Economics Private and Public Choice 15th Edition by James D. Gwartney - Test Bank

Economics Private and Public Choice 15th Edition by James D. Gwartney – Test Bank

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Economics Chapter 5—Difficult Cases for the Market and the Role of Government

MULTIPLE CHOICE

Which of the following is the most fundamental function of government?

a.	protection of individuals and their property
b.	imposing progressive taxes to fund income-transfer programs
c.	regulating prices and wages
d.	provision of postal services and garbage collection

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Thinking about the Economic Role of Government

KEY: Bloom’s: Comprehension MSC: Suggested Quiz

Economic efficiency requires that

a.	individuals produce at their maximum level.
b.	only long-lasting, high-quality products be produced without regard to cost.
c.	income be distributed equally among consumers.
d.	all economic activity generating more benefits than costs be undertaken.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

When production of a good generates external costs, the

a.	demand curve for the good will overstate the true social benefits from consumption of the good.
b.	demand curve for the good will understate the true social benefits from consumption of the good.
c.	supply curve for the good will overstate the true social cost of producing the good.
d.	supply curve for the good will understate the true social cost of producing the good.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market allocation will often lead to

a.	an output of the product that exceeds the amount consistent with ideal economic efficiency.
b.	an output of the product that is less than the amount consistent with ideal economic efficiency.
c.	an output of the product that equals the amount consistent with ideal economic efficiency.
d.	product prices that are below the cost of production.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

Competitive markets generally give consumers and producers correct incentives when

a.	externalities are present in the market.
b.	property rights are well-defined and enforced.
c.	the good being produced and consumed is a pure public good.
d.	there is a substantial lack of information on the part of either buyers or sellers.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Thinking about the Economic Role of Government

KEY: Bloom’s: Comprehension MSC: Suggested Quiz

Which of the following correctly describes the external benefit resulting from an individual’s purchase of a winter flu shot?

a.	The flu shot is cheaper than the cost of treatment when you get the flu.
b.	The income of doctors increases when you get the flu shot.
c.	The flu shot reduces the likelihood others will catch the flu.
d.	The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

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

a.	a government-run health care system
b.	the Walt Disney World amusement park
c.	national defense
d.	long-distance telephone service

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

Markets may have difficulty providing the proper quantity of a public good because

a.	individuals will tend to become free riders, and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good.
b.	the good generally has a very large value to consumers relative to its cost of production.
c.	the good is one that tends to benefit a large number of people.
d.	the large profit involved in the production of a public good is generally too much for private firms to effectively pay out to shareholders.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of paper in a competitive market compare with their values under conditions of ideal economic efficiency?

a.	The price will be too high, and the output will be too large.
b.	The price will be too low, and the output will be too large.
c.	The price will be too low, and the output will be too small.
d.	The price will be too high, and the output will be too small.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

Which of the following is a source of information that helps consumers acquire information about the quality of a good or service?

a.	brand names
b.	franchising
c.	consumer ratings magazines
d.	all of the above

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: Suggested Quiz

The idea that an action should be undertaken if and only if the benefits exceed the costs is known as the concept of

a.	economic efficiency.
b.	public welfare maximization.
c.	marginal comparative advantage.
d.	monetary construction of values.

ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Knowledge

When economists say that an activity meets the criterion for economic efficiency, they mean

a.	a majority of citizens favor the activity.
b.	the benefits that result from the activity exceed the costs.
c.	the number of people who gain from the activity exceeds the number on whom costs are imposed.
d.	the costs that result from the activity exceed the benefits.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Comprehension

If an economic action generates more costs than benefits, the action

a.	by definition increases the nation’s economic welfare.
b.	should not be undertaken from an efficiency standpoint.
c.	should be subsidized by the government in order to make sure that it is undertaken.
d.	is desirable from a public welfare standpoint even though many individuals will be harmed.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Application

Because the benefits derived from an activity decline as it is expanded, it is generally

a.	wise to undertake all actions that generate benefits.
b.	efficient to stop well before perfection is achieved.
c.	best to continue as long as it is possible to derive some additional benefits.
d.	unwise to engage in activities for which the benefits decline as you do more of it.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Comprehension

Which of the following best explains why making automobiles completely safe is not efficient?

a.	After some level of safety is reached, making cars even safer will not be worth the additional cost.
b.	Because human life is priceless, automobile safety generally doesn’t matter.
c.	The benefit from additional automobile safety will generally rise as automobiles are made safer, more than offsetting the opportunity cost involved.
d.	Economic efficiency suggests that automobiles should be made as safe as humanly possible.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Comprehension

Economic efficiency indicates that

a.	if something is worth doing, you should do it as well as humanly possible.
b.	all pollution should be eliminated.
c.	automobiles should be made as safe as possible
d.	it nearly always makes sense to stop an activity well before perfection is achieved.

ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Knowledge

There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the

a.	protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets.
b.	redistribution of income from some individuals to others and the waging of war to expand the nation’s territory.
c.	production of postal services and cable television.
d.	taxation of goods that are generally considered immoral or bad and the regulation of large corporations.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: Thinking about the Economic Role of Government KEY: Bloom’s: Comprehension

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the

a.	productive function of government.
b.	protective function of government.
c.	transfer function of government.
d.	illegitimate function of government.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Thinking about the Economic Role of Government

KEY: Bloom’s: Comprehension

Government provision of goods and services that cannot easily be provided through markets because it is difficult to establish a one-to-one link between payment and consumption of the good is referred to as the

a.	productive function of government.
b.	protective function of government.
c.	construction function of government.
d.	income redistribution function of government.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Thinking about the Economic Role of Government

KEY: Bloom’s: Comprehension

Markets fail to allocate resources efficiently when

a.	prices fluctuate.
b.	people who have property rights abuse their privileges.
c.	property rights are poorly enforced or not well established.
d.	the government refuses to intervene in private markets.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

A market transaction causes an externality if someone

a.	directly involved in the transaction receives uncompensated benefits or costs from it.
b.	not directly involved in the transaction receives uncompensated benefits or costs from it.
c.	directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out.
d.	not directly involved in the transaction interferes in it by imposing regulations or product standards.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Many external costs occur because

a.	people do not pay the true cost of using a resource.
b.	people do not pay the private cost of using a resource.
c.	companies do not pay the market price for natural resources.
d.	companies pay more than the true cost of using a resource.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

The key explanation for the prevalence of waterway pollution is

a.	the inclusion in production of all costs involving use of the waterway.
b.	that there are private costs but no costs to society.
c.	that waterways are often an open access, commonly owned resource.
d.	that waterways are subject to the market’s normal control procedures.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Relative to a competitive situation, if a market lacks competition, economic theory suggests that

a.	output will be lower and price higher.
b.	output will be higher and price lower.
c.	both output and price will be higher.
d.	both output and price will be lower.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by

a.	raising price and reducing output.
b.	raising price and expanding output.
c.	lowering price and expanding output.
d.	raising price and leaving output unchanged.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When competitive forces in an industry are weak,

a.	the absence of competition generally leads to overproduction.
b.	prices may exceed the amount consumers are willing to pay.
c.	the operational efficiency of private firms will be enhanced.
d.	higher prices and less than optimal production may result.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

In a market that lacks sufficient competition,

a.	output will generally be less than the output that is ideal from the standpoint of economic efficiency.
b.	output will generally be greater than the output that is ideal from the standpoint of economic efficiency.
c.	price will generally be less than the price that would result if the market was competitive.
d.	profit rates will generally be so low that government subsidies will be necessary to ensure that the firms remain in business.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Sellers have a strong incentive to lobby government for legal restrictions that would reduce the intensity of competition in their market because

a.	the firms wish to be more efficient than competition will permit.
b.	competition tends to result in lower prices and lower profits.
c.	legal restrictions that lessen competition in a market generally benefit consumers.
d.	the firms fear that intense competition will lead to higher profits that will attract additional rivals into the market.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

The spillover effects of actions that affect the well-being of nonconsenting third parties are called

a.	side components.
b.	externalities.
c.	free riders.
d.	internalizations.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

When externalities are present,

a.	suppliers will refuse to produce desired goods and services.
b.	this indicates that property rights are well-defined and enforced.
c.	competitive market outcomes may be inconsistent with ideal economic efficiency.
d.	competitive markets will generally achieve ideal economic efficiency.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

Externalities cause the market mechanism to allocate goods and resources inefficiently because

a.	nonconsenting third parties are generally not hurt by externalities.
b.	producers and consumers ignore signals given by the competitive market.
c.	prices are always higher than they should be.
d.	competitive markets fail to give producers and consumers correct price signals.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Externalities are fundamentally the result of

a.	the absence of competition in a market.
b.	the lack of well-defined or enforced property rights.
c.	poor information on the part of consumers.
d.	the presence of significant comparative advantages in production.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If pollutants emitted by firms in the steel industry increase, but there is no increase in the costs borne by these firms, you could conclude that

a.	pollution is not a serious problem in this industry.
b.	the consumers of steel are unwilling to bear the costs of pollution generated from steel production.
c.	pollution is an externality in this market, since producers and purchasers of steel do not bear the full costs of the pollution.
d.	pollution creates an external benefit rather than an external cost in this case.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

a.	The equilibrium quantity of MBAs will equal the efficient quantity of MBAs.
b.	The equilibrium quantity of MBAs will be greater than the efficient quantity of MBAs.
c.	The equilibrium quantity of MBAs will be less than the efficient quantity of MBAs.
d.	The tuition paid by the student would be exceed the efficient amount.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the

a.	firm’s cost of producing electricity will be higher than the community’s true opportunity cost.
b.	firm will tend to produce too little electricity from the viewpoint of economic efficiency.
c.	community generally receives an external benefit from the production of electricity.
d.	firm’s cost of producing electricity will be lower than the community’s true opportunity cost.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

If production of a good creates external benefits, a competitive market will likely produce

a.	less output than would maximize profit.
b.	more output than would maximize profit.
c.	less output than is efficient.
d.	more output than is efficient.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When a firm generates external benefits, a more efficient outcome would result if

a.	the firm produced a larger output level.
b.	the firm reduced its output level.
c.	a tax were levied on the firm equal to the dollar amount of the externalities.
d.	price were fixed below the firm’s per-unit cost.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If in market equilibrium the true marginal cost of producing a good exceeds the marginal cost incurred by the firm,

a.	not enough of the product is being produced.
b.	the price charged for the good is too high.
c.	the good produces a positive externality.
d.	the good produces a negative externality.
e.	the government should produce the good.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Markets fail when externalities are present

a.	because all of the costs and benefits of producing a good are reflected in the market price.
b.	because some of the costs and benefits of producing a good are not reflected in the market price.
c.	only if they are negative; positive externalities are not market failures.
d.	because profits are not maximized.
e.	if the positive externalities are less than the negative externalities.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

A government passes a new law allowing only 1,000 tons of pollution per day to be generated and simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the following is true?

a.	The pollution will be created by those least willing and able to pay the damages.
b.	The pollution will be created by those most willing and able to pay for the right to pollute.
c.	The funds collected by the government will be enough to compensate any individuals harmed by the pollution.
d.	Pollution will increase from zero to 1,000 units per day.
e.	There will be no incentive for polluters to try to sneak emissions past government monitoring devices.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Potential Shortcomings of the Market

KEY: Bloom’s: Comprehension

If consumption of education creates an external benefit, then in order to increase efficiency relative to the outcome determined by private decisions,

a.	more education must be produced.
b.	the same amount of education must be produced, and the price should be lower.
c.	less education must be produced, and the price should be higher.
d.	less education must be produced, and the price should be lower.
e.	less education must be produced at the same price.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If education creates external benefits,

a.	actual market outcomes provide less than the efficient quantity of education.
b.	actual market outcomes provide more than the efficient quantity of education.
c.	actual market outcomes provide a higher price than the efficient price of education.
d.	the government should impose a depletion tax.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When production of a good provides external benefits, there will be

a.	too few resources devoted to its production.
b.	too many resources devoted to its production.
c.	the optimal amount of resources devoted to its production.
d.	abnormally high profits earned by producers of the good.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

As a general rule, if pollution costs are external, firms will produce

a.	too little of a polluting good.
b.	too much of a polluting good.
c.	an optimal amount of a polluting good.
d.	cannot be determined without additional information.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If government taxes a firm which pollutes this will

a.	increase the demand for the good produced.
b.	decrease the supply of the good produced.
c.	increase the equilibrium quantity of the good produced in the market.
d.	decrease the equilibrium price of the good produced in the market.
e.	all of the above.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Potential Shortcomings of the Market

KEY: Bloom’s: Comprehension

Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $18 and market output of 400 units. How does this outcome compare to the efficient, ideal equilibrium?

a.	The efficient price would higher than $18 while the efficient output would be less than 400 units.
b.	The efficient price would be higher than $18 while the efficient output would be greater than 400 units.
c.	The efficient price would be lower than $18 while the efficient output would be less than 400 units.
d.	The efficient price would be lower than $18 while the efficient output would be greater than 400 units.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose the actions of the producers of a good generate an external benefit which results in the actual market price of $30 and market output of 220 units. How does this outcome compare to the efficient, ideal equilibrium?

a.	The efficient price would higher than $30 while the efficient output would be less than 220 units.
b.	The efficient price would be higher than $30 while the efficient output would be greater than 220 units.
c.	The efficient price would be lower than $30 while the efficient output would be less than 220 units.
d.	The efficient price would be lower than $30 while the efficient output would be greater than 220 units.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Consider two goods – one that generates external benefits and another that generates external costs. The actual market outcome would

a.	result in a price that is lower than the efficient price for both goods.
b.	result in a price that is higher than the efficient price for both goods.
c.	result in a price that is lower than the efficient price for the good with an external benefit and a price that is higher than the efficient price for the good with an external cost.
d.	result in a price that is higher than the efficient price for the good with an external benefit and a price that is lower than the efficient price for the good with an external cost.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose external costs are present in a market which results in the actual market price of $24 and market output of 325 units. How does this outcome compare to the efficient, ideal equilibrium?

a.	The efficient outcome would be greater than 325 units.
b.	The efficient outcome would be less than 325 units.
c.	The efficient outcome would also be 325 units.
d.	The efficient price would be less than $24.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose external benefits are present in a market which results in the actual market price of $14 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

a.	The efficient outcome would be greater than 150 units.
b.	The efficient outcome would be less than 150 units.
c.	The efficient outcome would also be 150 units.
d.	The efficient price would be less than $14.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Potential Shortcomings of the Market

KEY: Bloom’s: Comprehension

Consider two goods–one that generates external costs and another that generates external benefits. The actual market outcome would

a.	result in output that is lower than the efficient output for both goods.
b.	result in output that is higher than the efficient output for both goods.
c.	result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.
d.	result in output that is higher than the efficient output for the good with an external benefit and output that is lower than the efficient output for the good with an external cost.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose external costs are present in a market which results in the actual market price of $70 and market output of 150 units. How does this outcome compare to the efficient, ideal equilibrium?

a.	The efficient price would be higher than $70.
b.	The efficient price would be lower than $70.
c.	The efficient price would also be $70.
d.	The efficient output would be greater than 150 units.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose external benefits are present in a market which results in the actual market price of $49 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

a.	The efficient price would be higher than $49.
b.	The efficient price would be lower than $49.
c.	The efficient price would also be $49.
d.	The efficient output would be less than 800 units.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When external costs are present in a market,

a.	less of the good will be produced than the amount consistent with economic efficiency.
b.	more of the good will be produced than the amount consistent with economic efficiency.
c.	the amount of the good produced will be equal to the amount consistent with economic efficiency.
d.	corresponding external benefits are always generated.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

In a competitive market, if the production process involves an external cost, such as pollution of the environment, the market will

a.	produce the economically efficient outcome.
b.	result in a market price that is higher than the efficient one.
c.	register a price that is lower than the efficient one.
d.	result in too little of the good being produced compared to the ideal efficient outcome.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?

a.	The price would be too low, and the output would be too large.
b.	The price would be too high, and the output would be too large.
c.	The price would be too low, and the output would be too small.
d.	The price would be too high, and the output would be too small.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When external benefits are present in a market,

a.	less of the good will be produced than the amount consistent with economic efficiency.
b.	more of the good will be produced than the amount consistent with economic efficiency.
c.	the amount of the good produced will be equal to the amount consistent with economic efficiency.
d.	corresponding external costs are always generated.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

In a competitive market, if the production process involves an external benefit, the market will

a.	produce the economically efficient outcome.
b.	result in a market price that is higher than the efficient one.
c.	result in a market price that is lower than the efficient one.
d.	result in too much of the good being produced compared to the ideal efficient outcome.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Consider two goods–one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce

a.	too much of both goods.
b.	too little of both goods.
c.	too much of the good that generates external benefits and too little of the good that generates external costs.
d.	too little of the good that generates external benefits and too much of the good that generates external costs.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Potential Shortcomings of the Market

KEY: Bloom’s: Comprehension

A good is considered to be a public good if it

a.	is a good produced by the government sector.
b.	is both nonrival-in-consumption and nonexcludable.
c.	benefits only a small group of consumers but is very costly to produce.
d.	is a good whose production is financed by tax revenue.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

Students in a class are assigned to groups to work on a project. A grade will be given for each project, and everyone in the group will receive that grade. For the members of a particular group, the grade is a

a.	external benefit.
b.	public good.
c.	external cost.
d.	repeat purchase item.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

What are the two distinguishing characteristics of a public good?

a.	nonrivalry in consumption and nonexcludability
b.	indivisibility in production and excludability of nonpaying customers
c.	provision by government and funding through taxation
d.	mass production and comparative advantage

ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

A good that is both nonexcludable and nonrival-in-consumption is called a

a.	common good.
b.	external good.
c.	public good.
d.	private good.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a

a.	public good.
b.	joint good.
c.	excludable good.
d.	national good.

ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

A good is considered nonrival-in-consumption if

a.	many individuals can share in the consumption of the same unit of the good.
b.	the consumption of the good by one individual lowers the amount available for others.
c.	even nonpaying customers can receive the full benefit from the good.
d.	its production is financed through tax revenue rather than market prices.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

A free-rider problem exists when a good that has the following characteristic?

a.	Rivalry in consumption.
b.	Elastic demand.
c.	Inelastic demand.
d.	Nonexcludable.

ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

Because of the free-rider problem,

a.	competitive markets will tend to undersupply public goods.
b.	the federal government spends too much on national defense.
c.	fireworks displays have become increasingly dangerous.
d.	poverty has increased.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

When the free-rider problem exists,

a.	the market will devote too few resources to the production of the good.
b.	the cost of the good will always be more than the benefit of the good.
c.	the good will not be produced.
d.	entrepreneurs will eventually find a way to make free-riders pay their share.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

The government sometimes provides public goods because

a.	private markets are incapable of producing public goods.
b.	free-riders make it difficult for private markets to supply the efficient quantity.
c.	markets are always better off with some government oversight.
d.	external benefits will accrue to private producers.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

The government sometimes provides public goods because

a.	private markets would not produce any of the goods.
b.	private markets would not produce the efficient quantity of the goods.
c.	private markets would charge too high a price for the goods.
d.	the government produces public goods more efficiently than private markets can.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be

a.	durable.
b.	nonrival-in-consumption.
c.	a common good.
d.	a natural resource.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

How does an additional individual’s consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers?

a.	The amount available to others will decline.
b.	The amount available to others will increase.
c.	The amount available to others is unaffected.
d.	The amount available to others is eliminated.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

A good is considered nonexcludable if

a.	many individuals can share in the consumption of the same unit of the good.
b.	the consumption of the good by one individual lowers the amount available for others.
c.	it is impossible or very costly to exclude nonpaying customers from receiving the good.
d.	its production is financed through tax revenue rather than market prices.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

If it is impossible or very costly to exclude nonpaying customers from receiving a good, the good is considered to be

a.	freeware.
b.	nonexcludable.
c.	a common good.
d.	a receiving good.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

When a good is nonexcludable,

a.	it is impossible or very costly to exclude nonpaying customers from receiving the good.
b.	individuals will have an incentive to become free riders.
c.	it will be difficult for a private firm producing the good to generate revenue sufficient to cover the cost of production.
d.	all of the above are true.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

People who receive the benefit of a good without contributing to its costs of production are called

a.	contributors in kind.
b.	free riders.
c.	frequent flyers.
d.	cost maximizers.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

In economics, a free rider is the term used for a person who

a.	receives the benefit of a good without contributing to its costs of production.
b.	purchases an item during a “buy one, get one free” sale.
c.	lives in a town in which the city provides free bus service.
d.	pays for exactly what they receive.

ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

A college has found that during every home football game, a group of students sits on a hillside next to the stadium and watches the game without purchasing tickets. In economics, the problem that this college is facing is referred to as a

a.	common good problem.
b.	free rider problem.
c.	onlooker problem.
d.	deadweight loss problem.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Which of the following about public goods is true?

a.	Consumption of a public good by one individual reduces the availability of the good for others.
b.	It is extremely difficult to limit the benefits of a public good to only the people who pay for it.
c.	Public goods are free to a society when they are produced by the government.
d.	From an efficiency standpoint, a market will generally supply too much of a public good.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

From the standpoint of economic efficiency, markets tend to provide

a.	less of a public good than would be efficient.
b.	more of a public good than would be efficient.
c.	exactly the amount of a public good that is efficient.
d.	none of the above.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

A market is unlikely to provide an efficient quantity of public goods because

a.	only the government has the vast resources necessary to produce public goods.
b.	the nature of public goods makes it difficult for producers to withhold them from nonpaying consumers.
c.	the technology involved in the production of public goods makes it difficult for private firms to produce them even though they could be produced efficiently.
d.	private production of public goods generally results in a large amount of profit, which is difficult for a firm to effectively pay out to shareholders.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

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

a.	When the government provides economic goods, they are free; costs are only incurred when such goods are provided by private firms.
b.	Voters tend to be better informed than market consumers.
c.	Decision makers in the market are motivated by self-interest, whereas, political decision makers are primarily motivated by 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, while the government can use taxes to overcome this problem.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Potential Shortcomings of the Market

KEY: Bloom’s: Comprehension

A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should

a.	always gather all available information about prices.
b.	gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it.
c.	gather information about prices only if it can be gathered without cost.
d.	ignore information about prices because it is irrelevant to making an “optimally imperfect” decision.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Sellers will tend to be most concerned with customer satisfaction when

a.	it is difficult for the customer to evaluate product quality.
b.	they depend on repeat customers for most of their business.
c.	they sell primarily to tourists.
d.	they are a monopoly protected from competition by government licensing.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Which of the following statements is true regarding potential information problems faced by consumers?

a.	Sellers have little incentive to inform customers about their products.
b.	The market provides consumers with a strong incentive to acquire information.
c.	Information problems tend to be most problematic for items consumers purchase regularly.
d.	In markets, people make all decisions with full information.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Which of the following most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers?

a.	The franchiser has a monopoly on the sale of products in his industry.
b.	If quality is not maintained, the franchiser will be limited in his ability to sell other franchises and collect franchise fees.
c.	If quality is not maintained, the government will prohibit future sales of the franchises.
d.	Franchisers do not gain financially by maintaining quality, but they generally maintain quality anyway because they are consumers as well as producers.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When consumers cannot tell the difference at the time of sale between high-quality products and those with defects, strong sales of the low-quality products will tend to depress price and drive the high-quality products from the market. Economists call this

a.	the curse of advertising.
b.	the imperfect information problem.
c.	the brand name problem.
d.	an open-access resource.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Manny’s Bar-n-Grill is next door to a franchised fast-food restaurant near a busy freeway exit. Essentially, the menus, food quality, atmosphere, and service are equal at the two restaurants. Nevertheless, the nationally franchised restaurant can attract more customers, even though its prices are higher. This situation

a.	indicates that people are irrational because it never makes sense to pay a higher price when a product is cheaper elsewhere.
b.	is one in which the national franchise provides uninformed consumers with valuable information that reduces their risk of being unsatisfied with the purchase.
c.	reflects the greater elasticity of supply for food at Manny’s Bar-n-Grill relative to the nationally franchised restaurant.
d.	is inconsistent with the basic postulates that underlie the economic way of thinking.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

Market failure will most likely arise from poor information when the product is

a.	a repeat-purchase item.
b.	easily evaluated on inspection.
c.	often purchased from the same seller.
d.	unlikely to be purchased from the same seller in the future.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

An item purchased often by the same buyer is known as a

a.	frequent transaction good.
b.	repeat-purchase item.
c.	free rider good.
d.	public good.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

Brand names such as “Coca Cola” or “Nike”

a.	raise the cost of goods because they require advertising to make consumers aware of the brand name and, therefore, generally increase the price of products to consumers without producing any benefit to them.
b.	generally convey little information about a product to consumers.
c.	benefit consumers by assuring them of a known quality level when they buy a product that they have little previous first-hand knowledge about.
d.	provide the most value to consumers for goods that are repeat-purchase items.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

When market failure is present,

a.	democratic political decision-making can be counted on to improve the efficiency of resource allocation.
b.	market allocation will achieve idealized economic efficiency.
c.	the conditions implied by idealized efficient allocation of resources will be absent, but it does not follow that political action will improve the situation.
d.	democratic political decision-making will never be able to improve the efficiency of resource allocation.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: Market and Government Failure KEY: Bloom’s: Comprehension

A sound legal system that protects individuals and their property,

a.	cannot be expected until markets are already working well.
b.	is vital to the smooth operation of markets.
c.	is normally found in most economies of the world.
d.	is helpful for the rich, but harmful to the economic well-being of others.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Market and Government Failure

KEY: Bloom’s: Comprehension

When there is reason to think that the existing structure of incentives will cause individuals in the market to act in ways that are inconsistent with ideal economic efficiency, economists say that

a.	market failure is present.
b.	democratic political decision-making will lead to the ideal efficient outcome.
c.	government action, however well intended, cannot improve the situation.
d.	government failure is present.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: Market and Government Failure KEY: Bloom’s: Comprehension

The economic way of thinking indicates that government action will

a.	never improve on the allocation of resources through markets.
b.	always improve on the results of markets if the political process is democratic.
c.	reflect the actions of political decision-makers seeking to advance the public interest, rather than their own personal interests.
d.	can either improve the well-being of the general public, or harm it, depending on the circumstances.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Market and Government Failure

KEY: Bloom’s: Comprehension

“Government failure” exists when political decision-makers choose actions that

a.	seek efficient outcomes rather than fair outcomes.
b.	seek fair outcomes rather than efficient outcomes.
c.	conflict with efficient allocation of resources.
d.	conflict with the outcome favored by the majority of voters.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Market and Government Failure

KEY: Bloom’s: Comprehension

“Government failure” is present when

a.	constitutional restrictions block government action that is favored by the majority of voters.
b.	political decision-makers try to serve the general public rather than their personal interest.
c.	the structure of incentives encourages political decision-makers to undertake actions that conflict with the efficient allocation of resources.
d.	the political decision-makers are motivated by something other than good intentions; if they have good intentions, political action will allocate resources efficiently.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Market and Government Failure

KEY: Bloom’s: Comprehension

Figure 5-1

In Figure 5-1, S₁ and D illustrate the demand and supply for a product if it were produced in a normal competitive market. Which of the following would be true if the firms in the industry were instead able to get government licensing restrictions to limit competition in the market?

a.	The restricted market supply would be S₃, resulting in a lower price and a higher than efficient level of output.
b.	The restricted market supply would be S₃, resulting in a higher price and a less than efficient level of output.
c.	The restricted market supply would be S₂, resulting in a lower price and a higher than efficient level of output.
d.	The restricted market supply would be S₂, resulting in a higher price and a less than efficient level of output.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Use the figure below to answer the following question(s).

Figure 5-2

Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

a.	Relative to economic efficiency, output of the good will be too large and the price too low.
b.	Relative to economic efficiency, output of the good will be too large and the price too high.
c.	Relative to economic efficiency, output of the good will be too small and the price too low.
d.	Relative to economic efficiency, output of the good will be too small and the price too high.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Figure 5-2 illustrates the market for a product that generates an external cost. S₁ is the private market supply curve, while S₂ is the supply curve including the external cost. Which of the following is true?

a.	Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency.
b.	Point b illustrates the competitive private market outcome, while point a illustrates the outcome consistent with economic efficiency.
c.	The competitive private market outcome is consistent with the conditions for economic efficiency.
d.	The good will tend to be undersupplied relative to the conditions for economic efficiency.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Use the figure below to answer the following question(s).

Figure 5-3

Figure 5-3 illustrates the market for a product that generates an external benefit. D₁ is the private market demand curve, while D₂ is the demand curve including the external benefit. Which of the following is true?

a.	Relative to economic efficiency, output of the good will be too large and the price too low.
b.	Relative to economic efficiency, output of the good will be too large and the price too high.
c.	Relative to economic efficiency, output of the good will be too small and the price too low.
d.	Relative to economic efficiency, output of the good will be too small and the price too high.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Figure 5-3 illustrates the market for a product that generates an external benefit. D₁ is the private market demand curve, while D₂ is the demand curve including the external benefit. Which of the following is true?

a.	Point a illustrates the competitive private market outcome, while point b illustrates the outcome consistent with economic efficiency.
b.	Point b illustrates the competitive private market outcome, while point a illustrates the outcome consistent with economic efficiency.
c.	The competitive private market outcome is consistent with the conditions for economic efficiency.
d.	The good will tend to be oversupplied relative to the conditions for economic efficiency.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Figure 5-4

Refer to Figure 5-4. The figure illustrates an industry that generates

a.	external benefits.
b.	external costs.
c.	no externalities.
d.	economies of scale.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Refer to Figure 5-4. The inefficient equilibrium price and quantity are

a.	$1.90 and 38 units, respectively.
b.	$1.80 and 35 units, respectively.
c.	$1.60 and 42 units, respectively.
d.	$1.35 and 58 units, respectively.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Refer to Figure 5-4. The efficient price and quantity are

a.	$1.90 and 38 units, respectively.
b.	$1.80 and 35 units, respectively.
c.	$1.60 and 42 units, respectively.
d.	$1.35 and 58 units, respectively.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Refer to Figure 5-4. If the government uses a pollution tax, how much of a tax must be imposed on each unit of production?

a.	$1.90
b.	$1.80
c.	$1.60
d.	$0.30

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Application

MSC: Graphics Questions

Which of the following best explains why making air travel completely safe is not efficient?

a.	After some level of safety is reached, making airplanes even safer is not worth the opportunity cost that would be incurred.
b.	Because one can’t put a price on human life, airplane safety generally doesn’t matter economically.
c.	The benefit from additional airplane safety will generally rise as airplanes are made safer, more than offsetting the opportunity cost involved.
d.	The question is misleading–making airplanes safer is always efficient.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Application

MSC: On-line Practice

Which of the following is most consistent with the idea that if it’s worth doing, it’s worth doing imperfectly?

a.	When Mia cleaned her apartment, she didn’t clean under the refrigerator.
b.	Mason is so disorganized that he spends 15 minutes every day trying to find his glasses.
c.	The senator stated, “No price is too high to save a life!”
d.	Ford’s new policy is to make every car completely safe.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Comprehension

MSC: On-line Practice

Which of the following would be a protective function of government?

a.	legal enforcement of contracts and rules against fraud
b.	undertaking income redistribution
c.	providing national parks
d.	providing a stable monetary system

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Thinking about the Economic Role of Government

KEY: Bloom’s: Comprehension MSC: On-line Practice

As more and more resources are dedicated to an activity

a.	the benefits will increase proportionately.
b.	the benefits will become smaller and smaller while the costs will rise.
c.	the demand for that activity will increase.
d.	the costs will be offset by the benefits received from the activity.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Comprehension

MSC: On-line Practice

The standard economists use to assess whether an activity should be undertaken is

a.	majority vote
b.	the marginal benefit assessment.
c.	the gold standard
d.	economic efficiency.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Comprehension

MSC: On-line Practice

Because the benefits derived from an activity decline as it is expanded, it is generally wise to

a.	undertake all actions that generate benefits.
b.	expend the smallest possible amount of resources on this type of activity.
c.	avoid any activity with this characteristic.
d.	stop the activity before perfection is reached..

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: If It’s Worth Doing, It’s Worth Doing Imperfectly KEY: Bloom’s: Comprehension

MSC: On-line Practice

Which of the following is a true statement regarding why the government produces public goods?

a.	Public goods are valued highly by some but not by the majority.
b.	Because of the electoral system, the public sector tends towards producing those goods that help politicians get elected.
c.	Some goods should be produced whether they are economically efficient or not.
d.	Because it is difficult to exclude those who do not pay for public goods.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Potential Shortcomings of the Market

KEY: Bloom’s: Comprehension MSC: On-line Practice

Suppose that the producers of copper are permitted to emit harmful pollutants, free of charge, into the air. How will the price and output of copper products in a competitive market compare with their values under conditions of ideal economic efficiency?

a.	The price will be too high, and the output will be too large.
b.	The price will be too low, and the output will be too large.
c.	The price will be too low, and the output will be too small.
d.	The price will be too high, and the output will be too small.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: On-line Practice

Which of the following provides an example of an externality?

a.	a paper pulp mill releasing pollution into the atmosphere
b.	persons driving during a busy rush hour
c.	a drunk driver operating a car on a public highway
d.	all of the above

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: On-line Practice

Which of the following provides the best example of a public good?

a.	elementary and secondary education
b.	residential trash pickups provided by a local government
c.	an unscrambled television signal
d.	the medical services provided by a local hospital

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: On-line Practice

Which of the following is true of public goods?

a.	They can only be supplied by the government.
b.	They will tend to be supplied efficiently by the private sector when markets are competitive.
c.	It is difficult to establish a one-to-one link between payment and receipt of such goods.
d.	From an efficiency standpoint, private markets will tend to supply an excessively large amount of public goods.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: On-line Practice

Markets provide the efficient amount of a good or service when

a.	externalities are present.
b.	monopoly exists.
c.	public goods are present.
d.	competition is present and externalities and public goods are absent.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Comprehension

MSC: On-line Practice

The “free rider problem” occurs in connection with

a.	private goods.
b.	both public and private goods.
c.	goods that are not scarce.
d.	public goods.

ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Knowledge

MSC: On-line Practice

If the construction of a new elementary school would create $5 million worth of benefits for citizens and cost $7 million to construct, then using the criterion of economic efficiency, the school

a.	should be built.
b.	should not be built.
c.	results in a substantial improvement to the welfare of society.
d.	should be built if it passes by a majority vote.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Comprehension

MSC: On-line Practice

ESSAY

National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

ANS:

Perhaps. Beaches, parks, and public swimming pools all can become overcrowded. It is also possible to exclude (though it may be costly) nonpayers from most public goods, for example, highways. One example that comes close to national defense, however, is produced in the private sector. A radio broadcast never becomes congested, and once it is produced, it is virtually impossible to prevent anyone from consuming it.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Analysis

MSC: Critical Thinking

After spending $400,000 to build your dream home, you recently discovered that after less than one year the foundation is cracking. Further investigation reveals that the contractor used substandard concrete. Is there a role for the public sector in this situation?

ANS:

There would certainly appear to be since this would come under the source of market failure known as “poor information.” First, the public sector has established standards for foundation concrete. Since you discovered these violations after the house was built, the public sector offers laws and a court system for you to recover your losses. Also, if this contractor habitually engages in such activities, the public sector has the power to put him out of business, to protect potential future dream home owners.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

How does the text define economic efficiency? Is this an absolute or a relative definition? Would another type of definition be preferable? Why or why not?

ANS:

The text defines economic efficiency contextually, for example, within the context of a particular state of affairs. It is efficient to undertake activities that generate additional benefits in excess of costs. Similarly, it is inefficient if an action generates costs that exceed benefits. This relative definition is acceptable. Since economic thinking is marginal thinking, efficiency always must be defined in relative terms. An absolute definition does not appear possible.

PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: A Closer Look at Economic Efficiency KEY: Bloom’s: Analysis

MSC: Critical Thinking

Sam lives next to The Party Pub and its outdoor “beer garden” that features live music. An economics major, Sam considers this a positive externality. Dave, another economics student, lives next to The Party Pub too, but he considers the music a negative externality. Which student, if either, is correct? Why?

ANS:

Both students are correct if they are accurately stating their preferences. Sam must enjoy live music. He can sit in his yard and enjoy these benefits without having to pay a cover charge. Dave, on the other hand, thinks the music a nuisance. It imposes a cost on him since he obviously values a quieter environment.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

Is your economics textbook a public or private good? If you conclude that it is a private good, why do we have copyright laws?

ANS:

To a student, the book seems close to a pure private good–once purchased, the owner has complete excludability. The public goods problem arises over the author’s rights. Without copyright laws, he cannot prevent others from copying the book and selling the copies. Information in the book has the characteristic of nonrivalry-in-consumption, and even with copyright laws, it is difficult to prevent those who do not pay the author from consuming information.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

Is education a public good? Focus on whether it meets the two criteria for being a public good.

ANS:

First, consider the nonrivalry-in-consumption characteristics. You may be in an economics class at a large university with several hundred students consuming the same lecture. Is this equivalent to a class with 30 students in which you get the same benefits? Perhaps, but what if we consider a class with several hundred first-graders. Would we expect the same learning to occur as in a smaller class? Education has some nonrivalry-in-consumption characteristics, but these appear limited, especially at lower educational levels. Is it difficult or costly to exclude nonpayers? Even if you attend a large university, nonpayers are still effectively excluded from transcripts and degrees, the benefits most students seek. At lower educational levels, exclusion could be as simple as a guard at the door.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

Why is a stable monetary system essential for the smooth operation of a market system? What would an unstable monetary system be like? Why isn’t a barter economy just as efficient as an economy with money?

ANS:

A stable monetary system allows us to exchange currency for the goods and services we desire. We also accept currency knowing it will retain its value, and we can, therefore, use it at a later date. In an unstable system, currency loses its value rapidly (due to rising prices). People would be unwilling to accept the currency or would only want to hold it for very short periods. A barter economy, where goods are exchanged for goods, is less efficient because it is predicated on a coincidence of wants. I have to want the good you are offering, and you have to want what I have. Also, if what I have is perishable (for instance, bread), I will have to trade quickly for goods I do not necessarily need at the time. Because of inefficiency, barter economies evolve into money economies where certain goods, such as gold, become the medium of exchange.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: Thinking about the Economic Role of Government

KEY: Bloom’s: Analysis MSC: Critical Thinking

A hilly, public golf course is often used by sledders in the winter. One of the sledders was quoted as saying, “This is public property, so we have just as much a right to be on these hills as anyone else. Besides, when it snows, golfers can’t use the course anyway. Sledding doesn’t harm anything.” Is he correct? Why or why not?

ANS:

Sledding can inflict external costs to golf courses. First, it damages the course as runners from the sled dig into the ground and destroy the frozen grass underneath. Second, sledders often build bonfires on the course to stay warm, further damaging the course. Third, sledders often leave trash behind, and this is quite evident when the snow thaws. While none of these factors absolutely will occur, experience suggests they are quite prevalent.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

Anne has just purchased a new house in a lovely neighborhood. Her neighbors are friendly and even brought her house-warming gifts. Anne, however, has a problem. Her neighbors have cats, and Anne hates cats. Even though the city has a law requiring all outdoor pets to be on a leash, her neighbors ignore it, and the cats roam all over Anne’s property. How would an economist describe this situation? Is there anything Anne can do?

ANS:

An economist would say negative externalities are present if the neighbors’ cats are imposing an external cost on Anne. She could report the lawbreakers to the police, and have Animal Control round up the cats, but this wouldn’t be very neighborly. Her best bet might be to get together with her neighbors and negotiate a compromise. Since they are the only two parties to this problem, they have a good chance of working out a mutually acceptable agreement.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

Sparkle-Bright toothpaste is a new product that advertises it will give you fresh breath and shiny, white teeth. You buy a tube for $1.99, and after brushing, you have both bad breath and dull teeth. Is there a role for the public sector in this situation?

ANS:

The market should be able to handle the manufacturers of Sparkle-Bright with little difficulty. You, and perhaps other consumers, were lured into purchasing the initial tube of Sparkle-Bright, but none of you will likely buy the second tube. Since toothpaste sellers depend on repeat purchases, it is unlikely that Sparkle-Bright will be in business long.

PTS: 1 DIF: Challenging NAT: BUSPROG: Analytic

STA: DISC: Markets, market failure, and externalities

TOP: The Potential Shortcomings of the Market KEY: Bloom’s: Analysis

MSC: Critical Thinking

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