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Market failure occurs when
A. the unrestrained market economy leads to too few or too many resources going to a specific economic activity.
B. the market system fails to allocate resources to each individual according to their abilities.
C. the market system fails to allocate an equal share of resources to all individuals.
D. the market system fails to allocate resources to each individual according to their needs.
Market failure occurs because
A. the market system does not make individuals responsible for the social costs/benefits of their actions.
B. the market system does not make individuals responsible for the private costs/benefits of their actions.
C. the market system forces individuals to consider the social consequences of their actions.
D. the market system forces individuals to consider the social and private consequences of their actions.
Suppose the government adopts a policy that forces pesticide producers to bear the social costs of groundwater contamination associated with the use of their product. This policy will _________ the price of pesticides. (Graph, S.S.)
Since orange growers regard the pesticide as a key input in the production of oranges, the market for oranges will obviously be affected.
The government policy on pesticides causes the market price of oranges to ______
The government policy on pesticides causes the equilibrium quantity of oranges to ______
Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in virtually all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges. (Graph, S.S.)
In what sense do consumers of oranges now “pay” for dealing with the spillover costs of pesticide production?
A. The price of oranges to consumers is higher.
B. Because of regulation, oranges are of a lower quality.
C. Consumers do not pay since the taxes and/or regulations are imposed on the growers.
D. Orange consumption is higher.
Which of the following government policies might be effective in achieving the amount of orange production that fully reflects all social costs?
A. A tax on growers commensurate with the cost to third parties.
B. Government financing or production of oranges.
C. Regulations that limit the use of pesticides.
D. Both A and C are viable policies.
E. Both A and B are viable policies.
Many people who do not smoke cigars are bothered by the odor of cigar smoke. Use the accompanying diagram of the market for cigars to illustrate the implications of a failure of the market cigar supply curve to reflect the social or spillover costs of cigar smoking. (Graph, S.S.)?
In the absence of any government involvement in the market for cigars, will too many or too few cigars be produced and consumed?
From society’s point of view, will the market price of cigars be too high or too low?
A nation’s government has determined that mass transit, such as bus lines, helps alleviate traffic congestion, thereby benefiting both individual auto commuters and companies that desire to move products and factors of production speedily along streets and highways.
Nevertheless, even though several private bus lines are in service, commuters in the city are failing to take the social benefits of the use of mass transit into account.
The socially efficient use of bus services may be achieved by which of the following government policies?
C. Government financing and/or production.
D. Any of the above?
E. None of the above
Consider a nation with a government that does not provide people with property rights for a number of items and that fails to enforce the property rights it does assign for remaining items.
Externalities would be _______ common in this nation than in a country such as the United States.
A careful study has determined that bus transit has an external benefit for society valued at $2 per bus ride as a result of the reductions in urban congestion and air emissions that result.
Consider the current demand for and supply of bus transit, which in this locale is provided by a number of firms in a competitive marketplace and which currently do not account for the$2 per-ride external benefit.
To reach the optimal level of production shown in your graph, the government should
A. pay a subsidy to either the producers or riders
B. start to produce the good
C. tax those receiving the extra benefit
D. do nothing
A cost or benefit of an economic activity that has an impact on an individual’s well-being, even though the individual was not directly involved in the activity, is known as a(n)
C. capital loss.
D. public good.
In the figure, P and Q locate the socially optimal price and quantity of a good. In the case of a good that generates positive externalities, the market price would be _____P and the market quantity would be ______ Q, while in the case of a good that generates negative externalities, the market price would be ________ P and the market quantity would be ____________ Q.
A. equal to; lower than; higher than; equal to
B. lower than; equal to; higher than; equal to
C. lower than; lower than; higher than; higher than
D. lower than; lower than; lower than; higher than
Pollution produced by a factory is being dumped into a local river. The community uses local funds to clean the river. This is an example of
A. an effluent fee because it is as if the factory is taxing the community.
B. an external benefit since it creates jobs in environmental science.
C. an external cost as the community, not the factory, is paying for the clean up.
D. a public good.
Which one of the following is a primary difference between a public good and a private good?
A. Private goods are purchased by money transfers while public goods are purchased by in-kind transfers.
B. A private good is subject to the free-rider problem while a public good is not.
C. Private goods are manufactured because of the workings of the price system while public goods come about through antitrust legislation.
D. Private goods are subject to the principle of rival consumption while public goods are not.
A true public good must be provided by the government. Which of the following goods provided by the government is a true public good?
A. Highways where tolls are collected.
B. Postal service.
C. Tax collection.
D. Flood control.
Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that
A. Canadians perceive national defense as generating external costs rather than as a public good.
B. Canada’s tax system is less efficient than other industrial nations.
C. Canada is able to free-ride on the defense spending of the United States.
D. national defense is not a public good in Canada.
Other than correcting externalities, other economic functions of government include
A. providing a legal system, allocating public goods, promoting competition, and stabilizing the economy.
B. income redistribution and the regulation and provision of merit and demerit goods.
C. deciding what to produce, how to produce it and for whom to produce for all sectors of the economy.
D. deciding which states may or may not impose income taxes, charge fees and enforce contracts.
Which of the following is not a political function of the government that leads to involvement in the economy?
A. Merit and demerit goods.
B. Income redistribution.
C. Public goods.
D. In-kind transfers.
A good that has been deemed socially desirable through the political process is known as
A. a demerit good.
B. a free-rider.
C. a positive externality.
D. a merit good.
Which of the following is not an economic function of government?
A. Providing a legal system.
B. Promoting competition.
C. Ensuring economy-wide stability.
D. Income redistribution.
Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as
A. black market payments.
B. demerit payments.?
C. transfer payments.
D. merit payments.
A government is considering two alternative plans for providing subsidy to private schools. Under the first plan it offers to let a number of students at a public school transfer to a private school under two conditions: It will transmit to the private school the same per-pupil subsidy it currently provides the public school, and the private school will be required to admit the students at a below market tuition rate. Under the second plan, the government will simply provide the students with grants to cover the current market tuition rate at the private school.?( Hint: Does it matter if schools receive payments directly from the government or from the consumers?)
The outcomes of the two plans
A. will be different; under the first plan where a private school directly receives the subsidy, it will provide a level of educational services that is less than the market equilibrium quantity.
B. will be different; under the first plan where a private school directly receives the subsidy, it will provide a quantity of educational services in excess of the market equilibrium quantity.
C. will be identical; a private school will provide identical educational services under both the plans.
D. will be identical; a private school will charge the students the same tuition rate.
Suppose that the current price of a tablet device is $300 and that people are buying 1 million tablets per year. The government decides to begin subsidizing the purchase of new tablet devices.
The government believes that the appropriate price is $260 per tablet, so the program offers to send people cash for the difference between $260 and whatever the people pay for each tablet they buy. Note: Throughout this exercise enter all responses as whole numbers. If no consumers change their tablet-buying behavior, this program will cost the taxpayer’s (300 – 260) million.
The number of tablets people will buy as a result of the subsidy will be
A. less, since the subsidy will suggest to consumers that tablet devices are not worth their face value.
B. the same number, since the subsidy will not mask the true value of tablet devices to consumers.
C. more, on the assumption that the demand for tablet devices is downward sloping.
Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, this program will cost the taxpayer’s $ 60 (40 X 1.5) million.
Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to $320, this program will cost the taxpayer’s $ 90 (60 x 1.5) million.
Suppose that, as part of an expansion of its State Care health system, a state government decides to offer a $50 subsidy to all people who, according to their physicians, should have their own blood pressure monitoring devices. Prior to this governmental decision, the market clearing price of blood pressure monitoring devices in this state was $50, and the equilibrium quantity purchased was 20,000 per year.
After the government expands its State Care plan, people in this state desire to purchase 40,000 devices each year. Manufacturers of blood pressure monitoring devices are willing to provide 40,000 devices at a price of $60 per device. In this case the out-of-pocket price each consumer pays for a blood pressure monitoring device is $_____ (enter your response as a whole number).
The dollar amount of the increase in total expenditures on blood pressure monitoring devices in this state following the expansion in the State Care program is $ ____million. (enter your response rounded to one decimal place).
Following the expansion of the State Care program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is _____ (enter your response rounded to the nearest whole percentage).
The percentage of total expenditures paid by the consumers of these devices is _____ (enter your response rounded to the nearest whole percentage).
Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the U.S. government except
A. total medical spending (number of consumers times the price of medical services) has risen rapidly in the U.S.
B. government planners failed to correctly estimate the increase in consumption of medical services.
C. consumers of Medicare tend to only consume the high valued medical services.
D. the profit motive of physicians and hospitals.
Subsidizing medical services through Medicare
A. makes medical services available to a large percentage of the population, who otherwise could not afford them.
B. drives a wedge between the price received by providers and the price perceived by consumers.
C. is a relatively low percentage of U.S. GDP compared to other nations.
D. All of the above are true.
E. Only A and B are true.
Subsidizing medical services through Medicare
A. raises the price per unit of medical care received by producers.
B. makes the quantity demanded of medical services smaller than the quantity supplied.
C. lowers the price per unit of medical care received by producers.
D. makes the quantity supplied of medical services smaller than the quantity demanded.
Based on the accompanying graph which depicts the market for CAT scans, in the free market, the price of a CAT scan would be $_____
In the free market the quantity of CAT scans consumed would be _____
The government subsidizes the CAT scans and pays hospitals $450.When the subsidy is paid there will be ______ CAT scans produced.
Consumers are willing to pay $ ______ out of the pocket expenses for a CAT scan. The amount of the subsidy is $ _____.
Subsidizing CAT scans results in _______ CAT scans being consumed.
In the decision making process for markets and the public sector
A. dollars spent count as votes in the market system, but in the public sector one person gets one vote.
B. the market system is run by proportional voting rules and the public sector is run by majority rule.
C. the spending of dollars can indicate intensity of want, but political voting does not.
D. All of the above.
The study of collective decision making or the process through which voters, politicians and other interested parties influence nonmarket choices is known as
A. the exclusion principle.
B. a private choice theory.
C. antitrust legislation.
D. public choice theory.
One reason that collective and private decision making differ is
A. the government actions do not have an opportunity cost while private actions do.
B. individuals working in the government sector face a different incentive structure than those in the private sector.
C. private individuals compete and act in their own interest while government bureaucrats do not.
D. there is no difference between collective and private decision making.
The theory of public choice is the study of
A. the process through which voters, politicians, and other interested parties interact to influence nonmarket choices.
B. how legal coercion influences the allocation of resources in the private sector.
C. how the price system allocates resources in the public sector.
D. the study of the system of rewards or punishments in the private sector.
Since 1971, the legal classification of the U.S. Postal Service (USPS) has been as a private enterprise. However,?
A. it is an example of a pure public enterprise.
B. its economic functions remain government-inhibited.
C. its economic functions remain government-controlled.
D. its economic functions remain government-sponsored.
Since the USPS is the only institution in the United States authorized to make regular deliveries of “non-urgent letters” to mailboxes of households, businesses, and government offices, the USPS is?
A. a competitve firm.
B. a duopolist firm.
C. a price-leader.
D. a monopoly.
USPS is the only institution in the United States authorized to make regular deliveries of “non-urgent letters” to mailboxes of households, businesses, and government offices. Thus, the USPS
A. is a government-owned public institution dealing with public goods to which the principle of rival consumption does not apply.
B. receives an implicit subsidy from the government to protect it from competition.
C. receives an explicit subsidy from the government in the form of direct payment.
D. is a private franchise who openly competes with other firms in the mail-delivery business.
Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct for the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. These actions by the government lead to all the following outcomes, except
A. a reduction in the negative externality caused by cigarette smoking.
B. a leftward shift of the supply curve of tobacco.
C. an increase in the negative externality caused by cigarette smoking.
D. a leftward shift of the supply curve of cigarettes.
After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents’ and students’ valuations of the services provided at both private and public schools adjust to equality with the true market price of educational services. As a result of this voucher program,?
A. the public schools and the private schools will gain equally.
B. the public schools will gain.
C. the public schools will lose.
D. the parents of these school children will lose.
In a small town, a rubber manufacturer produces air pollution. If the government does not intervene, the equilibrium price of rubber will be __________, and the equilibrium quantity of rubber will be __________.
A. less than the socially optimal price, less than the socially optimal quantity
B. greater than the socially optimal price, greater than the socially optimal quantity
C. greater than the socially optimal price, less than the socially optimal quantity
D. equal to the socially optimal price, equal to the socially optimal quantity
E. less than the socially optimal price, greater than the socially optimal quantity
The government could best correct this externality by taxing the production of rubber
The French government recently allocated the equivalent of more than $120 million in public funds to Quaero (Latin for “I search”), an Internet search engine analogous to Google or Yahoo.
Is a publicly funded Internet search engine a public good or a government sponsored good?
A. It is a public good, unlikely to be provided in the private market.
B. It is a government sponsored good, deemed socially desirable through the political process.
C. It is a government sponsored good, deemed politically desirable through the political process.
D. It is a public good, deemed socially desirable through the political process.
Does an Internet search engine satisfy the key characteristics of a public good???
A. Yes, because it can be used by many people simultaneously at some additional opportunity cost, and it would be impossible to exclude users.
B. o, users can access the engine simultaneously, but advertising space is limited and can be sold to pay for the engine.
C. No, because it can be used by many people simultaneously at no additional opportunity cost, but users could be excluded.
D. Yes, because the principle of rival consumption does not apply and it would be too costly to exclude users.
Does an Internet search engine satisfy the key characteristics of a public good?
A. No, because it can be used by many people simultaneously at no additional opportunity cost but users could be excluded.
B. Yes, because the principle of rival consumption does not applyand it would be too costly to exclude users.
C. Yes, because it can be used by many people simultaneously at some additional opportunity cost and it would be impossible to exclude users.
D. No, it can be consumed simultaneously by many users at little or no additional cost but the advertising space is limited, and advertisers can be excluded.
For each of the following goods or services, select whether it is a public or a private good.
A lighthouse is
A magazine is
Clean air is
In many countries, education is either wholly provided by the government or is heavily subsidized.
How would an economist explain this?
A. Education is a pure public good and those who do not pay cannot be excluded from it.
B. The only way to provide education is through a government-sponsored system.
C. Individuals will not purchase education because they do not benefit from it.
D. Since education has a spillover cost, private markets will over provide for it.
E. Since education has a spillover benefit, private markets will under provide for it.
The governments of country A and country B spend the same amount each year. However, the types of spending differ dramatically between the two as the following table shows:
Share of government spending on: Country A Country B
functions relating to dealing with market externalities and public goods 25% 75%
the provision of merit goods and efforts to restrict the production of demerit goods 75% 25%
The country whose government is more heavily involved in the economy through economic functions of government as opposed to political functions is (enter a single letter: ‘A’ or ‘B’):
The government of country B is more heavily involved in the economy through economic functions rather than political functions because it devotes a higher fraction of its budget toward?
A. the discouragement of goods that are deemed socially undesirable.
B. activities that are subjective rather than objective.
C. efforts to affect the way exchange is carried out.
D. the encouragement of goods that are deemed socially desirable.?
Which of the following is an example of a transfer in kind?
A. Food stamps.
B. Social Security.
C. Disability benefits.
D. Unemployment insurance benefits.
Which of the following is an example of a transfer payment?
A. food stamps.
B. Subsidized public housing.
C. Social Security.
Suppose that the State of Massachusetts decides to subsidize the cost of purchasing a treadmill for cardiac patients, as prescribed by their doctors. Prior to the program, the equilibrium price of treadmills was $800, and the equilibrium quantity purchased was 50,000.
The state decides to subsidize $800 of the cost of the treadmill, and with the subsidy, the quantity that consumers wish to purchase is 70,000. Manufacturers are willing to supply this quantity at a price of $1,000.
The cost of this program to the State of Massachusetts is $ ____ million.
After the subsidy, consumers will pay _____% of the cost of the treadmill, and the state will pay _____% of the cost.
(800 / 1000 X 100 = ___; 100 – 80 = _____)
Suppose that the State of Connecticut decides to subsidize the cost of purchasing a treadmill for cardiac patients, as prescribed by their doctors. Prior to the program, the equilibrium price of treadmills was $800, and the equilibrium quantity purchased was 50,000.
The state decides to subsidize $500 of the cost of the treadmill, and with the subsidy, the quantity that consumers wish to purchase is 70,000. Manufacturers are willing to supply this quantity at a price of $1,000.
The cost of this program to the State of Connecticut is $______ million.
After the subsidy, consumers will pay _____% of the cost of the treadmill, and the state will pay _______% of the cost.
Since the 1960s, public spending on education has _________, while student performance has ______________.
A. decreased, remained constant or increased
B. decreased, remained constant or increased
C. increased, increased
D. increased, remained constant or declined
E. decreased, decreased
A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort and, if successful, receive larger budget allocation in future years. Another rationale for expanding the agency’s activities is that this will make the jobs of its workers more interesting, which may help the agency attract better-qualified employees. Nevertheless, to broaden its legal mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In addition, to expand its activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel.
The behavior of the government agency is similar to a profit-seeking private enterprise in all of the following aspects, except
A. the government agency is promoting competition.
B. the government agency attempts to make its workers’ jobs more interesting.
C. the government agency depends on majority rule to enact the changes that it is seeking.
D. the government agency attempts to increase its budgetary allocations.
According to the theory of public choice, the employees of Microsoft and employees of the U.S. Department of State should act differently because
A. public employees act to maximize collective welfare rather than individual welfare.
B. private employees are motivated only by money.
C. public employees cannot be fired while private employees can.
D. the incentives facing them are different.
Which of the following is not a difference between market and collective decision making?
A. The government can use expropriation to extract payments, but private firms cannot.
B. Money payments can signal intensity of desire for a product, but voting cannot.
C. Government goods are often provided free of charge, while market goods have a price.
D. Government goods are costless to produce, while private goods have production costs.
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