
d.
more output than is efficient.
37. When a firm generates external benefits, a more efficient outcome would result if
a.
the firm produced a larger output level.
b.
the firm reduced its output level.
c.
a tax were levied on the firm equal to the dollar amount of the externalities.
d.
price were fixed below the firm’s per-unit cost.
38. If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred
by the firm,
a.
not enough of the product is being produced.
b.
the price charged for the good is too high.
c.
the good produces a positive externality.
d.
the good produces a negative externality.
e.
the government should produce the good.
39. Markets fail when externalities are present
a.
because all of the costs and benefits of producing a good are reflected in the market price.
b.
because some of the costs and benefits of producing a good are not reflected in the market
price.
c.
only if they are negative; positive externalities are not market failures.
d.
because profits are not maximized.
e.
if the positive externalities are less than the negative externalities.
40. A government passes a new law allowing only 1,000 tons of pollution per day to be generated and
simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the
following is true?
a.
The pollution will be created by those least willing and able to pay the damages.
b.
The pollution will be created by those most willing and able to pay for the right to pollute.
c.
The funds collected by the government will be enough to compensate any individuals
harmed by the pollution.
d.
Pollution will increase from zero to 1,000 units per day.
e.
There will be no incentive for polluters to try to sneak emissions past government
monitoring devices.
41. If consumption of education creates an external benefit, then in order to increase efficiency relative to
the outcome determined by private decisions,
a.
more education must be produced.
b.
the same amount of education must be produced, and the price should be lower.
c.
less education must be produced, and the price should be higher.
d.
less education must be produced, and the price should be lower.
e.
less education must be produced at the same price.
42. If education creates external benefits,
a.
actual market outcomes provide less than the efficient quantity of education.
b.
actual market outcomes provide more than the efficient quantity of education.
c.
actual market outcomes provide a higher price than the efficient price of education.
d.
the government should impose a depletion tax.
43. When production of a good provides external benefits, there will be
a.
too few resources devoted to its production.
b.
too many resources devoted to its production.
c.
the optimal amount of resources devoted to its production.
d.
abnormally high profits earned by producers of the good.
44. As a general rule, if pollution costs are external, firms will produce
a.
too little of a polluting good.
b.
too much of a polluting good.
c.
an optimal amount of a polluting good.
d.
cannot be determined without additional information.
45. If government taxes a firm which pollutes this will
a.
increase the demand for the good produced.
b.
decrease the supply of the good produced.
c.
increase the equilibrium quantity of the good produced in the market.
d.
decrease the equilibrium price of the good produced in the market.
e.
all of the above.
46. Suppose the actions of the producers of a good impose an external cost which results in the actual
market price of $18 and market output of 400 units. How does this outcome compare to the efficient,
ideal equilibrium?
a.
The efficient price would higher than $18 while the efficient output would be less than 400
units.
b.
The efficient price would be higher than $18 while the efficient output would be greater
than 400 units.
c.
The efficient price would be lower than $18 while the efficient output would be less than
400 units.
d.
The efficient price would be lower than $18 while the efficient output would be greater
than 400 units.
47. Suppose the actions of the producers of a good generate an external benefit which results in the actual
market price of $30 and market output of 220 units. How does this outcome compare to the efficient,
ideal equilibrium?
a.
The efficient price would higher than $30 while the efficient output would be less than 220
units.
b.
The efficient price would be higher than $30 while the efficient output would be greater
than 220 units.
c.
The efficient price would be lower than $30 while the efficient output would be less than
220 units.
d.
The efficient price would be lower than $30 while the efficient output would be greater
than 220 units.
48. Consider two goods – one that generates external benefits and another that generates external costs.
The actual market outcome would
a.
result in a price that is lower than the efficient price for both goods.
b.
result in a price that is higher than the efficient price for both goods.
c.
result in a price that is lower than the efficient price for the good with an external benefit
and a price that is higher than the efficient price for the good with an external cost.
d.
result in a price that is higher than the efficient price for the good with an external benefit
and a price that is lower than the efficient price for the good with an external cost.
49. Suppose external costs are present in a market which results in the actual market price of $24 and
market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?
a.
The efficient outcome would be greater than 325 units.
b.
The efficient outcome would be less than 325 units.
c.
The efficient outcome would also be 325 units.
d.
The efficient price would be less than $24.
50. Suppose external benefits are present in a market which results in the actual market price of $14 and
market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?
a.
The efficient outcome would be greater than 150 units.
b.
The efficient outcome would be less than 150 units.
c.
The efficient outcome would also be 150 units.
d.
The efficient price would be less than $14.
51. Consider two goods—one that generates external costs and another that generates external benefits. The
actual market outcome would
a.
result in output that is lower than the efficient output for both goods.
b.
result in output that is higher than the efficient output for both goods.
c.
result in output that is lower than the efficient output for the good with an external benefit
and output that is higher than the efficient output for the good with an external cost.
d.
result in output that is higher than the efficient output for the good with an external benefit
and output that is lower than the efficient output for the good with an external cost.
52. Suppose external costs are present in a market which results in the actual market price of $70 and
market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?
a.
The efficient price would be higher than $70.
b.
The efficient price would be lower than $70.
c.
The efficient price would also be $70.
d.
The efficient output would be greater than 150 units.
53. Suppose external benefits are present in a market which results in the actual market price of $49 and
market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?
a.
The efficient price would be higher than $49.
b.
The efficient price would be lower than $49.
c.
The efficient price would also be $49.
d.
The efficient output would be less than 800 units.
54. When external costs are present in a market,
a.
less of the good will be produced than the amount consistent with economic efficiency.
b.
more of the good will be produced than the amount consistent with economic efficiency.
c.
the amount of the good produced will be equal to the amount consistent with economic
efficiency.
d.
corresponding external benefits are always generated.
55. In a competitive market, if the production process involves an external cost, such as pollution of the
environment, the market will
a.
produce the economically efficient outcome.
b.
result in a market price that is higher than the efficient one.
c.
register a price that is lower than the efficient one.
d.
result in too little of the good being produced compared to the ideal efficient outcome.
56. Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into
rivers. How will the price and output of the chemical products in a competitive market compare with
their values under conditions of ideal economic efficiency?
a.
The price would be too low, and the output would be too large.
b.
The price would be too high, and the output would be too large.
c.
The price would be too low, and the output would be too small.
d.
The price would be too high, and the output would be too small.
57. When external benefits are present in a market,
a.
less of the good will be produced than the amount consistent with economic efficiency.
b.
more of the good will be produced than the amount consistent with economic efficiency.
c.
the amount of the good produced will be equal to the amount consistent with economic
efficiency.
d.
corresponding external costs are always generated.
58. In a competitive market, if the production process involves an external benefit, the market will
a.
produce the economically efficient outcome.
b.
result in a market price that is higher than the efficient one.
c.
result in a market price that is lower than the efficient one.
d.
result in too much of the good being produced compared to the ideal efficient outcome.
59. Consider two goods—one that generates external benefits and another that generates external costs. A
competitive market economy would tend to produce
a.
too much of both goods.
b.
too little of both goods.
c.
too much of the good that generates external benefits and too little of the good that
generates external costs.
d.
too little of the good that generates external benefits and too much of the good that
generates external costs.
60. A good is considered to be a public good if it
a.
is a good produced by the government sector.
b.
is both nonrival-in-consumption and nonexcludable.
c.
benefits only a small group of consumers but is very costly to produce.
d.
is a good whose production is financed by tax revenue.
61. Students in a class are assigned to groups to work on a project. A grade will be given for each project,
and everyone in the group will receive that grade. For the members of a particular group, the grade is a
a.
external benefit.
b.
public good.
c.
external cost.
d.
repeat purchase item.
62. What are the two distinguishing characteristics of a public good?
a.
nonrivalry in consumption and nonexcludability
b.
indivisibility in production and excludability of nonpaying customers
c.
provision by government and funding through taxation
d.
mass production and comparative advantage
63. A good that is both nonexcludable and nonrival-in-consumption is called a
a.
common good.
b.
external good.
c.
public good.
d.
private good.
64. A good for which it is impossible or at least very costly to exclude nonpaying customers from
receiving the good and for which many individuals can share in the consumption of the same unit of
the good is called a
a.
public good.
b.
joint good.
c.
excludable good.
d.
national good.
65. A good is considered nonrival-in-consumption if
a.
many individuals can share in the consumption of the same unit of the good.
b.
the consumption of the good by one individual lowers the amount available for others.
c.
even nonpaying customers can receive the full benefit from the good.
d.
its production is financed through tax revenue rather than market prices.
66. A free-rider problem exists when a good that has the following characteristic?
a.
Rivalry in consumption.
b.
Elastic demand.
c.
Inelastic demand.
d.
Nonexcludable.
67. Because of the free-rider problem,
a.
competitive markets will tend to undersupply public goods.
b.
the federal government spends too much on national defense.
c.
fireworks displays have become increasingly dangerous.
d.
poverty has increased.
68. When the free-rider problem exists,
a.
the market will devote too few resources to the production of the good.
b.
the cost of the good will always be more than the benefit of the good.
c.
the good will not be produced.
d.
entrepreneurs will eventually find a way to make free-riders pay their share.
69. The government sometimes provides public goods because
a.
private markets are incapable of producing public goods.
b.
free-riders make it difficult for private markets to supply the efficient quantity.
c.
markets are always better off with some government oversight.
d.
external benefits will accrue to private producers.
70. The government sometimes provides public goods because
a.
private markets would not produce any of the goods.
b.
private markets would not produce the efficient quantity of the goods.
c.
private markets would charge too high a price for the goods.
d.
the government produces public goods more efficiently than private markets can.
71. If the consumption of a good by one individual does not change the amount of the good available to
others, the good is considered to be
a.
durable.
b.
nonrival-in-consumption.
c.
a common good.
d.
a natural resource.
72. How does an additional individual’s consumption of a good that is nonrival-in-consumption, such as a
radio broadcast, affect the amount of the good available to other consumers?
a.
The amount available to others will decline.
b.
The amount available to others will increase.
c.
The amount available to others is unaffected.
d.
The amount available to others is eliminated.
73. A good is considered nonexcludable if
a.
many individuals can share in the consumption of the same unit of the good.
b.
the consumption of the good by one individual lowers the amount available for others.
c.
it is impossible or very costly to exclude nonpaying customers from receiving the good.
d.
its production is financed through tax revenue rather than market prices.
74. If it is impossible or very costly to exclude nonpaying customers from receiving a good, the good is
considered to be
a.
freeware.
b.
nonexcludable.
c.
a common good.
d.
a receiving good.
75. When a good is nonexcludable,
a.
it is impossible or very costly to exclude nonpaying customers from receiving the good.
b.
individuals will have an incentive to become free riders.
c.
it will be difficult for a private firm producing the good to generate revenue sufficient to
cover the cost of production.
d.
all of the above are true.
76. People who receive the benefit of a good without contributing to its costs of production are called
a.
contributors in kind.
b.
free riders.
c.
frequent flyers.
d.
cost maximizers.
77. In economics, a free rider is the term used for a person who
a.
receives the benefit of a good without contributing to its costs of production.
b.
purchases an item during a “buy one, get one free” sale.
c.
lives in a town in which the city provides free bus service.
d.
pays for exactly what they receive.
78. A college has found that during every home football game, a group of students sits on a hillside next to
the stadium and watches the game without purchasing tickets. In economics, the problem that this
college is facing is referred to as a
a.
common good problem.
b.
free rider problem.
c.
onlooker problem.