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d.
they end up in a position from which each would prefer to move away.
e.
none of the above
42. If government removes two people from a prisoner’s dilemma setting (and, in the process, requires that the two
persons pay taxes for the service that government provides), it holds that on net
a.
each of the two persons is better off.
b.
each of the two persons is worse off.
c.
one person is better off and the other person is worse off.
d.
a, b, or c
e.
none of the above
43. Which of the following statements is false?
a.
Government can remove individuals from a prisoner’s dilemma setting and make both participants better off.
b.
Government can define and enforce the property rights that individuals actually want defined and enforced.
c.
Individuals in a prisoner’s dilemma setting may want to get out of the prisoner’s dilemma setting.
d.
none of the above
44. Consider a setting in which there is a negative externality, but no positive externality. It follows that
a.
the market outcome is inefficient.
b.
the market outcome is efficient.
c.
MSC > MPC
d.
MPC > MSC
e.
a and c
45. Consider a setting in which there is a negative externality, but no positive externality. The market outcome is
__________________; government can bring about the ___________________ outcome if it sets a tax equal to the
__________________.
a.
efficient; inefficient; MSC
b.
efficient; inefficient; MEC
c.
inefficient; efficient; MEC
d.
inefficient; efficient; MPC
e.
inefficient; efficient; MSB
46. Consider a setting in which there is a positive externality, but no negative externality. The market outcome is
__________________; government can bring about the ___________________ outcome if it sets a subsidy equal to the
__________________.
a.
inefficient; efficient; MEB
b.
inefficient; efficient; MEC
c.
efficient; inefficient; MPC
d.
inefficient; efficient; MPB
e.
inefficient; efficient; MSB
47. The government can _______________ change an inefficient market outcome (in the case where there is a negative
externality) into an efficient outcome by imposing a tax on the activity that generates the negative externality.
a.
in almost all situations
b.
possibly
c.
not
d.
in all situations
e.
a or d
48. The strongest case for government with respect to a negative externality is that government needs to set the
a.
subsidy equal to the marginal private benefits.
b.
tax equal to the marginal external costs plus $1.
c.
tax slightly below the marginal external costs.
d.
tax equal to the marginal external costs.
e.
subsidy equal to the marginal social benefits.
49. Government provides a nonexcludable public good that no one wants. This situation is most closely related with:
a.
government solving a market failure.
b.
government failure.
c.
market failure.
d.
the market solving a government failure.
50. Which of the following statements is false?
a.
A government with the power to tax can solve the free rider problem.
b.
A government with the power to tax can set a tax greater than the MEC when trying to change the market
outcome into the efficient outcome.
c.
A government with the power to subsidize can set a subsidy greater than the MEB when trying to change the
market outcome into the efficient outcome.
d.
Government can remove individuals from a prisoner’s dilemma setting by changing the payoffs in the payoff
matrix.
e.
none of the above
51. Individuals want nonexcludable public good X, but the market does not provide it because of the free rider
problem. Government overcomes the free rider problem by ______________ individuals and then either producing good
X itself or paying someone to produce it.
a.
forcing individuals to work longer hours
b.
taxing
c.
surveying
d.
subsidizing
e.
none of the above
52. A nonexcludable public good is
a.
rivalrous in consumption and nonexcludable
b.
nonrivalrous in consumption and excludable
c.
nonrivalrous in consumption and nonexcludable
d.
rivalrous in consumption and excludable
e.
none of the above
53. The answer is, “Because of the free rider problem.” The question is:
a.
Why can’t the government produce nonexcludable public goods?
b.
Why can’t the market produce nonexcludable public goods?
c.
Why do negative externalities exist?
d.
Why do positive externalities exist?
e.
b and d
54. “I’m not going to pay for the good if, once produced, the good cannot be denied to anyone.” This statement is most
relevant to
a.
negative externalities.
b.
positive externalities
c.
private goods.
d.
nonexcludable public goods.
e.
the issue of rivalry versus nonrivalry in consumption.
55. Person A argues that government is unnecessary and often does more harm than good. Economist A disagrees. What
does economist A --- who believes that there is a legitimate case that can be made for government --- most likely say to
support his position?
a.
Government almost always does more good than harm.
b.
Without government, life would be anarchy.
c.
There are some things that individuals want done that can’t get done without government.
d.
There are better people going into government work than are going into the private sector.
e.
none of the above
56. Economist A believes that the case for government is a strong one, but she doesn’t always say, when it comes to
negative externalities, that government can turn an inefficient market outcome into an efficient outcome. Which
statement is economist A most likely to make?
a.
If the tax placed on the activity that generates the negative externality is too large, we are not likely too move
from inefficiency to efficiency.
b.
If the subsidy placed on the activity that generates the negative externality is too small, we are not likely to
move from inefficiency to efficiency.
c.
If there is a free rider problem, then government cannot solve the problem of negative externalities.
d.
a and b
e.
none of the above
57. Economist B thinks that it is important to identify the condition(s) under which the case for government is
strongest. With respect to the provision of nonexcludable public goods, she says
a.
people must pay taxes to pay for the nonexcludable public good.
b.
firms must pay taxes to pay for the nonexcludable public good.
c.
people must actually want the nonexcludable public good that the government provides.
d.
people must express their desire for the nonexcludable public good by voting for it.
e.
none of the above
58. Suppose health-care reform X makes it unlawful for insurance companies to deny insurance to persons with a
preexisting disease. One unintended effect of this reform is that some people
a.
will buy more health insurance than they would have without reform X.
b.
may wait until they have a particular disease before they buy health insurance.
c.
will try to work longer hours, to earn more income, to pay for increasing health insurance premiums.
d.
a and c
e.
none of the above
59. Suppose health-care reform Y makes it unlawful for insurance companies to deny insurance to persons with a
preexisting disease and sets a fine for those people who do not buy insurance. It follows that if the fine is
a.
larger than the benefits derived from not buying insurance right away, then people will not buy the insurance
and pay the fine.
b.
smaller than the benefits derived from not buying the insurance right away, then people will not buy the
insurance and pay the fine.
c.
larger than the benefits derived from not buying insurance right away, then people will buy the insurance right
away and not pay the fine.
d.
b and c
e.
none of the above
60. The federal government and many state governments gave tax credits to first-time home buyers in 2009 and 2010. An
effect of these tax credits was to
a.
make the price of houses higher than they would have been without the tax credit.
b.
lower house prices.
c.
shift the demand curve for houses leftward.
d.
b and c
e.
none of the above
61. To say that government sometimes functions as a “transfer mechanism,” means that government sometimes
a.
ends up transferring goods to individuals in return for taxes paid.
b.
ends up transferring negative externalities into positive externalities.
c.
ends up taking from group X to give to group Y.
d.
transfers taxes into subsidies.
e.
none of the above
62. Tiffany gives $50 to Jeremy for his birthday. This is an example of a(n)
a.
involuntary transfer.
b.
involuntary-voluntary transfer.
c.
voluntary transfer.
d.
gift.
e.
c and d
63. A special interest group has a good chance of redistributing (transferring) income from others to itself if the
a.
costs of the transfer are spread over a very large number of people.
b.
costs of the transfer are spread over a very small number of people.
c.
costs of the transfer are spread over the same number of people that comprise the special interest group.
d.
the number of members in the special interest group is greater than 100.
e.
none of the above
64. Why might special interest groups be more likely to push for transfers instead of economic growth? The answer is
because it usually takes a much __________________ percentage _______________ in growth to equal what they can get
from the transfer.
a.
smaller; decrease
b.
larger; increase
c.
larger; decrease
d.
smaller; increase
e.
none of the above
65. A community of 100 persons wants to redistribute (transfer) some income from themselves to members of group
A. So far, they don’t seem to be able to do what they say they want to do. This is most likely because each member of
the community of 100 persons sees his contribution as __________________ relative to the total (of contributions) and
therefore chooses to be a __________________.
a.
large; rent-seeker
b.
small; rent-seeker
c.
small; free rider
d.
large; free rider
e.
none of the above
66. Special interest group A receives a 1/10,000th slice of the economic pie (Real GDP). It is seeking a transfer of
$1,000. For group A to be indifferent between a transfer policy and an economic growth policy, economic growth must
be ________________ times larger than the _________________.
a.
1,000; transfer
b.
10,000; transfer
c.
100; transfer
d.
10,000; transfer minus $1,000
e.
1,000; transfer; minus $10,000
67. Government provides a nonexcludable public good that the public demands and can’t seem to acquire through the
market. This is government
a.
acting as a transfer mechanism.
b.
being non-productive.
c.
engaging in rent-seeking activities.
d.
being productive.
e.
a and c
68. In the case of externalities, government can use taxes and subsidies to turn an inefficient outcome into an efficient
outcome.
a.
True
b.
False
69. Government always makes individuals better off when it removes them from a prisoner’s dilemma setting.
a.
True
b.
False
70. In the case of a nonexcludable public good, the market will fail to produce the good because of the free rider problem.
a.
True
b.
False
71. Critics of government frequently assert that special interest groups favor transfer policies rather than economic growth
policies.
a.
True
b.
False
72. Government can overcome the free rider problem by collecting taxes and using the funds to provide individuals with
nonexcludable public goods that they want to buy but the market cannot provide.
a.
True
b.
False
73. It is possible for the government to remove individuals from a prisoner’s dilemma setting and make them better off.
a.
True
b.
False
74. If the government grants tax credits to first-time homebuyers, the supply of houses would increase and the price of
housing would fall.
a.
True
b.
False
75. Given that the demand for unskilled labor curve is downward-sloping, an unintended effect of raising the minimum
wage is that some people who worked at the lower wage will lose their jobs at the higher wage.
a.
True
b.
False
76. Involuntary transfers are the type of transfers used in the case against government.
a.
True
b.
False
77. Special interest groups are very unlikely to push for policies that increase the size of their slice of the economic pie if
it means that the overall size of the economic pie will shrink.
a.
True
b.
False
78. Some people see the government as being more heavily involved in taking sides than in serving the common interest.
a.
True
b.
False
79. A divisive society is one in which members of society work together for the common good.
a.
True
b.
False
80. List and describe the three different types of transfers discussed in this chapter. Give a hypothetical example of each
to help support your answer.
81. Describe the intended effects of the first-time home buyer tax credits granted by Congress and many state
governments in 2009 and 2010. In addition, describe in detail the unintended effect of this type of legislation.
82. In making the case against government, discuss the two main points about special interest groups.
