Exam 3

An externality is the uncompensated impact of

one person's actions on the well-being of a bystander.

If you give money to a homeless person and ask them to use the money to buy food, but they go buy booze instead, this is an example of ... (a) a principle-agent problem. (b) a free-rider problem. (c) a shortage. (d) adverse selection.

(a) a principle-agent problem.

Someone who consumes a good but does not pay for it is a ... (a) free rider (b) principal (c) agent (d) residual claimant

(a) free rider

The benefit your neighbor receives from hearing you play your pleasant music is a... (a) private cost. (b) external benefit. (c) private benefit. (d) external cost.

(b) external benefit.

Principal-Agent problems are fundamentally rooted in . . . (a) inequality of assets to liabilities. (b) misalignment of incentives. (c) free riders. (d) the law of diminishing marginal utility.

(b) misalignment of incentives.

Parties with better information may be tempted to exploit their information advantage at the expense of trading partners. Examples might include a taxi driver who takes longer routes to jack up their fares; also an auto mechanic who exploits his/her customer's ignorance to recommend unnecessary "repairs." These are both examples of ... (a) inelastic supply. (b) moral hazard. (c) lemons problems. (d) Gresham's law.

(b) moral hazard.

When you hire a contractor to build a garage on your property, in the relationship between you and the contractor you are the ... (a) agent. (b) principal. (c) residual claimant. (d) moral hazard. (e) plaintiff.

(b) principal.

If you want to be a successful politician - supporting and enacting policies that lead to your election/reelection - then a formula for success is to choose policies that ... (a) diffuse benefits and concentrate costs. (b) concentrate benefits and costs. (c) diffuse costs and concentrate benefits. (d) diffuse benefits and costs.

(c) diffuse costs and concentrate benefits.

Bob is convinced that he needs to vote because of the threat of global warming. Bob votes in every election that he is eligible to vote in and bases his votes on which candidates are most concerned about global warming. Bob very much aims to make a difference; to affect policy towards ending global warming. Bob is ... (a) a warm voter. (b) a defensive voter. (c) an expressive voter. (d) an instrumental voter.

(d) an instrumental voter.

Public choice analysis is concerned with whether political agents have the incentives to correct market failures and whether they have the _______________________ to act consistently with those incentives. (a) revenues (b) state capacity (c) rule of law (d) information

(d) information

While this is not strictly true in reality, the theory of Nobel Prize winner George Ackerlof predicts that the only used cars bought and sold will be ... (a) luxury models. (b) economy models. (c) cars with warranties. (d) lemons.

(d) lemons.

This involves attacking an obtainable (but imperfect) option by comparing it to an unobtainable (but perfect) alternative. (a) the ad hominem fallacy. (b) the fallacy of composition. (c) public interest theory. (d) the nirvana fallacy.

(d) the nirvana fallacy.

Individuals may not vote their true policy preferences if they are ... (a) decisive voters. (b) rationally ignorant. (c) instrumental voters. (d) median voters. (e) expressive voters.

(e) expressive voters.

When a good is rival in consumption, a. one person's use of the good diminishes another person's ability to use it. b. people can be prevented from using the good. c. an unlimited number of people can use the good at the same time. d. everyone will be excluded from obtaining the good.

a. one person's use of the good diminishes another person's ability to use it.

Because of the free-rider problem, a. private markets tend to undersupply public goods. b. the federal government spends too many resources on national defense and not enough resources on medical research. c. firework displays provided by private markets have become increasingly popular. d. poverty can easily be eliminated through private charity.

a. private markets tend to undersupply public goods.

36. According to the Coase theorem, private parties can solve the problem of externalities if a. property rights are clearly defined. b. the cost of bargaining is large. c. the number of parties involved is sufficiently large. d. the initial distribution of legal rights favors the person causing the negative externality.

a. property rights are clearly defined.

The Tragedy of the Commons results when a good is a. rival in consumption and not excludable. b. excludable and not rival in consumption. c. both rival in consumption and excludable. d. neither rival in consumption nor excludable.

a. rival in consumption and not excludable.

Expressive voting is meant to signal something about yourself to other people. a. True. b. False.

a. True.

A _________________ is when an agent tries to exploit an information advantage in a dishonest or undesirable way. a. moral hazard b. negative externality c. free rider d. none of the above

a. moral hazard

When voters tend to stress the very recent and present more than the past or future, economists say that voters are... a. myopic. b. uninformed. c. biased. d. unbiased.

a. myopic.

Which of the following is an example of a positive externality? a. A college student buys a new car when she graduates. b. Your neighbor plants a nice garden in front of his house. c. A person litters in a public park. d. Your friend pays to get her hair cut and colored at the salon.

b. Your neighbor plants a nice garden in front of his house.

Market failure associated with the free-rider problem is a result of a. a problem associated with pollution. b. benefits that accrue to those who don't pay. c. benefits that accrue to providers of the product. d. market power.

b. benefits that accrue to those who don't pay.

Goods that are rival in consumption but not excludable would be considered a. club goods. b. common resources. c. public goods. d. private goods.

b. common resources.

When property rights are not well established, a. private goods become public goods. b. markets fail to allocate resources efficiently. c. the distribution of private goods is unfair. d. government resources are used inefficiently.

b. markets fail to allocate resources efficiently.

The provision of a public good generates a a. positive externality, as does the use of a common resource. b. positive externality and the use of a common resource generates a negative externality. c. negative externality, as does the use of a common resource. d. negative externality and the use of a common resource generates a positive externality.

b. positive externality and the use of a common resource generates a negative externality.

A free rider is a person who a. will only purchase a product on sale. b. receives the benefit of a good but avoids paying for it. c. can produce a good at no cost. d. rides public transit regularly.

b. receives the benefit of a good but avoids paying for it.

When positive externalities are present in a market a. private benefits will be greater than social benefits. b. social benefits will be greater than private benefits. c. only government regulation will solve the problem. d. the market will not be able to generate an equilibrium.

b. social benefits will be greater than private benefits.

The overuse of a common resource relative to its economically efficient use is called a. the free-rider problem. b. the Tragedy of the Commons. c. a public good. d. cost-benefit analysis.

b. the Tragedy of the Commons.

When the benefits are high enough, firms can obtain monopoly rents through influencing legislators/regulatory agencies to promote a particular policy outcome. This is known as... a. Public Choice b. Capture Theory c. Transaction Costs d. Moral Hazard

b. Capture Theory

Which group has a greater incentive to stay informed about a potential import quota on Japanese cars? a. Domestic car consumers. b. Domestic car producers. c. Domestic voters. d. All of the above.

b. Domestic car producers.

The Nirvana Fallacy of politics assumes that government agents have the knowledge, but not the incentives, necessary to allocate resources better than the market. a. True. b. False.

b. False.

_____________________ is the study of political behavior using the tools of economics. a. Welfare Economics b. Public Choice c. Political Science d. Median Voter Theorem

b. Public Choice

When one party to an exchange has more, or better, information than the other party, economists say this is an example of... a. signaling. b. asymmetric information. c. free riding. d. moral hazard.

b. asymmetric information.

When the benefits from a voter staying informed are less than the costs of staying informed, we say this voter is... a. disinterested. b. rationally ignorant. c. disenfranchised. d. a bad citizen.

b. rationally ignorant.

Which of the following statements about a well-maintained yard best conveys the general nature of the externality? a. A well-maintained yard conveys a positive externality because it increases the home's market value. b. A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. c. A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. d. A well-maintained yard cannot provide any type of externality.

c. A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.

Which of the following illustrates the concept of a negative externality? a. A college professor plays a vigorous game of racquet ball with the racquet she recently purchased. b. You have an adverse reaction to a medication your doctor prescribed for you. c. Your sleep is disrupted by a neighbor's loud music. d. A flood wipes out a farmer's corn crop.

c. Your sleep is disrupted by a neighbor's loud music.

A state-owned bridge is a. always a public good, whether or not it is congested. b. a public good when it is congested, but it is a common resource when it is not congested. c. a common resource when it is congested, but it is a public good when it is not congested. d. always a common resource, whether or not it is congested.

c. a common resource when it is congested, but it is a public good when it is not congested.

Goods that are rival in consumption include both a. club goods and public goods. b. public goods and common resources. c. common resources and private goods. d. private goods and club goods.

c. common resources and private goods.

Private goods are both a. excludable and nonrival in consumption. b. nonexcludable and rival in consumption. c. excludable and rival in consumption. d. nonexcludable and nonrival consumption.

c. excludable and rival in consumption.

The parable called the Tragedy of the Commons applies to goods and services such as a. police protection and cable TV. b. tornado sirens and medical research. c. grazing land and fishing. d. antipoverty programs and national defense.

c. grazing land and fishing.

People cannot be prevented from using a good if the good is a a. private good or a public good. b. private good or a common resource. c. public good or a common resource. d. public good or a club good.

c. public good or a common resource.

Voters are irrational because being informed is... a. boring. b. easy. c. costly. d. myopic.

c. costly.

A male peacock displaying his large, full, and colorful tale to the female peacock is an example of... a. asymmetric information. b. external benefit. c. signaling. d. moral hazard.

c. signaling.

Special interest groups stand to gain millions of dollars (or more) if particular laws are passed and lobby very hard for them, whereas voters stand to lose only a little and don't find opposing them worth their effort. This is because... a. the costs to voters are concentrated but the benefits to interest groups are dispersed. b. the costs to interest groups are concentrated but the benefits to voters are dispersed. c. the costs to voters are dispersed but the benefits to interest groups are concentrated. d. the costs to interest groups are dispersed but the benefits to voters are concentrated.

c. the costs to voters are dispersed but the benefits to interest groups are concentrated.

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct? a. At the current output level, the marginal social cost exceeds the marginal private cost. b. The current output level is inefficiently high. c. A per-shot tax could turn an inefficient situation into an efficient one. d. At the current output level, the marginal social benefit exceeds the marginal private benefit.

d. At the current output level, the marginal social benefit exceeds the marginal private benefit.

Which of the following is not a characteristic of a public good? a. It is not excludable. b. It is not diminished or depreciated as additional people consume the good. c. Its benefits cannot be withheld from anyone. d. Because it is a free good, there is no opportunity cost.

d. Because it is a free good, there is no opportunity cost.

The phenomenon of free riding is most closely associated with which type of good? a. Private goods b. Club goods c. Inferior goods d. Public goods

d. Public goods

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of a. an opportunity cost. b. an implicit cost. c. a sunk cost. d. a transaction cost.

d. a transaction cost.

Pollution is a a. problem that is entirely unrelated to the parable called the Tragedy of the Commons. b. problem that cannot be remedied with regulations or corrective taxes. c. negative externality that can be viewed as a public-goods problem. d. negative externality that can be viewed as a common-resource problem.

d. negative externality that can be viewed as a common-resource problem.

Both public goods and common resources are a. rival in consumption. b. nonrival in consumption. c. excludable. d. nonexcludable.

d. nonexcludable.

A good is excludable if a. one person's use of the good diminishes another person's enjoyment of it. b. the government can regulate its availability. c. it is not a normal good. d. people can be prevented from using it.

d. people can be prevented from using it.

Goods that are excludable include both a. club goods and public goods. b. public goods and common resources. c. common resources and private goods. d. private goods and club goods.

d. private goods and club goods.

A taxi driver can visibly determine the passenger is a tourist and deliberately takes the long route to the airport, driving up the cost of the cab fare. This is an example of... a. asymmetric information. b. moral hazard. c. adverse selection. d. (a) and (b). e. (b) and (c).

d. (a) and (b).

In the car repair market, moral hazard is a problem because... a. The car owner might opt not to get a repair that was actually needed for fear of being ripped off. b. The car owner might pay money for a repair or service that was not needed. c. The car owner has more information about the car's status than the car mechanic. d. (a) and (b).

d. (a) and (b).

Special interest groups tend to get their way when... I. a policy is narrow in impact. II. a policy is difficult to understand. III. a policy affects a large part of the economy. a. I. b. II. c. III. d. I and II. e. All of the above.

d. I and II.

Public Choice is often understood as... a. the tools of economics applied to politics. b. "politics without romance." c. the nirvana fallacy. d. a and b. e. none of the above.

d. a and b.

Public Choice assumes that political agents... a. are rational, self-interested economizers. b. benevolent and selfless people. c. act on incentives and information. d. a and c. e. none of the above.

d. a and c.

Which of the following are features that limit adverse selection in health insurance? I. Inspections and Checkups II. Group Plans III. Conscientiousness a. I b. II c. III d. I and II e. All of the above.

e. All of the above.

Ashlyn installed a wooden sculpture in her front yard. A positive externality arises if the sculpture

increases the value of other properties in the neighborhood.

Dioxin emission that results from the production of paper is a good example of a negative externality because

self-interested paper producers will not consider the full cost of the dioxin pollution they create.