Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 9: Market Failure
1) Which of the following best defines “market failure”?
A) the inability to make the most efficient use of society’s limited resources
B) the failure to consider internal benefits in deciding how much of a product to consume.
C) the failure to fully consider internal costs in determining the optimal level of production
D) the failure of monopolists to produce the profit maximizing level of output
E) the failure of firms to minimize their private costs
2) Market power is a source of market failure because
A) it permits firms to ignore the private costs associated with their production activities, thus
wasting economic resources.
B) it allows firms to consider only the external costs associated with their production activities,
thus distorting the allocation of scarce resources.
C) firms with market power tend to produce too much output, thus wasting scarce economic
resources.
D) firms with market power tend to produce too little output, thus misallocating economic
resources.
E) firms with market power use their political influence to weaken environmental laws.
3) Which of the following is true?
A) Private costs are the sum of social costs plus external costs.
B) Social costs are the sum of private costs plus external costs.
C) Private costs are the sum of internal costs plus external costs.
D) External costs are the sum of private costs plus internal costs.
E) External costs are the sum of spillover costs plus internal costs.
4) Which of the following is an example of an external benefit?
A) Your neighbor agrees to share the cost of constructing a fence between your homes.
B) Your neighbor’s teenage son buys a new motorcycle, which he likes to take for midnight
rides.
C) Your parents agree to give you their old car if you will paint their house.
D) The bar next door advertises “2 for 1 drinks” and some of the customers stop by your
restaurant for dinner.
E) You and your friends share the cost of an extra-large pizza.
5) Which of the following is least likely to provide external benefits?
A) The family dog gets its annual rabies shot.
B) Your sister enrolls in a life-saving course at the local community college.
C) Your roommate buys a new toothbrush.
D) Your neighbors repaint their house.
E) Your mother doubles the size of her garden.
6) When firms are required to pay the private costs of producing their product, rather than the
social costs
A) the selling price of the product tends to be higher than if social costs were considered.
B) the level of output tends to be lower than optimal.
C) society’s resources are optimally used.
D) the level of production tends to be higher than optimal.
E) they tend to earn lower profits.
7) When the firms in an industry fail to consider external costs,
A) the selling price of the product tends to be artificially high.
B) the market output is less than the allocatively efficient output.
C) the market output is equal to the allocatively efficient output.
D) the market output is more than the allocatively efficient output.
E) Both A and B are true.
8) When firms in an industry fail to consider external costs,
A) the selling price of the product tends to be artificially high.
B) they produce too little output from society’s point of view.
C) they produce the socially optimal level of output, but charge an artificially low price.
D) they produce too much output from society’s point of view.
E) Both A and B are true.
9) When firms are forced to pay the social costs of producing their product
A) the selling price and level of output will tend to be higher than if only internal costs were
considered.
B) the selling price and level of output will tend to be lower than if only internal costs were
considered.
C) the selling price will be higher and level of output will be lower than if only internal costs
were considered.
D) the selling price will be lower and level of output will be higher than if only internal costs
were considered.
E) the firms will earn higher profits than they would if they were required to pay their internal
costs.
10) If the production of a product creates external costs, the supply curve that reflects social
costs
A) will lie to the left of the supply curve reflecting private costs.
B) will lie to the right of the supply curve reflecting internal costs.
C) will represent the sum of private plus internal costs.
D) will be a vertical straight line.
E) will be a horizontal straight line.
11) The three basic approaches to resolving disputes involving external costs are
A) government regulation, private bargaining, and command and control.
B) private bargaining, taxation, and negotiation.
C) government regulation, private bargaining, and taxation.
D) taxation, command and control, and government regulation.
E) negotiation, command and control, and private bargaining.
12) When property rights are poorly defined,
A) pollution cannot occur.
B) resources tend to be misused.
C) resources still tend to be used optimally.
D) emissions standards are required to eliminate pollution.
E) negotiation can lead to the optimal use of the resources involved.
13) Private bargaining can be used to resolve externality problems
A) under virtually all conditions.
B) whenever property rights are clearly defined.
C) whenever the negotiations would involve a large number of individuals and/or businesses.
D) if property rights are clearly defined and the cost of negotiation is not prohibitive.
E) only if the parties involved in the negotiation are concerned about the public welfare.
14) Pollution or “emissions” standards
A) are probably the least expensive method of achieving a given level of environmental quality.
B) specify the maximum amounts of wastes that firms are permitted to discharge into the
environment.
C) encourage firms to reduce their discharge of wastes by more than the law requires.
D) have been used very sparingly in the United States and primarily in an experimental manner.
E) permit the individual firms to establish the level of waste discharge that is acceptable.
15) If the firms in an industry are forced to internalize the external costs they create, the burden
of paying those costs is shifted from
A) the consumers of the product to the producers of the product.
B) society to the producers and consumers of the product.
C) the producers of the product to society as a whole.
D) the producers of the product to the consumers of the product.
E) the producers to the government.
16) The purpose of a pollution tax is to
A) force firms to internalize their external costs.
B) force firms to cease production.
C) make a product’s price more accurately reflect the true private cost of its production.
D) encourage polluting firms to expand output to the socially optimal level.
E) encourage firms to pollute.
17) Economists favor pollution taxes over emissions standards because
A) emissions standards are usually viewed as unfair.
B) pollution taxes force each firm to reduce its pollution by the same amount.
C) emissions standards do not tend to increase production costs, while pollution taxes do.
D) pollution taxes are a less expensive approach to reducing pollution.
E) pollution taxes don’t result in higher prices, while emissions standards do.
18) Tradable emissions permits
A) are an example of the “command and control” approach.
B) encourage businesses to reduce pollution in the least costly way.
C) subsidize polluting firms.
D) require all firms to use a specific method to reduce their pollution.
E) have been criticized as a needlessly costly method of reducing pollution.
19) In a market economy, products yielding external benefits tend to be
A) underproduced, because consumers consider only private benefits.
B) underproduced, because they generally cannot be sold at a profit.
C) overproduced, because they are extremely attractive to consumers.
D) overproduced, because they are a prime candidate for government taxation.
E) produced in the proper amount, unlike products yielding external costs.
20) When products yield external benefits, market economies
A) tend to produce less than the allocatively efficient output of these products.
B) always take such benefits into consideration.
C) tend to attach too much value to these benefits.
D) tend to produce more than the allocatively efficient output of these products.
E) tend to produce more of these products than can be justified by their social benefits.
21) If a product yields external benefits, the demand curve that reflects social benefits
A) will be to the right of the demand curve that reflects private benefits.
B) will be to the left of the demand curve that reflects private benefits.
C) will tend to be horizontal.
D) will lie to the right of the supply curve at all levels of output.
E) will be vertical.
22) If the consumption of a product creates external benefits
A) it should be taxed, since it will be very popular with those who purchase it.
B) it will tend to be overproduced by a market economy.
C) it should be subsidized in order to encourage its purchase.
D) it must be a public good.
E) it must be provided free by the government, since it cannot be profitably produced by private
firms.
23) Pure private goods
A) will tend to be underproduced in a market economy.
B) convey their benefits only to the purchaser.
C) are products such as fire and police protection.
D) will tend to be overproduced in a market economy.
E) convey their benefits only to the seller.
24) Polio inoculations, first-aid courses, and fire protection are examples of
A) pure private goods.
B) pure public goods.
C) private goods that yield significant external benefits.
D) external goods.
E) necessary evils.
25) Which of the following is not a public good?
A) a flood control dam
B) national defense
C) driver’s training
D) a lighthouse
E) a tornado warning siren
26) A public good is
A) any good or service that is now being provided by the local, state, or federal government.
B) any product that provides its benefits only to the party purchasing it.
C) a product that provides benefits equally to those who purchase the product and those who do
not.
D) a product that is produced by a government-owned business.
E) any product that is sold in a public place.
27) If a private firm were to sell a “public good,”
A) its owners would be fined or imprisoned for violating the law.
B) it would probably lose money and go out of business.
C) more of the product would be produced than is socially optimal.
D) its sale would have to be carefully regulated to protect consumers from unreasonable prices.
E) there would probably be concerns about environmental safety around the production facility.
28) Because of the free rider problem
A) public transportation tends to be unprofitable.
B) private firms are encouraged to ignore the external costs they create.
C) we are encouraged not to pick up hitchhikers.
D) products yielding external benefits tend to be overproduced.
E) private firms generally find it unprofitable to produce public goods.
29) Which of the following most accurately describes the income distribution of households in
the United States?
A) The richest fifth receives approximately 80 percent of aggregate income; the poorest fifth
receives less than 2 percent.
B) The richest fifth receives approximately 60 percent of aggregate income; the poorest fifth
receives less than 5 percent.
C) The richest fifth receives approximately 50 percent of aggregate income; the poorest receives
less than 5 percent.
D) The richest fifth receives approximately 40 percent of aggregate income; the poorest receives
less than 10 percent.
E) The richest fifth receives approximately 30 percent of aggregate income; the poorest receives
less than 10 percent.
30) Over the past 20 years, the fraction of aggregate income going to the richest fifth of U.S.
households has
A) increased from less than 40 percent to more than 70 percent.
B) increased to approximately 50 percent.
C) remained virtually constant.
D) declined from more than 50 percent to less than 40 percent.
E) declined from about 30 percent to roughly 20 percent.
31) In 2008 what percent of the U.S. population was officially classified as “poor”?
A) 1 percent
B) 3 percent
C) 7 percent
D) 10 percent
E) More than 10 percent
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32) According to public choice economists,
A) politicians and government bureaucrats tend to act in the public interest.
B) logrolling always leads to an efficient use of society’s resources.
C) government action always leads to inefficiency and/or inequity.
D) politicians tend to be vote maximizers.
E) majority voting always leads to an efficient use of society’s resources.
33) Imagine a proposed government project that would cost $10 million and convey benefits
worth $3,000 each to 5,000 people, and benefits worth $75 each to 95,000 people. If each person
would be assessed a $100 tax to pay for this project, the theory of public choice predicts that it
would be
A) approved because the project’s total benefits exceed its total costs.
B) rejected because the voters are unable to reflect the strength of their preferences.
C) approved because voters recognize that it is an efficient use of society’s scarce resources.
D) rejected because the project’s total costs exceed its total benefits.
E) rejected because voters recognize that it is an inefficient use of society’s scarce resources.
34) According to the “rational ignorance effect,”
A) consumers are seldom adequately informed before they make their purchasing decisions.
B) individuals are generally less informed as consumers than they are as voters.
C) voters go to great lengths to avoid electing the wrong person to office.
D) voters choose to remain uninformed because the costs of becoming informed outweigh the
likely benefits.
E) individuals are generally more informed as voters than they are as consumers.
35) “Government failure” describes
A) the fact that many citizens choose not to vote.
B) the political disagreements which slow government action.
C) the failure of politicians to enact the policies favored by special-interest groups.
D) the enactment of government policies that lead to an inefficient use of society’s resources.
E) the misuse of resources that results because politicians fail to consider their own self-interest.
1) The three approaches for resolving disputes involving negative externalities are
A) government regulation, taxation, and private bargaining.
B) command and control, taxation, and government regulation.
C) private banking, government regulation, and subsidies.
D) direct control, taxation, and government regulation.
2) Private bargaining is most likely to be effective in resolving externality-related disputes when
A) the dispute involves a large number of parties
B) property rights are poorly defined.
C) the dispute involves very few parties and property rights are well defined.
D) it is very costly for the parties to negotiate a settlement.
3) Which of the following is most likely to produce external costs?
A) liquor
B) a steak
C) a flower garden
D) a storm warning system
4) Suppose that chicken-processing plants create external costs. Then, in the absence of
government intervention, it is likely that
A) too few chickens will be processed, from a social point of view, and the price of a processed
chicken will be artificially low.
B) too many chickens will be processed, from a social point of view, and the price of a processed
chicken will be artificially high.
C) too few chickens will be processed, from a social point of view, and the price of a processed
chicken will be artificially high.
D) too many chickens will be processed, from a social point of view, and the price of a processed
chicken will be artificially low.
5) If the firms in an industry have been creating pollution and are forced to find a method of
waste disposal that does not damage the environment, the result will probably be
A) a lower price for the product offered by the firms.
B) a higher product price and a higher equilibrium quantity.
C) a lower product price and a higher equilibrium quantity.
D) a higher product price and a lower equilibrium quantity.
6) Which of the following is the best example of a pure public good?
A) a cigarette
B) a bus
C) a lighthouse
D) an automobile
7) Suppose that an AIDS vaccine is developed. In the absence of government intervention, it is
likely that
A) too few AIDS shots will be administered because individuals will fail to consider the private
benefits provided by the shots.
B) too many AIDS shots will be administered because individuals will consider only the private
cost of the shots.
C) too few AIDS shots will be administered because individuals will consider only the private
benefits provided by the shots.
D) too many AIDS shots will be administered because individuals will ignore the external
benefits associated with the shots.
8) If a product creates external benefits, the demand curve that reflects all social benefits
A) will be to the left of the demand curve which reflects only private benefits.
B) will be to the right of the demand curve which reflects only private benefits.
C) will not slope downward.
D) will be the same as the demand curve which reflects private benefits.
9) Public goods can lead to market failure because they
A) create external costs.
B) create social costs.
C) cannot be sold easily in markets.
D) cannot be paid for through taxes.
10) Which of the following policies is NOT consistent with this chapter’s content?
A) Imposing excise taxes on beer and other alcoholic beverages.
B) Subsidizing driver’s training classes.
C) Imposing excise taxes on smoke detectors.
D) Subsidizing mass transit.
11) According to the rational ignorance effect
A) politicians support special interest groups because that’s where the votes are.
B) voters choose to remain uninformed because the costs of becoming informed outweigh the
benefits.
C) politicians agree to vote for a proposal they oppose in order to gain support for a project they
support.
D) bureaucrats restrict all efforts to restrict their agencies growth or influence.
12) Which of the following best describes the free-rider problem?
A) Your brother always rides home with you but never pays for the gas.
B) Some private goods create external benefits for those who have not paid.
C) Some people think that the environment is a free resource and therefore abuse it.
D) Some goods cannot be sold in markets because the benefits they confer are available to all
whether they have paid or not.
13) Public choice economists argue that
A) majority voting always leads to efficient outcomes.
B) government bureaucrats tend to act in the public interest.
C) politicians generally find it in their self-interest to oppose special-interest groups.
D) self-interest is the motivation of both business executives and politicians.
14) Suppose that a proposed government project would cost $50,000 and convey benefits worth
$100 to 1,000 people, and benefits worth $5 to the remaining 9,000 people in the community. If
each person was assessed a $50 tax to pay for this project, the theory of public choice predicts
that it would be
A) rejected because the project’s total costs exceed its total benefits.
B) approved because the project’s total benefits exceed its total costs.
C) rejected because voters are unable to reflect the strength of their preferences.
D) approved because voters recognize that it is an efficient use of society’s limited resources.