Question 1

Which of the following is a valid reason for the government rather than the market to finance the provision of certain economic goods and services?

Accepted Answer

A) ​When the government provides economic goods, they are free; costs are incurred when such goods are provided by private firms. 
B) ​Voters tend to be better informed than market consumers are. 
C) ​Decision makers in the market sector are motivated by self-interest, whereas political decision makers are primarily motivated by altruism (the desire to help others). 
D) ​Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers; the government can use taxes to overcome this problem of nonpayment. 
A) ​When the government provides economic goods, they are free; costs are incurred when such goods are provided by private firms. 
B) ​Voters tend to be better informed than market consumers are. 
C) ​Decision makers in the market sector are motivated by self-interest, whereas political decision makers are primarily motivated by altruism (the desire to help others). 
D) ​Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers; the government can use taxes to overcome this problem of nonpayment.

Question 2

A tradable emissions permit program is efficient because the cap protects the environment while:

Accepted Answer

A) ​generating substantial revenues for the government. 
B) ​keeping compliance and administration costs relatively low. 
C) ​while requiring the same response by each polluter. 
D) ​none of above 
A) ​generating substantial revenues for the government. 
B) ​keeping compliance and administration costs relatively low. 
C) ​while requiring the same response by each polluter. 
D) ​none of above

Question 3

If quality-detection costs are very low,

Accepted Answer

A) ​lower quality products will tend to be outcompeted in the market, and the average quality will rise. 
B) ​lower quality products will tend to be outcompeted in the market, but the average quality will fall. 
C) ​higher quality products will tend to be outcompeted in the market, and the average quality will rise. 
D) ​higher quality products will tend to be outcompeted in the market, and the average quality will fall. 
A) ​lower quality products will tend to be outcompeted in the market, and the average quality will rise. 
B) ​lower quality products will tend to be outcompeted in the market, but the average quality will fall. 
C) ​higher quality products will tend to be outcompeted in the market, and the average quality will rise. 
D) ​higher quality products will tend to be outcompeted in the market, and the average quality will fall.

Question 4

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 5

The efficient level of pollution is greater

Accepted Answer

A) ​The higher the marginal social benefit of abatement function and the higher the marginal social benefit of abatement function. 
B) ​The higher the marginal social benefit of abatement function and the lower the marginal social benefit of abatement function. 
C) ​The lower the marginal social benefit of abatement function and the higher the marginal social benefit of abatement function. 
D) ​The lower the marginal social benefit of abatement function and the lower the marginal social benefit of abatement function. 
A) ​The higher the marginal social benefit of abatement function and the higher the marginal social benefit of abatement function. 
B) ​The higher the marginal social benefit of abatement function and the lower the marginal social benefit of abatement function. 
C) ​The lower the marginal social benefit of abatement function and the higher the marginal social benefit of abatement function. 
D) ​The lower the marginal social benefit of abatement function and the lower the marginal social benefit of abatement function.

Question 6

The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Accepted Answer

A) True 
 B)False

Question 7

An individual insured against a particular cost,

Accepted Answer

A) ​has reduced incentives to take precautions against those costs. 
B) ​may take on additional risk because he/she is insured. 
C) ​faces incentives that can result in higher insurance rates. 
D) ​All of the above are true. 
A) ​has reduced incentives to take precautions against those costs. 
B) ​may take on additional risk because he/she is insured. 
C) ​faces incentives that can result in higher insurance rates. 
D) ​All of the above are true.

Question 8

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 9

The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example 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 10

For society as a whole, the optimal amount of pollution control exists when:

Accepted Answer

A) ​the marginal cost of pollution reduction is equal to the marginal benefit of the pollution reduction. 
B) ​firms are allowed to produce as much pollution as necessary to make the goods people want. 
C) ​the marginal costs of pollution clean up exceed the benefits. 
D) ​no pollution is permitted at all. 
A) ​the marginal cost of pollution reduction is equal to the marginal benefit of the pollution reduction. 
B) ​firms are allowed to produce as much pollution as necessary to make the goods people want. 
C) ​the marginal costs of pollution clean up exceed the benefits. 
D) ​no pollution is permitted at all.

Question 11

Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes the decision are called ____ costs.

Accepted Answer

A) ​negative; positive 
B) ​social; private 
C) ​private; social 
D) ​positive; negative 
A) ​negative; positive 
B) ​social; private 
C) ​private; social 
D) ​positive; negative

Question 12

The optimal level of pollution is achieved when:

Accepted Answer

A) ​the marginal social benefit from decreased pollution is equal to the marginal social cost of reducing pollution. 
B) ​the level of pollution reaches zero. 
C) ​pollution abatement exceeds the pollution level. 
D) ​benefits from further pollution abatement are zero. 
A) ​the marginal social benefit from decreased pollution is equal to the marginal social cost of reducing pollution. 
B) ​the level of pollution reaches zero. 
C) ​pollution abatement exceeds the pollution level. 
D) ​benefits from further pollution abatement are zero.

Question 13

Which of the following may involve external benefits?

Accepted Answer

A) ​drunken driving. 
B) ​smoking. 
C) ​public education. 
D) ​highway congestion. 
A) ​drunken driving. 
B) ​smoking. 
C) ​public education. 
D) ​highway congestion.

Question 14

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Accepted Answer

A) True 
 B)False

Question 15

Technology spillovers:

Accepted Answer

A) ​Are caused by patents. 
B) ​Can lead to clustering of technology firms near one another. 
C) ​Are examples of negative externalities. 
D) ​All of the above are true. 
A) ​Are caused by patents. 
B) ​Can lead to clustering of technology firms near one another. 
C) ​Are examples of negative externalities. 
D) ​All of the above are true.

Question 16

Factory A can reduce emissions at a cost of $400 per ton. Factory B can reduce emissions at a cost of $100 per ton. In a system in which the government issues transferable pollution right at a price of $200 per ton:

Accepted Answer

A) ​Factory A can profit from selling its pollution rights to Factory B. 
B) ​Neither firm can profit from selling its pollution rights to the other. 
C) ​Factory B can profit from selling its pollution rights to Factory A. 
D) ​Both firms have an incentive to sell pollution rights. 
A) ​Factory A can profit from selling its pollution rights to Factory B. 
B) ​Neither firm can profit from selling its pollution rights to the other. 
C) ​Factory B can profit from selling its pollution rights to Factory A. 
D) ​Both firms have an incentive to sell pollution rights.

Question 17

Assume that production of a good imposes external costs on others. The equilibrium price 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 18

The total social costs of production are:

Accepted Answer

A) ​private costs plus private benefits. 
B) ​private benefits minus private costs. 
C) ​private costs plus external costs. 
D) ​private costs minus external costs. 
A) ​private costs plus private benefits. 
B) ​private benefits minus private costs. 
C) ​private costs plus external costs. 
D) ​private costs minus external costs.

Question 19

If education produces positive externalities and the government does not intervene in the market, we would expect

Accepted Answer

A) ​the market equilibrium price to be higher than the efficient equilibrium price. 
B) ​the market equilibrium quantity to be lower than the efficient equilibrium output level. 
C) ​the market equilibrium quantity to be higher than the efficient equilibrium output level. 
D) ​none of the above 
A) ​the market equilibrium price to be higher than the efficient equilibrium price. 
B) ​the market equilibrium quantity to be lower than the efficient equilibrium output level. 
C) ​the market equilibrium quantity to be higher than the efficient equilibrium output level. 
D) ​none of the above

Question 20

When your neighbor's dog barks all night long, this is an example of a negative externality.

Accepted Answer

A) True 
 B)False

Exam 8: Market Failure

Which of the following is a valid reason for the government rather than the market to finance the provision of certain economic goods and services?

A tradable emissions permit program is efficient because the cap protects the environment while:

If quality-detection costs are very low,

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.

The efficient level of pollution is greater

The government can act to internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

An individual insured against a particular cost,

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

The U.S. government establishing a policy that it will bail out troubled financial institutions and a resulting increase in the number of bank failures is an example of:

For society as a whole, the optimal amount of pollution control exists when:

Costs that accrue to the total population are called ____ costs. Costs incurred by the producer or consumer who makes the decision are called ____ costs.

The optimal level of pollution is achieved when:

Which of the following may involve external benefits?

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Technology spillovers:

Factory A can reduce emissions at a cost of $400 per ton. Factory B can reduce emissions at a cost of $100 per ton. In a system in which the government issues transferable pollution right at a price of $200 per ton:

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

The total social costs of production are:

If education produces positive externalities and the government does not intervene in the market, we would expect

When your neighbor's dog barks all night long, this is an example of a negative externality.

The Role and Method of Economics

Eight Powerful Ideas

Scarcity, Trade-Offs, and Production Possibilities

Demand, Supply, and Market Equilibrium

Market 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

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.

Costs that accrue to the total population are called costs. Costs incurred by the producer or consumer who makes the decision are called costs.

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