Question 1

A policy in which the marginal costs of undertaking the policy equal the marginal benefits of that policy is best called an:

Accepted Answer

A) equality policy. 
B) incentive policy. 
C) optimal policy. 
D) opportunity policy. 
A) equality policy. 
B) incentive policy. 
C) optimal policy. 
D) opportunity policy. C

Question 2

An optimal policy is one in which the marginal cost of undertaking a policy is less than the marginal benefit of that policy.

Accepted Answer

A) True 
 B)False  False

Question 3

If a negative externality is to be internalized to the decision maker, the:

Accepted Answer

A) producers' marginal costs should be increased by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
B) producers' marginal costs should be reduced by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
C) consumer of the good should receive a subsidy equal to the marginal cost to those outside the trade that results from production of the good. 
D) consumer of the good should pay a tax equal to the marginal benefit to those outside the trade that results from consuming the good. 
A) producers' marginal costs should be increased by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
B) producers' marginal costs should be reduced by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
C) consumer of the good should receive a subsidy equal to the marginal cost to those outside the trade that results from production of the good. 
D) consumer of the good should pay a tax equal to the marginal benefit to those outside the trade that results from consuming the good. A

Question 4

An externality is present in a free market whenever:

Accepted Answer

A) a monopolist spends funds to keep potential competitors out of the market. 
B) an activity generates costs or benefits that are not reflected in market prices. 
C) firms hire employees from outside the firm to fill positions normally filled by promotion from within the firm. 
D) a tax is imposed on the supplier of a good. 
A) a monopolist spends funds to keep potential competitors out of the market. 
B) an activity generates costs or benefits that are not reflected in market prices. 
C) firms hire employees from outside the firm to fill positions normally filled by promotion from within the firm. 
D) a tax is imposed on the supplier of a good.

Question 5

What are three major sources of market failure?

Accepted Answer

Three main sources o

Question 6

If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on that good will:

Accepted Answer

A) increase both the price of that good and pollution. 
B) reduce the price of that good and increase pollution. 
C) reduce both the price of that good and pollution. 
D) increase the price of that good and reduce pollution. 
A) increase both the price of that good and pollution. 
B) reduce the price of that good and increase pollution. 
C) reduce both the price of that good and pollution. 
D) increase the price of that good and reduce pollution.

Question 7

If a positive externality is associated with the purchase of smoke detectors:

Accepted Answer

A) the marginal social benefit of smoke detectors exceeds their price. 
B) the marginal social benefit of smoke detectors is zero. 
C) the marginal social benefit of smoke detectors equals their price. 
D) more than the efficient quantity of smoke detectors will be sold. 
A) the marginal social benefit of smoke detectors exceeds their price. 
B) the marginal social benefit of smoke detectors is zero. 
C) the marginal social benefit of smoke detectors equals their price. 
D) more than the efficient quantity of smoke detectors will be sold.

Question 8

A market incentive plan:

Accepted Answer

A) regulates the amount of a resource a person can consume through direct limits. 
B) requires that people choose to consume until the marginal costs exceed the marginal benefits. 
C) makes the price of a resource reflect not only the marginal private costs but also the marginal social costs of consuming that resource. 
D) makes the price of a resource reflect the marginal private costs of consuming that resource. 
A) regulates the amount of a resource a person can consume through direct limits. 
B) requires that people choose to consume until the marginal costs exceed the marginal benefits. 
C) makes the price of a resource reflect not only the marginal private costs but also the marginal social costs of consuming that resource. 
D) makes the price of a resource reflect the marginal private costs of consuming that resource.

Question 9

Government provides secondary education because of its private good aspects.

Accepted Answer

A) True 
 B)False

Question 10

Government failure is likely to occur for all of the following reasons except:

Accepted Answer

A) special interest groups might lobby government to the detriment of the public good. 
B) individuals have better information about a situation that affects them than does government. 
C) intervention in markets is always simpler than it initially seems. 
D) the bureaucratic nature of government intervention does not allow fine-tuning. 
A) special interest groups might lobby government to the detriment of the public good. 
B) individuals have better information about a situation that affects them than does government. 
C) intervention in markets is always simpler than it initially seems. 
D) the bureaucratic nature of government intervention does not allow fine-tuning.

Question 11

All of the following are justifications for government intervention except:

Accepted Answer

A) too much competition. 
B) informational problems. 
C) externalities. 
D) public goods. 
A) too much competition. 
B) informational problems. 
C) externalities. 
D) public goods.

Question 12

Adverse selection is most likely to be a problem when:

Accepted Answer

A) one side of the market, either buyer or seller, has better information than the other side. 
B) there are public goods involved. 
C) the good being exchanged has negative externalities. 
D) the good being exchanged has free rider problems. 
A) one side of the market, either buyer or seller, has better information than the other side. 
B) there are public goods involved. 
C) the good being exchanged has negative externalities. 
D) the good being exchanged has free rider problems.

Question 13

The free rider problem:

Accepted Answer

A) can never prevent pure public goods from being supplied. 
B) results because people act unselfishly. 
C) results because people behave irrationally. 
D) prevents voluntary cost sharing from achieving the efficient output of a public good. 
A) can never prevent pure public goods from being supplied. 
B) results because people act unselfishly. 
C) results because people behave irrationally. 
D) prevents voluntary cost sharing from achieving the efficient output of a public good.

Question 14

The unwillingness of individuals to share in the cost of a public good is called the:

Accepted Answer

A) free rider problem. 
B) social conscience problem. 
C) volunteer problem. 
D) public choice problem. 
A) free rider problem. 
B) social conscience problem. 
C) volunteer problem. 
D) public choice problem.

Question 15

Economists believe that free riders often can undermine the social commitment of many in the society, causing voluntary policies to fail.

Accepted Answer

A) True 
 B)False

Question 16

Suppose Mary finds it easier to conserve than Jim does. The difference between a tax incentive program and a marketable certificate plan in this case is that:

Accepted Answer

A) Mary undertakes most of the conservation in the case of a tax incentive program and least in the marketable certificate program. 
B) Mary undertakes least of the conservation in the case of a tax incentive program and most in the marketable certificate program. 
C) Mary takes on most of the conservation in both cases but can be paid by Jim in the marketable certificate program. 
D) Jim takes on most of the conservation in both cases but can be paid by Mary in the marketable certificate program. 
A) Mary undertakes most of the conservation in the case of a tax incentive program and least in the marketable certificate program. 
B) Mary undertakes least of the conservation in the case of a tax incentive program and most in the marketable certificate program. 
C) Mary takes on most of the conservation in both cases but can be paid by Jim in the marketable certificate program. 
D) Jim takes on most of the conservation in both cases but can be paid by Mary in the marketable certificate program.

Question 17

The problem that arises when people don't have to bear the negative consequence of their actions is known as:

Accepted Answer

A) adverse selection. 
B) externality. 
C) moral hazard. 
D) signaling. 
A) adverse selection. 
B) externality. 
C) moral hazard. 
D) signaling.

Question 18

Explain why incentive programs are more efficient than direct regulation as a means of eliminating the problems of externalities.

Accepted Answer

Saying that incentive programs are more

Question 19

If air pollution control is a public good, it follows that:

Accepted Answer

A) the efficient output of air pollution control is zero. 
B) additional persons can benefit from a given amount of air pollution control without reducing the benefits enjoyed by others. 
C) the efficient output of air pollution control can be attained by selling it by the unit in a market. 
D) the more air pollution control enjoyed by any one person, the less is available to others. 
A) the efficient output of air pollution control is zero. 
B) additional persons can benefit from a given amount of air pollution control without reducing the benefits enjoyed by others. 
C) the efficient output of air pollution control can be attained by selling it by the unit in a market. 
D) the more air pollution control enjoyed by any one person, the less is available to others.

Question 20

What is the difference between screening and signaling? How are they similar?

Accepted Answer

Screening refers to an action taken by t

Exam 8: Market Failure Versus Government Failure

A policy in which the marginal costs of undertaking the policy equal the marginal benefits of that policy is best called an:

An optimal policy is one in which the marginal cost of undertaking a policy is less than the marginal benefit of that policy.

If a negative externality is to be internalized to the decision maker, the:

An externality is present in a free market whenever:

What are three major sources of market failure?

If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on that good will:

If a positive externality is associated with the purchase of smoke detectors:

A market incentive plan:

Government provides secondary education because of its private good aspects.

Government failure is likely to occur for all of the following reasons except:

All of the following are justifications for government intervention except:

Adverse selection is most likely to be a problem when:

The free rider problem:

The unwillingness of individuals to share in the cost of a public good is called the:

Economists believe that free riders often can undermine the social commitment of many in the society, causing voluntary policies to fail.

Suppose Mary finds it easier to conserve than Jim does. The difference between a tax incentive program and a marketable certificate plan in this case is that:

The problem that arises when people don't have to bear the negative consequence of their actions is known as:

Explain why incentive programs are more efficient than direct regulation as a means of eliminating the problems of externalities.

If air pollution control is a public good, it follows that:

What is the difference between screening and signaling? How are they similar?

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

The Financial Sector and the Economy

Monetary Policy

Financial Crises, Panics, and Unconventional Monetary Policy

Deficits and Debt: the Austerity Debate

The Fiscal Policy Dilemma

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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