Econ Exam 2
What is free riding?
Free riding is benefiting from a good without paying for it.
Which of the following is an example of rent seeking behavior?
U.S. sugar firms convinced Congress to impose a quota on imports of sugar.
When are we likely to see private solutions to the problem of externalities?
When transaction costs are low. and When the parties involved have information about the externality. and When the number of parties involved is small.
The term tax incidence refers to
the actual division of the burden of a tax between buyers and sellers in a market.
Tax incidence indicates
the actual division of the burden of a tax.
Economic efficiency in a free market occurs when
the sum of consumer surplus and producer surplus is maximized.
Which of the following is the average tax rate?
the total tax paid divided by total income
A price ceiling refers to
the upper limit on the price of a good
A monopoly is characterized by all of the following except
there are only a few sellers, each selling a unique product.
Both presidents Kennedy and Reagan proposed significant cuts in income taxes because
they believed that the tax cuts would enhance economic efficiency.
A producer or a consumer will internalize an externality because
they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.
The lawsuit the Justice Department brought against Apple regarding the pricing of eminus−books for its iPad is an example of attempts by the government
to keep firms from artificially restricting competition to raise prices.
The presence of a positive externality in a market leads to ________.
underproduction of the good
A merger between U.S. Steel and General Motors would be an example of a
vertical merger.
What kind of good? Education in a public school (Grades K through 12):
A common resource
What kind of good? An apple:
A private good
What kind of good? Education in a private school (Grades K through 12):
A private good
What kind of good? Mail delivery:
A private good
What kind of good? A television broadcast of the World Series:
A public good
What kind of good? Hiking in a large park (no congestion) not surrounded by a fence:
A public good
What are Normative Statements?
A value judgement is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence
What kind of good? Hiking in a large park (no congestion) surrounded by a fence:
A quasi-public good
Which of the following best describes the process of regulatory capture?
Bank of America encourages the FDIC-Federal Deposit Insurance Corporation- to make banks with less than $50 million of deposits pay a higher percentage into the insurance fund "for the protection of consumers."
Which of the following statements is false about rent seeking?
Because rent seeking redistributes society's resources, anyone engaging in such behavior is violating the law.
How does a free market eliminate a shortage?
By letting the price rise
________ are highly excludable but non-rival in consumption.
Club goods
Another crucial principle [of tax incidence] is that only people can pay taxes. Businesses and other artificial entities cannot pay taxes. true or not?
Correct. The tax is borne by the workers in the form of lower wages, the customers in the form of higher prices, and the shareholders in the form of lower returns.
Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?
Deadweight loss will increase
Which of the following is true?
If production of a good gives rise to a negative externality, it can be internalized by taxing the producers of the good.
What is regulatory capture?
It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest.
What is meant by the term "rational ignorance"?
It means the lack an economic incentive for voters to become informed about a pending legislation.
Do the people who are legally required to pay a tax always bear the burden of the tax?
No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.
Ordinarily, governments attempt to promote competition in markets. Why do governments use patents to block entry into some markets when this prohibits competition?
Patents encourage firms to spend money on research necessary to create new products.
Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity?
Positive externality
What are positive statements?
Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence.
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage
When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?
Quantity demanded
Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?
Quantity demanded will decrease, quantity supplied will increase, and a surplus will result
What is the focus of a command-and-control approach to reducing pollution?
The government imposing quantitative limits on the amount of pollution firms are allowed to generate.
Which is more important in determining the impact of the tax system on economic behavior?
The marginal tax rate.
Which of the following tax rates has the greatest effect on people's willingness to work, save, and invest?
The marginal tax rate.
Arnold Harberger was the first economist to estimate the loss of economic efficiency due to market power. Since Harberger's findings were published, other researchers have studied this same issue. How do the results of these researchers compare to Harberger's results?
The other researchers reached conclusions similar to Harberger's; namely, the loss of economic efficiency due to market power is about 1 percent of the value of production in the United States.
Which of the following leads to the tragedy of the commons?
The use of common pool resources above the socially optimal level
Why do most economists favor tradable emissions allowances to the command-and-control approach to pollution?
Tradable emissions allowances eliminate pollution at lower cost than the command-and-control approach.
Is there an economically efficient amount of crime?
Yes. The economically efficient amount of crime is where the marginal social benefit equals the marginal social cost.
Rent control is an example
a price ceilin
Which term refers to a legally established minimum price that firms may charge?
a price floor
A Pigovian tax is
a tax to bring about an efficient level of output in the presence of externalities.
The Coase Theorem states that
if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
The Coase Theorem suggests that:
if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
private bargaining will tend to be limited when:
all parties are not willing to accept a reasonable solution
Collusion is
an agreement among firms to charge the same price or otherwise not to compete.
The public choice model
applies economic analysis to government decision making.
Some individuals seek to use government action to make themselves better off at the expense of others. The actions of these individuals
are examples of rent seeking.
According to public choice theory, policymakers
are likely to pursue their own selfminus−interest, even if their selfminus−interest conflicts with the public interest
The public choice model assumes that government policymakers
are likely to pursue their own self−interests, even if their self−interests conflict with the public interest.
When members of Congress vote to pass new legislation, they will
fail to consistently represent the underlying preferences of voters.
Why is a typical person likely to gather more information when buying a new car than when voting for a member of Congress?
because buying a new car affects a person more immediately and personally compared to voting for a member of Congress. In the latter, a person's vote is only one of many voters and therefore, not likely to have a large impact on the outcome.
The De Beers Company, one of the longest−lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds?
because previously owned diamonds would be a close substitute to newly mined diamonds and therefore reduce De Beers' market power
The parties involved in an externality have an incentive to reach an efficient solution because
both parties become better off when an efficient solution is reached.
A Pigovian tax is a government tax intended to
bring about an efficient level of output in the presence of externalities.
A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a ________ to solve an externality.
command and control approach
When the demand for a product is less elastic than supply, _______________ pay the majority of the tax on a product
consumers
when supply for a product is more elastic than the demand, _____________ pay the majority of the tax on the product.
consumers
A corrective subsidy induces the ________ to the socially optimal level.
consumers of a positive externality to increase the quantity consumed
By imposing a tax on toilet paper, the government will cause
consumers to internalize the externality causing the equilibrium quantity of toilet paper consumed to decrease.
A price ceiling...
does not increase the amount of the product that consumers buy because it creates a shortage.
Which of the following is not an example of rent-seeking behavior?
engaging in aggressive advertising that slams a competitor's product
Financial contributions to the campaigns of members of Congress, state legislators, and other elected officials by firms that seek special interest legislation that make the firms better off are
examples of rent seeking.
Private goods
excludable, rival
Network externalities
exist when the usefulness of a product increases with the number of consumers who use it.
An individual producer or a consumer "internalizes an externality" when
in their own decisions they take into account the external effects of their actions.
A public franchise
is a government designation that a private firm is the only legal producer of a good or service.
Compared to perfect competition, the consumer surplus in a monopoly
is lower because price is higher and output is lower.
A price floor is the ________.
lower limit on the price of a good
The median voter model implies that
many people will be dissatisfied with the amount of spending on government funded projects.
Economists played a key role in the development of merger guidelines by the Department of Justice and the Federal Trade Commission in 1982. These guidelines have three main parts. What are these parts?
market definition; measure of concentration; merger standards
The voting paradox suggests that the "voting market", as represented by elections
may often lead to an inefficient outcome in representing consumer preferences compared to the private market for goods and services.
In a sense, consumers in a market might be "paying" a Pigovian tax even if the government hasn't imposed an explicit tax if there are
negative externalities in that market so that consumers are experiencing an external cost.
Traffic congestion is an example of a ________.
negative externality (too little roads)
The Arrow impossibility theorem states that
no system of voting can be devised that will always consistently represent the underlying preferences of voters.
Public goods
non excludable, non rival
Common resources
non excludable, rival
Quasi - public goods
non rival, excludable
Experience with patents in the pharmaceutical industry shows that when patents on drugs expire
other firms are free to produce chemically identical drugs. Competition reduces the profits that had been earned by the firms that received patents.
One result of the public choice model is that most economists believe that
policymakers may have incentives to intervene in the economy in ways that do not promote economic efficiency.
The social cost of producing a good that generates negative externalities is the sum of the ________.
private cost and external costs of production
Imposing price controls on goods would make them hard to find because
producers would not want to supply as much as they did before the price controls.
Governments grant patents to encourage
research and development on new products.
When the government imposes price floors or price ceilings,
some people win, some people lose, and there is a loss of economic efficiency.
A Herfindahlminus−Hirschman Index is calculated by
summing the squares of the market shares of each firm in the industry.
One reason patent protection is vitally important to pharmaceutical firms is
the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process.
At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to
the cost of the externality.
What are the sources of externalities and market failure?
the difficulty of enforcing property rights in certain countries and incomplete property rights
A price ceiling does NOT lead to a deadweight loss if ________.
the equilibrium market price lies below the price ceiling
If a natural monopoly regulatory commission sets a price where marginal cost is equal to demand
the firm would incur a loss.
A marginal tax rate is
the fraction of each additional dollar of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income.
What do economists mean by "an economically efficient level of pollution"? The economically efficient level of pollution is that amount where
the marginal cost of pollution reduction equals the marginal benefit of pollution reduction.
When a Pigouvian tax is imposed, ________.
the marginal private cost curve shifts upward
How is free riding related to the tendency of a public good to create market failure? Free riding results in
the market producing a quantity of public goods that is inefficiently low because they are non excludable.
One important difference between the political process and the market process is that
the political process results in collective actions in which everyone is obliged to participate while in the market process individuals are free to participate or not.
A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments
will be better off if he does not get caught because that amount will be above the equilibrium. and will be worse off if he gets caught.
Someone who will be moving to Lowell next year and who intends to rent an apartment after the rent control
will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling. and will be worse off if they are unable to find an apartment to rent.
Someone currently renting an apartment in Lowell after the government has placed a rent control
will be better off if they keep their apartment because rent is lower due to the price ceiling. and will be worse off if they lose their apartment.
A landlord who intends to abide by the rent control law
will be worse off because he will be receiving less rent.
Which of the following statements refers to rent seeking?
"Laws passed by the federal government often provide benefits for a small number of individuals. These individuals, in turn, have an incentive to contribute to the campaigns of politicians who pass these laws."
Example of a normative statement
"Rent controls, government farm programs, and other price ceilings and price floors are bad."
Consider an industry that is made up of six firms with the following market shares: Firm A minus− 50%, Firm B minus− 20%, Firms C and D minus− 10% each, and Firms E and F minus− 5% each. What is the value of the Herfindahlminus−Hirschman Index and how will the industry be categorized?
3,150; highly concentrated
Which two factors make regulating mergers complicated?
First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually.
Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly?
No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.
When there are many people involved in attempting to reach an agreement, the transactions costs are often _______ than the net benefits from reducing an externality. In such cases, a private solution to an externality problem _______ feasible.
higher; is not
The tragedy of the commons occur because some goods are ________ in consumption.
non-excludable but rival
