Micro Ch.5

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The benefits that result from the activity exceed the costs

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

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

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

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

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

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