Question 1

Which of the following is an example of the command approach to regulation?

Accepted Answer

A) The market for permits to emit sulfur dioxide on the Chicago Mercantile Exchange 
B) A carbon tax 
C) Zoning in many areas that restricts the types of buildings that can be constructed 
D) The government providing subsidies for public education 
E) A Pigouvian tax 
A) The market for permits to emit sulfur dioxide on the Chicago Mercantile Exchange 
B) A carbon tax 
C) Zoning in many areas that restricts the types of buildings that can be constructed 
D) The government providing subsidies for public education 
E) A Pigouvian tax

Question 2

Under a marketable pollution permit system,property rights to an externality are created so that a more efficient allocation of resources will result.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is true of externality?

Accepted Answer

A) An externality enhances the efficiency of the market system. 
B) An externality is not an economic problem because it is external to the market. 
C) An externality is a cost borne by the people who are directly or indirectly involved in the production of a good or service. 
D) An externality accrues to someone who had nothing to do with the production or consumption of a good or service. 
E) An externality refers to some unexpected change in the equilibrium price or quantity of a product. 
A) An externality enhances the efficiency of the market system. 
B) An externality is not an economic problem because it is external to the market. 
C) An externality is a cost borne by the people who are directly or indirectly involved in the production of a good or service. 
D) An externality accrues to someone who had nothing to do with the production or consumption of a good or service. 
E) An externality refers to some unexpected change in the equilibrium price or quantity of a product.

Question 4

When negotiation is costly,it makes a difference where liability is placed in terms of reaching an efficient solution to a negative externality problem.

Accepted Answer

A) True 
 B)False

Question 5

When a good commodity is driven out of the market by a bad commodity it is called:

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) positive externality. 
D) negative externality. 
E) tragedy of commons. 
A) moral hazard. 
B) adverse selection. 
C) positive externality. 
D) negative externality. 
E) tragedy of commons.

Question 6

When all costs and benefits of a transaction are borne by the participants of that transaction:

Accepted Answer

A) the market outcome will be inefficient. 
B) then private costs and social costs are identical. 
C) negative externalities exist. 
D) positive externalities exist. 
E) the private costs are more than the social costs. 
A) the market outcome will be inefficient. 
B) then private costs and social costs are identical. 
C) negative externalities exist. 
D) positive externalities exist. 
E) the private costs are more than the social costs.

Question 7

Why do market failures arise in case of public goods?

Accepted Answer

A) The quantity produced is much more than is actually required by the people. 
B) The quality of these goods are not good enough. 
C) The quantity produced is too less from the society's point of view. 
D) The government wastes a lot of resources for producing a public good. 
E) The users of such goods are required to pay a high price for these goods. 
A) The quantity produced is much more than is actually required by the people. 
B) The quality of these goods are not good enough. 
C) The quantity produced is too less from the society's point of view. 
D) The government wastes a lot of resources for producing a public good. 
E) The users of such goods are required to pay a high price for these goods.

Question 8

A market in which adverse selection occurs is often called a lemons market.

Accepted Answer

A) True 
 B)False

Question 9

A good that is both excludable and rivalrous is a(n):

Accepted Answer

A) public good. 
B) club good. 
C) private good. 
D) inferior good. 
E) necessary good. 
A) public good. 
B) club good. 
C) private good. 
D) inferior good. 
E) necessary good.

Question 10

In China prior to 1990,most residential buildings were in dilapidation because:

Accepted Answer

A) people were not aware of the maintenance and beautification techniques. 
B) the government did not encourage wastage of resources for such purposes. 
C) no one had a property right to a home. 
D) all the properties were ancestral. 
E) the people had private property rights so they did not have an incentive to repair the houses. 
A) people were not aware of the maintenance and beautification techniques. 
B) the government did not encourage wastage of resources for such purposes. 
C) no one had a property right to a home. 
D) all the properties were ancestral. 
E) the people had private property rights so they did not have an incentive to repair the houses.

Question 11

Which of the following may be explained by adverse selection?

Accepted Answer

A) When banks raise the interest rate on loans,high-risk applicants leave the market. 
B) When health insurance companies decrease insurance charges but increase deductibles,less healthy people are more willing to purchase insurance. 
C) As the cost of insurance rises,low-risk applicants reduce their coverage. 
D) Products are sold at prices that reflect their true value. 
E) Loan companies do not require down payments. 
A) When banks raise the interest rate on loans,high-risk applicants leave the market. 
B) When health insurance companies decrease insurance charges but increase deductibles,less healthy people are more willing to purchase insurance. 
C) As the cost of insurance rises,low-risk applicants reduce their coverage. 
D) Products are sold at prices that reflect their true value. 
E) Loan companies do not require down payments.

Question 12

One reason that some whales were hunted close to extinction is that no one can claim ownership of a whale until it is killed.If property rights to the whale population were established:

Accepted Answer

A) then whales would surely be hunted to extinction. 
B) the owners would have the incentive to ensure a sustainable yield of whales,so the whale population could recover. 
C) no one would hunt whales. 
D) the price of whales would be kept artificially low so that trade in whales would become unprofitable. 
E) the whales would be hunted to extinction only when the price is high and it is profitable to trade in whales. 
A) then whales would surely be hunted to extinction. 
B) the owners would have the incentive to ensure a sustainable yield of whales,so the whale population could recover. 
C) no one would hunt whales. 
D) the price of whales would be kept artificially low so that trade in whales would become unprofitable. 
E) the whales would be hunted to extinction only when the price is high and it is profitable to trade in whales.

Question 13

When economic resources are devoted to transferring wealth from one sector of the economy to another rather than being used for productive purposes,the process is known as:

Accepted Answer

A) rent seeking. 
B) logrolling. 
C) central planning. 
D) negative externalities. 
E) deficit financing. 
A) rent seeking. 
B) logrolling. 
C) central planning. 
D) negative externalities. 
E) deficit financing.

Question 14

The figure given below shows the demand for permits and the maximum permissible level of pollution. Figure 13.4   In the figure,
The downward sloping line is the demand curve of permits;
The vertical line denotes the maximum permissible limit of pollution.
-Refer to Figure 13.4.Suppose the government wishes to reduce pollution to a quantity of Qb.If it sells marketable pollution permits at a quantity of Qb then:

Accepted Answer

A) firms will bid the price of the permits up to a price of Pa,and Qa pollution will result. 
B) firms will bid the price of the permits up to a price of Pb,and Qb pollution will result. 
C) firms will bid the price of the permits up to a price of Pc,and Qc pollution will result. 
D) firms will bid the price of the permits up to a price of Pc,and Qb pollution will result. 
E) firms will not be willing to pay a price for the permits,so no pollution will be reduced. 
A) firms will bid the price of the permits up to a price of Pa,and Qa pollution will result. 
B) firms will bid the price of the permits up to a price of Pb,and Qb pollution will result. 
C) firms will bid the price of the permits up to a price of Pc,and Qc pollution will result. 
D) firms will bid the price of the permits up to a price of Pc,and Qb pollution will result. 
E) firms will not be willing to pay a price for the permits,so no pollution will be reduced.

Question 15

When the benefits of an activity are received by those who are not directly involved in it:

Accepted Answer

A) a negative externality exists. 
B) the government is producing a free good. 
C) the society has to bear the burden of that particular activity. 
D) the government has to compensate for the loss in social welfare. 
E) a positive externality exists. 
A) a negative externality exists. 
B) the government is producing a free good. 
C) the society has to bear the burden of that particular activity. 
D) the government has to compensate for the loss in social welfare. 
E) a positive externality exists.

Question 16

The figure given below shows the demand and supply curves of automobiles. Figure 13.3   In the figure,
D: Demand curve of automobiles
S: Supply of automobiles prior to the tax
S+t: Supply of automobiles after the tax
-In Figure 13.3,the amount of tax levied by the government is equal to:

Accepted Answer

A) 0Pt 
B) 0P. 
C) Qtd - Qtc. 
D) 0Q - 0Qt. 
E) Qtb - Qtd. 
A) 0Pt 
B) 0P. 
C) Qtd - Qtc. 
D) 0Q - 0Qt. 
E) Qtb - Qtd.

Question 17

The figure given below shows the demand and supply curves of steel.SS1U1B1pS1U1B0 is the private supply curve,and SS1U1B1sS1U1B0 is the social supply curve that includes both private costs and external costs. Figure 13.2  
- In Figure 13.2,external costs are equal to _____.

Accepted Answer

A) Ps - Pp 
B) da 
C) Qp - Qs 
D) ab 
E) bc 
A) Ps - Pp 
B) da 
C) Qp - Qs 
D) ab 
E) bc

Question 18

Consumers in used car markets can very easily differentiate between high-quality and low-quality cars.

Accepted Answer

A) True 
 B)False

Question 19

Why does network externality arise?

Accepted Answer

A) Each additional unit of a good sold reduces the value of the previously sold units. 
B) As more and more units of a good are produced,the average cost declines. 
C) Consumption of a good by one user does not affect the consumption of subsequent users. 
D) The firms enjoy economies of scale in the long run. 
E) Each additional unit of the good sold increases the value of the previously sold units. 
A) Each additional unit of a good sold reduces the value of the previously sold units. 
B) As more and more units of a good are produced,the average cost declines. 
C) Consumption of a good by one user does not affect the consumption of subsequent users. 
D) The firms enjoy economies of scale in the long run. 
E) Each additional unit of the good sold increases the value of the previously sold units.

Question 20

Which of following would help minimize moral hazard in the financial market?

Accepted Answer

A) Raising the interest rate on loans 
B) Decreasing the down payment on a loan 
C) Eliminating the need for a borrower to provide collateral 
D) Requiring an insurance policyholder to carry a deductible 
E) An insurance company increasing the premium and reducing the deductible 
A) Raising the interest rate on loans 
B) Decreasing the down payment on a loan 
C) Eliminating the need for a borrower to provide collateral 
D) Requiring an insurance policyholder to carry a deductible 
E) An insurance company increasing the premium and reducing the deductible

Exam 13: Market Failures, Government Failures, and Rent Seeking

Which of the following is an example of the command approach to regulation?

Under a marketable pollution permit system,property rights to an externality are created so that a more efficient allocation of resources will result.

Which of the following is true of externality?

When negotiation is costly,it makes a difference where liability is placed in terms of reaching an efficient solution to a negative externality problem.

When a good commodity is driven out of the market by a bad commodity it is called:

When all costs and benefits of a transaction are borne by the participants of that transaction:

Why do market failures arise in case of public goods?

A market in which adverse selection occurs is often called a lemons market.

A good that is both excludable and rivalrous is a(n):

In China prior to 1990,most residential buildings were in dilapidation because:

Which of the following may be explained by adverse selection?

One reason that some whales were hunted close to extinction is that no one can claim ownership of a whale until it is killed.If property rights to the whale population were established:

When economic resources are devoted to transferring wealth from one sector of the economy to another rather than being used for productive purposes,the process is known as:

When the benefits of an activity are received by those who are not directly involved in it:

The figure given below shows the demand and supply curves of automobiles. Figure 13.3 In the figure, D: Demand curve of automobiles S: Supply of automobiles prior to the tax S+t: Supply of automobiles after the tax -In Figure 13.3,the amount of tax levied by the government is equal to:

The figure given below shows the demand and supply curves of steel.Sp is the private supply curve,and Ss is the social supply curve that includes both private costs and external costs. Figure 13.2 - In Figure 13.2,external costs are equal to _____.

Consumers in used car markets can very easily differentiate between high-quality and low-quality cars.

Why does network externality arise?

Which of following would help minimize moral hazard in the financial market?

Economics: The World Around You

Choice, opportunity Costs, and Specialization

Markets, Demand and Supply, and the Price System

The Market System and the Private and Public Sector

Elasticity: Demand and Supply

Consumer Choice

Supply: The Costs of Doing Business

Profit Maximization

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Antitrust and Regulation

Resource Markets

The Labor Market

Capital Markets

The Land Market and Natural Resources

Aging, Social Security and Health Care

Income Distribution,Poverty and Government Policy

World Trade Equilibrium

International Trade Restrictions

Exchange Rates and Financial Links Between Countries

Filters

The figure given below shows the demand and supply curves of steel.S_p is the private supply curve,and S_s is the social supply curve that includes both private costs and external costs. Figure 13.2 - In Figure 13.2,external costs are equal to _____.