Quiz 11: Public Goods and Externalities
To achieve the socially optimal level of pollution, the biggest polluters should be targeted for the greatest reduction in pollution.
false
Traditional public-goods legislation usually has a negative impact on the economy
false
When a system of pollution rights is in effect, polluters have no economic incentive to reduce the amount of pollution they generate.
false
Unpriced byproducts of production or consumption that provide benefits to other consumers or other firms are known as:
merit goods.
According to the Coase theorem, externality problems may be solved if the parties involved can negotiate. Which of the following is also required for an efficient solution?
According to the Coase theorem, externality problems may be solved if the parties involved can negotiate. Which of the following is also required for an efficient solution? Enforceable property rights and low bargaining costs
Which of the following is not a typical goal of bureaucrats?
Achieving greater efficiency
Which of the following federal budget allocations is an example of traditional public-goods legislation?
Funding for cancer research
Which of the following activities constitute tax avoidance?
Increasing one's charitable contributions in December
Which of the following is an example of an activity that generates positive externalities?
Initiating a program to encourage education
Which of the following is not an example of an open-access resource?
Oil deposits
A metal stamping factory moves next to a day care center. Noise from the factory makes it impossible for the kids to take a nap. Which of the following is likely to be true given the scenario?
Optimal solution cannot be achieved unless the costs are given.
Which of the following is true of ownership by taxpayers in a government bureau?
Ownership in the bureau can be surrendered but not transferred.
Which of the following is an example of tax avoidance?
Peter moving to a different state to benefit from its lower tax rates
The American Association of Retired Persons (AARP) provides checklists that summarize the voting and attendance records of legislators. Which of the following is true?
This policy is intended to reduce voters' rational ignorance by decreasing the cost of information.
Which of the following is true of the median voter model?
Under certain conditions, the median voter determines which outcome wins.
Under which of the following circumstances would a voter adopt a stance of rational ignorance instead of choosing to be informed of the public choices at hand in an election?
When information and the time required to acquire and digest it are scarce
Budget maximization by bureaus results in:
a larger budget than that desired by the median voter.
A carpenter builds a bookcase for an attorney in exchange for legal services. This transaction is:
a means of tax evasion.
When the consumption of a good or service imposes costs to society that are not reflected in the market price of the good, _____.
a negative externality arises
An individual who listens to loud music late in the night is creating:
a negative externality.
The depletion of rainforests due to human activities like logging or cattle ranching is an example of:
a negative externality.
The optimal level of air quality will increase if:
a new process allows pollution to be removed more cheaply.
An example of competing-interest legislation is:
a quota that limits imports of steel to the United States.
An example of traditional public-goods legislation is _____.
a system of justice
When the support price for milk and dairy products is higher than the market equilibrium price, _____.
a typical consumer-taxpayer pays an artificially high price for milk and, as a taxpayer, also pays for the surplus milk
Officials have estimated the size of the U.S. underground economy to be approximately _____ in 2012.
about $2 trillion
If voters realize that they have but a tiny possibility of influencing public choices, they:
adopt a stance of rational ignorance.
The underground economy describes:
all market activity that goes unreported because the activity itself is illegal.
An externality is:
any cost or benefit of a transaction that is not accounted for in the market price.
Direct transfer programs:
are generally more efficient but less politically acceptable than subsidy programs.
The basic difference between government bureaus and market firms is that bureaus:
are less concerned with satisfying consumer demand.
Campaign finance reform is usually proposed:
as a way of reducing the power of special-interest groups.
According to the Coase theorem, _____ in order to solve a negative externality problem efficiently.
bargaining costs must be low
The Clean Air Act of 1970 has:
been fairly successful in reducing auto emissions, especially lead.
With special-interest legislation, _____.
benefits are concentrated but costs widespread
Competing-interest legislation involves:
both concentrated costs and concentrated benefits.
In response to the threat of budget cuts, the Connecticut State Department of Recreation proposed shutting down many state parks and beaches. This is an example of:
budget maximizing by bureaus.
A negative externality is likely to arise if:
car owners refuse to pay for devices that reduce the emission of carbon monoxide.
A major source of water pollution in the United States is _____.
chemicals (used in pesticides and fertilizers) and sewage
The main objective of the Comprehensive Environmental Response, Compensation, and Liability Act, was to ensure that:
companies that generated hazardous wastes pay to clean up any wastes that are improperly disposed.
JPC Motors benefits from tariffs on imported automobiles. Companies that use imported automobile parts want to get them cheaply. In this case, the issue of tariff legislation involves:
competing interests because it promises concentrated costs and benefits.
Special-interest legislation is characterized by:
concentrated benefits and widespread costs.
Competing-interest legislation is characterized by:
concentrated costs and concentrated benefits.
The proposed takeover of Tony's Airlines by Plummet Airlines will result in increased profits for Plummet and increased air fares for consumers. This is an example of the:
concentrated distribution of benefits and widespread distribution of costs.
When the support price for a good is higher than the market equilibrium price, _____.
consumer surplus will decrease
As information and the time required to acquire and digest it are scarce, _____.
consumers concentrate on private choices rather than on public choices
The marginal social benefit of good air:
declines as air quality improves.
A tax on productive activity tends to:
decrease formal market activity because it lowers the return on such activity.
If the marginal social benefit of consuming a product exceeds the marginal social cost, social welfare:
decreases when output increases.
The efficient quantity of a public good produced is:
determined by the intersection of the market demand curve and the marginal cost curve.
The price of a pollution right is _______.
determined by the supply of and the demand for pollution rights
It is not likely that farm price supports will be replaced by direct transfer payments to farmers because:
direct transfer payments would attract public attention and threaten the survival of the program.
Generally, people are more satisfied with private market outcomes than with public voting outcomes because:
each consumer in the private market can choose the quantity he or she desires.
Rational ignorance suggests that voters may not spend much time examining candidates before an election because:
each voter has virtually no chance of affecting the outcome of the election.
According to the Coase theorem, if the appropriate property right is assigned to __________, an efficient solution to an externality problem will be achieved.
either one of the parties involved
The government of Marina sets floor prices for a wide range of farm products. The dairy farmers who purchased pasture lands after that legislation is passed will:
end up earning a normal rate of return in the long run.
One goal of a political action committee is to:
engage in rent seeking.
A large U.S. steel firm wants to restrict imports of Japanese steel, but Ford Motor Company wants fewer restrictions on steel imports so that its cost of production remains constant. This can best be described as a(n):
example of a competing interest.
According to the Coase theorem, _____.
externality problems can be solved efficiently by the assignment of property rights if transaction costs are low
Economists view pollution as an economic problem that arises because:
firms that pollute do not pay the full social cost of producing their output.
Bureaus are:
government agencies whose activities are financed by appropriations from legislative bodies.
An underground economy grows more when:
government regulations increase.
Fishing, lumbering, tourism, and city buildings in Canada are harmed by acid rain, most of which comes from the United States. According to the Coase theorem, the problem is:
hard to solve because international negotiations are costly.
Government bureaus:
have less incentive to improve consumer satisfaction because they receive less consumer feedback.
A person can cause a negative externality by_______.
having a loud conversation in the office
If the benefits to society of students attending college exceed the benefits to the students, then:
higher education provides a positive externality.
Suppose a citizen concludes that he has had enough of big government and decides to launch a personal campaign to expose the big spenders in Congress. In such a case, _____.
his action is not likely to affect public choices
To solve the common-pool problem in fishing, governments can _____ or _____.
impose a tax; restrict output
A public good, such as a community's emergency warning sirens, typically:
imposes both benefits and costs on many individuals.
Competing-interest legislation:
imposes both benefits and costs on relatively few individuals.
Society's total cost of producing a good:
includes only the private cost to a firm.
The total welfare cost of a monopoly that engages in rent-seeking activities:
includes the use of resources devoted to rent seeking.
The hiring of a brilliant tax lawyer by a firm that wants to find tax loopholes:
is an example of economic inefficiency caused by devoting resources to wealth redistribution rather than to production.
Raising tax rates:
leads to more underreporting of income.
Rent-seeking activities by special interest groups result in:
lower economic activity by diverting resources to less-productive or nonproductive uses.
A study found that privately operated juvenile correction facilities in Florida had _____ costs but experienced _____ rates of recidivism than state-operated juvenile corrections facilities.
lower, higher
Special-interest groups have little incentive to: influence government policies.
make the economy more efficient.
Rationality implies that in order to get what they want, people will spend the most time and effort:
making private market decisions.
Marginal social cost is equal to:
marginal private cost plus marginal external cost.
The socially efficient level of output is determined where:
marginal social cost equals marginal social benefit.
Suppose the production of electricity generates pollution. In this case, the optimal level of electricity is produced when the marginal social benefit from electricity production equals the _____.
marginal social cost of electricity production
If elected officials are assumed to be driven by rational self-interest, they are likely to:
maximize their political support.
A government bureau:
may be less inclined than a private firm to minimize cost by reducing quality.
A golf course or a swimming pool in a resort that is not crowded is an example of a(n):
natural monopoly.
Byproducts of production or consumption that impose costs on other consumers or firms are known as _______.
negative externalities
Free markets produce too little output when:
negative externalities exist.
Dumping raw sewage into Boston Harbor is an example of a:
negative externality.
In the U.S., people tend to discard items rather than repair them because:
of the high opportunity cost of time.
When using the economic efficiency approach to control air and water pollution, the government:
offers each firm the flexibility to reduce emissions in the most cost-effective manner, given its unique cost structure.
The Coase solution to the problem of externalities:
only works when bargaining costs are low.
A good that is rival but nonexclusive is called a(n):
open-access good.
Private firms and public bureaus differ in that:
private firms have more incentive to act on consumer feedback.
A good that is both rival and exclusive is called a(n):
private good.
If education creates positive externalities, then:
private markets provide less than the socially optimal quantity of education.
If the quality or quantity of a particular public service is difficult to monitor, a government is more likely to:
produce the service itself.
A meditation class meets on the second floor of a building; the first floor is a dance academy. The loud music from the academy disturbs the meditation classes. The academy could be soundproofed for a cost of $6,000 or move at a cost of $9,000. The class cannot be soundproofed enough to overcome the music, but could be moved for $5,000. According to the Coase theorem, a socially optimal solution can be achieved if:
property rights to a quiet environment are granted to the meditation class.
Legislators often have difficulty passing legislation with widespread benefits but concentrated costs because those who bear the costs will _____ the legislation, while those who reap the benefits will _____ the legislation.
protest; not actively support
Public choices are government decisions about:
public goods and taxes.
To purchase goods and services, governments prefer dealing with bureaus rather than private firms because:
public officials may be better able to control the details of production in bureaus than in private firms.
The Clean Air Act of 1970:
recognized air as an economic resource.
Rent-seeking activity:
reduces an economy's overall efficiency by reducing production.
According to the Coase theorem, there will be an efficient solution to the problem of toxic waste:
regardless of which party is assigned the property right as long as the bargaining costs are small.
Under representative democracy, _____.
representatives make public choices that reflect constituents' views
In order to increase society's well-being, a production process that generates a positive externality should be:
subsidized to encourage production.
In order to increase society's well-being, measles vaccinations should be:
subsidized to encourage production.
Suppose Woody wants to buy a boat. Since the interest paid on a boat loan is not tax deductible, he opts for a home equity loan, the interest on which is still tax deductible. This procedure is an example of _____.
tax avoidance
Filing a fraudulent income tax return that understates income or overstates deductions is known as:
tax evasion.
In order to increase a society's total welfare, a production process that produces a negative externality should be _____.
taxed
Special-interest legislation that imposes costs over many taxpayers can be enacted because:
taxpayers remain rationally ignorant of the legislation.
The marginal social benefit curve for water quality slopes downward because:
the added benefit from cleaner water is smaller when water quality is poor than when water quality is high.
Imposition of tax on an open-access resource increases the marginal private cost of using the resource by _____.
the amount of the tax
Pollution arises because:
the atmosphere is an open-access resource.
Environmentalists, worried about sulfur dioxide in the air, pressure the government to make it mandatory for bus manufacturers to modify the exhaust systems in buses. In this situation, _____.
the benefits of the proposed requirements are more widespread than costs
Suppose a city builds a new park that is advertised as being "open to the public" and the grass in the park is ruined by overuse within two months. This would be an example of _____.
the common-pool problem
In the long run, the beneficiaries of farm price supports are:
the early owners of specialized resources.
If taxpayers can enjoy mosquito abatement without paying for it, they tend to understate their true valuation of mosquito control measures. This is an example of:
the free-rider problem.
At the market output and price for a good whose production causes pollution, _____.
the marginal social benefit of production equals the marginal social cost of production
If production is characterized by variable technology and generates pollution, the optimal level of air quality occurs where:
the marginal social cost of air quality equals the marginal social benefit.
The socially optimal level of output of a good that generates an externality occurs when:
the marginal social cost of production equals the marginal social benefit of production.
In a democratic society, the preferences of _____ will often dominate decisions made by direct majority voting
the median voter
When the benefits to society of using a product exceed the benefits to the user, then:
the product provides a positive externality.
When society receives more benefits from a good than the individuals who consume the good, then:
the production of the good generates a positive externality.
Negative externalities of open resources arise because:
there are no enforceable property rights to open-access resources.
The deforestation of rainforests due to human activities has increased because:
there are no property rights on rainforests
Many eligible voters who do vote do not keep track of the performance records of candidates for public office. This is because:
they adopt a stance of rational ignorance.
Bureaucrats obtain the budget they want by:
threatening legislatures with an all-or-nothing choice.
Sally, Kelly, and Debbie are roommates deciding on how many cats they want to keep. Sally prefers three cats to two cats and two cats to one cat. Kelly prefers two cats to one cat and one cat to three cats. Debbie prefers one cat to two cats and two cats to three cats. If they decide by majority vote, they will get _____.
two cats
Resources employed to persuade government to redistribute income and wealth to special interests are:
unproductive because they do nothing to increase total output and usually end up reducing it.
Special-interest groups, such as the pharmaceutical lobby, often get what they demand because:
voters are rationally ignorant.
Rational ignorance occurs when:
voters find the cost of understanding a specific issue greater than the expected benefit from doing so.
Rational ignorance helps explain why:
voters may choose to remain ignorant of issues when there are large costs associated with becoming informed.
In a free market, a firm's equilibrium output is determined:
where marginal private cost equals marginal private benefit.
When the government increases taxes to provide traditional public goods, such as national security, there tends to be:
widespread benefits and costs.
If general tax revenues were used to subsidize the production of toothpicks, the government's actions would have:
widespread costs and concentrated benefits.
Open-access resources are owned by:
no one.
_____ resources can be used indefinitely over time.
Renewable
Compared to private firms, we should expect public bureaus to:
be less cost-efficient.
Elected officials may choose a public bureau over a private firm to collect garbage because:
the officials can grant political favors by giving people jobs in the public bureau.
The median-voter model attempts to explain why:
the preferences of the typical voter often dominate other choices in a democracy.
Suppose environmental groups pressure the local government to reduce the number of pollution rights to be sold. Other things equal, ______.
the price of pollution rights would rise and the amount of pollution would decrease
When the consumption of a good generates positive externalities, _____.
the private demand curve for the good lies below the marginal social benefit curve.
When consuming a good creates positive externalities, _____.
the private demand curve understates the marginal social benefit of the good.
Which of the following is a renewable resource?
Air
Which of the following is an example of a good that is nonrival and nonexclusive in consumption?
National defense
A society is better off if the level of education exceeds the private equilibrium.
false
Budget maximization by government bureaus results in a budget equal to that desired by the median voter.
false
Decreasing tax rates would likely increase activities in the underground economy.
false
Open-access resources tend to be ______.
overused
A good that is neither rival nor exclusive is called a(n):
public good.
Some of the nation's best minds are occupied with devising schemes to avoid taxes and to transfer income to favored groups at the expense of market efficiency. This is called:
rent seeking.
Payments higher than necessary to call forth a resource are known as _____.
rents
To maximize social welfare in the presence of a negative externality, marginal __________ must equal marginal __________.
social cost; private cost
Taxpayers and consumers end up paying for agricultural price supports.
true
Which of the following is true of bureaus?
They implement the laws created by government.
Nearly half of the Superfund has been spent on:
court costs and legal fees.
Rent seekers are those who:
secure special favors from government.
If the managers of a private firm perform poorly, each owner has the option of:
selling his or her share of the firm.
When using the traditional command-and-control approach to environmental regulation, the government attempts to:
set engineering standards that are applicable to all situations and do not recognize unique circumstances.
Untreated raw sewage in the U.S. is dumped directly into rivers and oceans by ______.
some of the largest cities
As a result of voters' rational ignorance, _____.
special interests often dominate legislation
Legislation that involves concentrated benefits but widespread costs is called:
special-interest legislation.
Legislation that provides a price support for dairy farmers is an example of:
special-interest legislation.
Legislation that provides a subsidies for tobacco growers is an example of:
special-interest legislation.
Control of water pollution from pesticide runoff in the United States is the responsibility of:
state departments of agriculture.
In order to increase society's well-being, education should be:
subsidized to encourage production.
Fish in the sea can be harvested till:
the marginal benefit of catching more fish is greater than the marginal cost.
In special-interest legislation, there are both widespread costs and benefits.
false
In the absence of government intervention, the marginal social cost of pollution abatement would equal its marginal social benefit.
false
Most water pollution in the United States comes from manufacturing sites.
false
Pollution occurs because property rights to exhaustible resources are well defined.
false
Pollution occurs because property rights to some open-access resources are well defined.
false
Rent seeking is a zero-sum game because the public's loss is the rent seeker's gain.
false
Rent-seeking behavior imposes no costs on society.
false
Special-interest legislation generally leads to an increase in social welfare.
false
The Coase solution to the externality problem works only when bargaining costs are high.
false
The United States reccles a greater portion of its garbage than Japan does.
false
The United States recycles a greater portion of its garbage than Japan does.
false
Dairy price supports result in a redistribution of welfare from consumers to dairy farmers.
true
The equilibrium price and quantity in a free market usually reflect private marginal costs and benefits, not social ones.
true
A firm wishing to acquire a monopoly position would be willing to spend up to its anticipated monopoly profit in rent-seeking activities.
true
An increase in the marginal cost of reducing greenhouse gas emissions will lead to lower air quality.
true
Environmental problems result when social costs and benefits are different from private costs and benefits.
true
Government allocation of pollution rights cannot be efficient if polluters cannot be easily identified and monitored.
true
Markets tend to underproduce goods that generate positive externalities.
true
Most of the Superfund expenditures have been used for court costs and legal fees.
true
Resources employed to persuade government to redistribute income and wealth to special interests are unproductive.
true
Special-interest legislation in a representative democracy benefits lawyers because their annual incomes increase more than their annual costs.
true
Taxing people according to their marginal valuations of a public good may be efficient, but it may not be fair if the ability to pay differs.
true
The optimal air quality is determined where the marginal social cost of improving air quality is equal to the marginal social benefit from cleaner air.
true
In a(n) _____, all market activity goes unreported either to avoid taxes or because the activity is illegal.
underground economy
Which of the following is a part of the underground economy?
A barber giving a person a haircut in exchange for a meal
Which of the following is a source of a positive externality?
A company that engages in research and development
Which of the following creates a positive externality?
A neighbor who beautifies her lawn
Which of the following is a positive externality?
Inoculations against a disease that reduce the likelihood of transmitting it to others
Fire departments receive their revenues from government budgets, but not on a per-fire-extinguished basis. Which of the following is likely to be true in this case?
It will be difficult for department officials to know if too much or too little fire protection is being supplied.
Which of the following is an example of a positive externality?
John's roommate going on a diet
Which of the following is an example of populist legislation?
Legislation for tort reforms
Which of the following accounts for the recent decline in the growth of trash-to-energy plants?
Less favorable tax treatment
The 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?
Pollution will be created by those most willing and able to pay for the right to pollute.
Which of the following correctly distinguishes between tax evasion and tax avoidance?
Tax evasion is illegal, whereas tax avoidance is legal.
_____ are the true owners of government bureaus.
Taxpayers
In order to dispose of the nuclear waste created by power plants around the country, the government buys land in Glowing Gulch, Idaho. Residents of that town organize to block construction of the nuclear waste facility. Which of the following statements is false?
The citizens of Glowing Gulch are equally concerned about all public issues.
A metal stamping factory moves next to a day care center. Noise from the factory makes it impossible for the kids to nap. It would cost the factory $5 million to move and $1 million for the day care center to move. Sound insulation for the factory costs $1 million, while insulation for the day care center costs $200,000. The court determines that the day care center has the property right. Which of the following optimal solution is likely to be true given the scenario?
The factory should buy insulation for the day care center.
Which of the following would happen if the government increased the quantity of pollution rights to be sold, other things equal?
The price of pollution rights would fall, and the amount of pollution would increase.
Which of the following is true of special-interest legislation?
The resources used by special-interest groups to persuade elected officials to create legislation to increase their wealth are unproductive to society because they do not increase real output and usually end up reducing it.
Which of the following is true of renewable resources?
They can be drawn on indefinitely if used conservatively.
Identify the correct statement about government bureaus.
They have less incentive to eliminate waste and inefficiency.
Susie spends more of October thinking about her Halloween costume than she spends thinking about a proposed law that will be on the November ballot. Which of the following is true?
This behavior is rational if she expects a greater benefit from the costume than from any possible effect her vote could have on the proposed law.
Which of the following is an example of tax evasion?
Understating one's income Martha not reporting the additional income she earns from waiting tables at a restaurant to reduce her taxable income
Which of the following is a crude but efficient mechanism that promotes efficiency in the provision of public goods by bureaus?
Vote with their feet
Tax evasion differs from tax avoidance in the sense that evasion:
is illegal.
Fishes in the ocean are:
renewable and also open-access resources.
The questions of what type of public goods to produce and how much to produce are resolved:
through public choices.
Suppose the legislature of the Democratic Republic of Marina proposes a 10 percent national income tax that would be used to fund universal health care, literacy, and access to the justice system for all citizens. This legislation is an example of:
traditional public-goods legislation.
