Exam 15: The Shortcomings of Free Markets

Suppose that the government decided to increase interest rates in order to encourage saving. Would this likely lead to an increase in investment and higher future economic growth rates? Explain.

What is the meaning of "a defective telescopic faculty," as described by A. C. Pigou?

When consumers or businessmen stop collecting information to make decisions at the point where marginal cost of data collection equals the marginal utility of the data, economists would call the decisions based on existing data

If polluters are forced to pay for the cost of their pollution, they will reduce pollution toward a socially optimal amount.

The production possibilities frontier shows the feasible combinations of production without waste.

The factor that most often leads to underpricing and overuse of an economic resource is human greed.

Low interest rates will persuade corporations to invest more right now.

A market transaction causes an externality if someone

If a commodity's price is above its marginal cost, the market will tend to produce too much of the good.

Land on both sides of the border of Brazil and Venezuela has long been occupied by the Yanomamo people. These "fierce people" are the last Stone Age tribe left in South America. Following discovery of gold, approximately 45,000 garimpeiros (gold miners)invaded the Yanomamo territory. The mining process pollutes the rivers and scares away game, so traditional Yanomamo sources of food are almost impossible to find now. The Yanomamo are starving. Economists call this problem

A monopoly price reflects a good's marginal utility.

Which of the following is not generally considered a failing of market economies?

The cost disease of personal services is caused by

Markets will always create more efficient outcomes without government intervention.

Moral hazard is best described as

Which of the following observations is true?

Public goods are

The construct used to demonstrate efficient use of society's resources is the

Governments can most effectively encourage a firm to produce the efficient level of output of a good whose production causes a beneficial externality by

A private good is characterized by excludability and depletability.