Question 1

Which of the following is an example of a public good?

Accepted Answer

A)  telephone service 
B)  national defense 
C)  a city-owned bus 
D)  electricity generated by a city-owned public utility 
A)  telephone service 
B)  national defense 
C)  a city-owned bus 
D)  electricity generated by a city-owned public utility

Question 2

The practice of potential buyers offering lower prices for a product of uncertain quality than they would for a product of certain quality is known as:

Accepted Answer

A)  the lemon problem. 
B)  moral hazard. 
C)  the winner's curse. 
D)  external costs. 
A)  the lemon problem. 
B)  moral hazard. 
C)  the winner's curse. 
D)  external costs.

Question 3

If a negative externality results from the refining of oil,the cost of production as seen by the oil refinery:

Accepted Answer

A)  does not include the external cost. 
B)  includes the external cost. 
C)  does not include the external benefit. 
D)  includes the external benefit. 
A)  does not include the external cost. 
B)  includes the external cost. 
C)  does not include the external benefit. 
D)  includes the external benefit.

Question 4

A free-rider problem arises whenever:

Accepted Answer

A)  goods cannot be provided exclusively to those who pay for them. 
B)  the price of a good is very low. 
C)  the government provides goods or services. 
D)  goods cease to be scarce. 
A)  goods cannot be provided exclusively to those who pay for them. 
B)  the price of a good is very low. 
C)  the government provides goods or services. 
D)  goods cease to be scarce.

Question 5

When a firm creates negative externalities by polluting,in order to achieve the socially efficient outcome:

Accepted Answer

A)  the firm's production should be prohibited. 
B)  the firm's production should be increased and the price of its output should be decreased. 
C)  the firm's production should be increased and the price of its output should be increased. 
D)  the firm's production should be reduced and the price of its output should be increased. 
A)  the firm's production should be prohibited. 
B)  the firm's production should be increased and the price of its output should be decreased. 
C)  the firm's production should be increased and the price of its output should be increased. 
D)  the firm's production should be reduced and the price of its output should be increased.

Question 6

Explain why broadcasting television over the air is considered a public good.

Accepted Answer

Broadcast television

Question 7

If a negative externality results from the production of chemicals,an external cost is imposed on parties not directly involved in the market for the chemicals.

Accepted Answer

A) True 
 B)False

Question 8

If,after she buys a car with air bags,Maria Andretti starts to drive recklessly,that would be an illustration of:

Accepted Answer

A)  the moral hazard problem. 
B)  the free rider problem. 
C)  the adverse selection problem. 
D)  the "lemon" problem. 
A)  the moral hazard problem. 
B)  the free rider problem. 
C)  the adverse selection problem. 
D)  the "lemon" problem.

Question 9

The tendency of those who are insured to take more risks is a problem of:

Accepted Answer

A)  free riding. 
B)  moral hazard. 
C)  adverse selection. 
D)  positive externalities. 
A)  free riding. 
B)  moral hazard. 
C)  adverse selection. 
D)  positive externalities.

Question 10

Assume that production of a good generates external benefits for others.The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

Accepted Answer

A)  too high; too high. 
B)  too high; too low. 
C)  too low; too high. 
D)  too low; too low. 
A)  too high; too high. 
B)  too high; too low. 
C)  too low; too high. 
D)  too low; too low.

Question 11

In a market where firms are able to reduce their private costs by shifting costs onto others,which of the following will not happen?

Accepted Answer

A)  Inefficiencies will occur. 
B)  Negative externalities will be observed. 
C)  The market prices of products produced by firms will be too low relative to the social optimum. 
D)  Output of the good being produced will be too low. 
A)  Inefficiencies will occur. 
B)  Negative externalities will be observed. 
C)  The market prices of products produced by firms will be too low relative to the social optimum. 
D)  Output of the good being produced will be too low.

Question 12

If transaction costs of negotiating are ____,the ____ suggests that the private market ____ allocate resources.

Accepted Answer

A)  low; Sexton Theorem; will not efficiently 
B)  high; Externality Theorem; will efficiently 
C)  high; Coase Theorem; will not efficiently 
D)  low; Coase Theorem; will efficiently 
E)  both c. and d. 
A)  low; Sexton Theorem; will not efficiently 
B)  high; Externality Theorem; will efficiently 
C)  high; Coase Theorem; will not efficiently 
D)  low; Coase Theorem; will efficiently 
E)  both c. and d.

Question 13

Which of the following is an example of an externality?

Accepted Answer

A)  cigarette smoke that permeates an entire restaurant 
B)  a flu shot that prevents a student from transmitting the virus 
C)  a beautiful flower garden outside the county courthouse 
D)  All of the above are correct. 
A)  cigarette smoke that permeates an entire restaurant 
B)  a flu shot that prevents a student from transmitting the virus 
C)  a beautiful flower garden outside the county courthouse 
D)  All of the above are correct.

Question 14

Nick owns a dog whose barking annoys his neighbor Jane.Suppose that the benefit of owning the dog is worth $500 to Nick,and that Jane bears a cost of $700 from the barking.Assume that the city has no ordinance against barking dogs.A possible private solution that would benefit both parties is for:

Accepted Answer

A)  Jane to pay Nick $450 to get rid of the dog. 
B)  Nick to pay Jane $650 for her inconvenience. 
C)  Jane to pay Nick $650 to get rid of the dog. 
D)  There is no private solution that would improve this situation for both parties. 
A)  Jane to pay Nick $450 to get rid of the dog. 
B)  Nick to pay Jane $650 for her inconvenience. 
C)  Jane to pay Nick $650 to get rid of the dog. 
D)  There is no private solution that would improve this situation for both parties.

Question 15

Transaction costs are the cost of negotiating and executing an exchange.

Accepted Answer

A) True 
 B)False

Question 16

If the government tried to implement a total ban on pollution:

Accepted Answer

A)  output prices would decrease. 
B)  output prices would increase. 
C)  production would increase. 
D)  production would be unchanged. 
E)  there would be little affect on the standard of living. 
A)  output prices would decrease. 
B)  output prices would increase. 
C)  production would increase. 
D)  production would be unchanged. 
E)  there would be little affect on the standard of living.

Question 17

If the production of a good creates large spillover benefits on others,the government might correct for the:

Accepted Answer

A)  overallocation of resources to its production by subsidizing it. 
B)  overallocation of resources to its production by imposing a tax on it. 
C)  underallocation of resources to its production by subsidizing it. 
D)  underallocation of resources to its production by imposing a tax on it. 
A)  overallocation of resources to its production by subsidizing it. 
B)  overallocation of resources to its production by imposing a tax on it. 
C)  underallocation of resources to its production by subsidizing it. 
D)  underallocation of resources to its production by imposing a tax on it.

Question 18

Identify the approach used by the Environmental Protection Agency (EPA)to enforce environmental standards.

Accepted Answer

A)  pollution taxes 
B)  least-cost method 
C)  compliance standards 
D)  pollution rights 
A)  pollution taxes 
B)  least-cost method 
C)  compliance standards 
D)  pollution rights

Question 19

An ideal pollution control policy:

Accepted Answer

A)  would reduce pollution to zero. 
B)  would reduce pollution to the socially efficient level. 
C)  discourage firms from wasting time developing abatement technologies. 
D)  reduce pollution as quickly as possible, regardless of the cost. 
A)  would reduce pollution to zero. 
B)  would reduce pollution to the socially efficient level. 
C)  discourage firms from wasting time developing abatement technologies. 
D)  reduce pollution as quickly as possible, regardless of the cost.

Question 20

In a competitive economy with no government sector:

Accepted Answer

A)  goods with spillover benefits will not be produced at all. 
B)  there will be too few public goods produced. 
C)  goods with spillover costs will be underproduced. 
D)  too few resources be allocated to each industry. 
A)  goods with spillover benefits will not be produced at all. 
B)  there will be too few public goods produced. 
C)  goods with spillover costs will be underproduced. 
D)  too few resources be allocated to each industry.

Exam 8: Market Failure

Which of the following is an example of a public good?

The practice of potential buyers offering lower prices for a product of uncertain quality than they would for a product of certain quality is known as:

If a negative externality results from the refining of oil,the cost of production as seen by the oil refinery:

A free-rider problem arises whenever:

When a firm creates negative externalities by polluting,in order to achieve the socially efficient outcome:

Explain why broadcasting television over the air is considered a public good.

If a negative externality results from the production of chemicals,an external cost is imposed on parties not directly involved in the market for the chemicals.

If,after she buys a car with air bags,Maria Andretti starts to drive recklessly,that would be an illustration of:

The tendency of those who are insured to take more risks is a problem of:

Assume that production of a good generates external benefits for others.The equilibrium price of the good will be ____ and the equilibrium quantity ____ for efficient resource allocation.

In a market where firms are able to reduce their private costs by shifting costs onto others,which of the following will not happen?

If transaction costs of negotiating are ____,the ____ suggests that the private market ____ allocate resources.

Which of the following is an example of an externality?

Nick owns a dog whose barking annoys his neighbor Jane.Suppose that the benefit of owning the dog is worth $500 to Nick,and that Jane bears a cost of $700 from the barking.Assume that the city has no ordinance against barking dogs.A possible private solution that would benefit both parties is for:

Transaction costs are the cost of negotiating and executing an exchange.

If the government tried to implement a total ban on pollution:

If the production of a good creates large spillover benefits on others,the government might correct for the:

Identify the approach used by the Environmental Protection Agency (EPA)to enforce environmental standards.

An ideal pollution control policy:

In a competitive economy with no government sector:

The Role and Method of Economics

Economics: Eight Powerful Ideas

Scarcity, Trade-Offs, and Production Possibilities

Demand, Supply, and Market Equilibrium

Markets in Motion and Price Controls

Elasticities

Market Efficiency and Welfare

Public Finance and Public Choice

Consumer Choice Theory

The Firm: Production and Costs

Firms in Perfectly Competitive Markets

Monopoly and Antitrust

Monopolistic Competition and Product Differentiation

Oligopoly and Strategic Behavior

The Markets for Labor, Capital, and Land

Income, Poverty, and Health Care

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Measuring Economic Performance

Economic Growth in the Global Economy

Financial Markets, Saving, and Investment

Aggregate Demand and Aggregate Supply

The Aggregate Expenditure Model

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Trade

International Finance

Filters

Assume that production of a good generates external benefits for others.The equilibrium price of the good will be and the equilibrium quantity for efficient resource allocation.

If transaction costs of negotiating are ,the suggests that the private market allocate resources.