Chapter 5

In the private market sector, a dollar voting system is in effect. This dollar voting system is not equivalent to the voting system in the public sector.

1. In a political system, one person gets one vote, whereas in the market system, each dollar a person spends counts separately. 2. The political system is run by majority rule, whereas the market system is run by proportional rule. 3. The spending of dollars can indicate intensity of want, whereas because of the all-or-nothing nature of political voting, a vote cannot.

The combination of two fundamental characteristics of public goods sets them apart from all other goods:

1. Public goods can be used by more and more people at no additional opportunity cost and without depriving others of any of the services of the goods. 2. It is difficult to design a collection system for a public good on the basis of how much individuals use it.

Effluent fee

A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax.

Majority rule

A collective decision-making system in which group decisions are made on the basis of more than 50 percent of the vote. In other words, whatever more than half of the electorate votes for, the entire electorate has to accept.

Externality

A consequence of an economic activity that spills over to affect third parties. Pollution is an externality.

When there are too few or too many resources going to an economic​ activity, A. a market failure exists. B. scarcity of resources no longer exists. C. a public good exists. D. consumer sovereignty exists.

A. a market failure exists.

Private goods are goods A. for which the more one person has the less is available for someone else. B. for which price is greater than zero. C. that are produced by the government. D. that carry a price.

A. for which the more one person has the less is available for someone else.

An important assumption in the theory of public choice is that A. individuals will act within the political process to maximize their individual​ well-being. B. individuals will act within the political process to maximize their collective​ well-being. C. scarcity does not exist in the government sector. D. individuals will only operate outside the political process when their​ well-being is involved.

A. individuals will act within the political process to maximize their individual​ well-being.

In the​ figure, P and Q locate the socially optimal price and quantity of a good. In the case of a good that generates positive​ externalities, the market price would be​ _____ P and the market quantity would be​ ______ Q​, while in the case of a good that generates negative​ externalities, the market price would be​ ________ P and the market quantity would be ____________ Q. A. lower​ than; lower​ than; lower​ than; higher than B. lower​ than; lower​ than; higher​ than; higher than C. lower​ than; equal​ to; higher​ than; equal to D. equal​ to; lower​ than; higher​ than; equal to

A. lower​ than; lower​ than; lower​ than; higher than The presence of positive externalities will lead the market to under produce and under price the good while negative externalities will cause the uncorrected market to yield too much output at too low a price.

The study of collective decision​ making, or the process through which​ voters, politicians and other interested parties influence nonmarket choices is known as A. public choice theory. B. the exclusion principle. C. antitrust legislation. D. a private choice theory.

A. public choice theory. The theory of public choice refers to the analysis of collective decision making involving​ voters, politicians, political​ parties, interest​ groups, and many others

The theory of public choice is the study of A. the process through which​ voters, politicians, and other interested parties interact to influence nonmarket choices. B. how the price system allocates resources in the public sector. C. how legal coercion influences the allocation of resources in the private sector. D. the study of the system of rewards or punishments in the private sector.

A. the process through which​ voters, politicians, and other interested parties interact to influence nonmarket choices. The examination of how​ voters, politicians, and other parties collectively reach decisions in the public sector of the economy is known as the theory of public choice.

If a government determines that the provision of services by museums should be​ encouraged, then this means that the government has judged museum displays to be​ a(n) A. ​government-sponsored good. B. exclusive good. C. public good. D. ​government-inhibited good.

A. ​government-sponsored good.

Which one of the following is a primary difference between a public good and a private​ good? A. A private good is subject to the​ free-rider problem while a public good is not. B. Private goods are subject to the principle of rival consumption while public goods are not. C. Private goods are purchased by money transfers while public goods are purchased by​ in-kind transfers. D. Private goods are manufactured because of the workings of the price system while public goods come about through antitrust legislation.

B. Private goods are subject to the principle of rival consumption while public goods are not. While several differences between these two types of goods​ exist, the primary difference is that the principle of rival consumption applies to private but not public goods. In other​ words, the use of private goods is exclusive to the people who purchase or rent them. One​ person's consumption of a private good reduces the amount available for others to consume. Public​ goods, however, can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity.

A government is considering two alternative plans for providing subsidy to private schools. Under the first plan it offers to let a number of students at a public school transfer to a private school under two​ conditions: It will transmit to the private school the same​ per-pupil subsidy it currently provides the public​ school, and the private school will be required to admit the students at a below market tuition rate. Under the second​ plan, the government will simply provide the students with grants to cover the current market tuition rate at the private school. ​( Hint: Does it matter if schools receive payments directly from the government or from the​ consumers?) The outcomes of the two plans A. will be​ identical; a private school will charge the students the same tuition rate. B. will be​ different; under the first plan where a private school directly receives the​ subsidy, it will provide a quantity of educational services in excess of the market equilibrium quantity. C. will be​ identical; a private school will provide identical educational services under both the plans. D. will be​ different; under the first plan where a private school directly receives the​ subsidy, it will provide a level of educational services that is less than the market equilibrium quantity.

B. will be​ different; under the first plan where a private school directly receives the​ subsidy, it will provide a quantity of educational services in excess of the market equilibrium quantity.

The amount of government spending on education per public school student has​ ________ since​ 1960, and the achievement level of students has generally​ ________ since that time. A. ​increased; increased B. ​increased; decreased C. ​decreased; increased D. ​decreased; decreased

B. ​increased; decreased

Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that A. ​Canada's tax system is less efficient than other industrial nations. B. Canadians perceive national defense as generating external costs rather than as a public good. C. Canada is able to​ free-ride on the defense spending of the United States. D. national defense is not a public good in Canada.

C. Canada is able to​ free-ride on the defense spending of the United States. The​ free-rider problem arises when some presume that others will pay for public goods so​ that, individually, they can escape paying for their portion without causing a reduction in production. Canadians can take advantage of the fact that the​ U.S., in defending its own​ territory, will simultaneously be defending all of North America.

Which of the following is a benefit of the price​ system? A. Consumers have what they want since politicians and business managers decide what is to be produced. B. the existence of positive externalities. C. The freedom of consumers to decide what they want to purchase. D. the production of public goods.

C. The freedom of consumers to decide what they want to purchase.

Market failure occurs when A. the stock market experiences a very large loss. B. an unrestrained market economy leads to too few or too many resources going to a specific economic activity. C. a good is too expensive for the market to provide. D. one good is superior to another and drives it out of the market.

C. a good is too expensive for the market to provide.

In the United​ States, which of the following is an example of a​ government-inhibited good? A. sports stadiums B. movies C. cocaine D. museums

C. cocaine

One reason that collective and private decision making differ is A. private individuals compete and act in their own interest while government bureaucrats do not. B. the government actions do not have an opportunity cost while private actions do. C. individuals working in the government sector face a different incentive structure than those in the private sector. D. there is no difference between collective and private decision making.

C. individuals working in the government sector face a different incentive structure than those in the private sector.

When a firm produces a product that creates external​ costs, A. the firm produces a level of output which would be the same as it would produce without the external cost. B. the firm produces a level of output smaller than would be produced without the external cost. C. the firm produces a level of output larger than would be produced without the external cost. D. the market provides the efficient level of output even with the existence of the external cost.

C. the firm produces a level of output larger than would be produced without the external cost.

A characteristic of a public good is A. the exclusion principle. B. rival consumption. C. the​ free-rider problem. D. clear property rights.

C. the​ free-rider problem.

In the decision making process for markets and the public sector A. the market system is run by proportional voting rules and the public sector is run by majority rule. B. the spending of dollars can indicate intensity of​ want, but political voting does not. C. dollars spent count as votes in the market​ system, but in the public sector one person gets one vote. D. All of the above.

D. All of the above. Each of the above the describes a key difference between the private​ market's dollar voting system and the voting system in the public sector.

A true public good must be provided by the government. Which of the following goods provided by the government is a true public​ good? A. Tax collection. B. Highways where tolls are collected. C. Postal service. D. Flood control.

D. Flood control. True public goods must necessarily be provided by government. This is because the private sector has a​ difficult, if not​ impossible, time providing them. Because nonpayers cannot be excluded from consuming the protection a flood control project​ yields, individuals in the private sector have no incentive to build and then sell flood protection.

Which of the following is TRUE about the political and market systems of​ voting? A. The political voting system functions according to proportional​ rule, while the market voting system functions according to majority rule. B. The political system and the market system are identical. C. The political voting system functions according to minority​ rule, while the market voting system functions according to majority rule. D. The political voting system functions according to majority​ rule, while the market voting system functions according to proportional rule.

D. The political voting system functions according to majority​ rule, while the market voting system functions according to proportional rule.

Which of the following is an example of a negative​ externality? A. The opening of a new shopping mall increases the business of nearby restaurants. B. A consumer pays a higher price than another consumer does for the same product. C. Consumers pay a sales tax in addition to the price of a product. D. There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers

D. There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers

A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort​ and, if​ successful, receive larger budget allocation in future years. Another rationale for expanding the​ agency's activities is that this will make the jobs of its workers more​ interesting, which may help the agency attract​ better-qualified employees.​ Nevertheless, to broaden its legal​ mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In​ addition, to expand its​ activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. The behavior of the government agency is similar to a​ profit-seeking private enterprise in all of the following​ aspects, except A. the government agency is promoting competition. B. the government agency attempts to increase its budgetary allocations. C. the government agency attempts to make its​ workers' jobs more interesting. D. the government agency depends on majority rule to enact the changes that it is seeking.

D. the government agency depends on majority rule to enact the changes that it is seeking.

In 1946, Congress passed the ___ ___, a landmark law concerning government responsibility for economic performance.

In 1946, Congress passed the Full-Employment Act, a landmark law concerning government responsibility for economic performance.

In its ideal form, a ___ system allows all resources to move from lower-valued uses to higher-valued uses via voluntary exchange, by which mutually advantageous trades take place.

In its ideal form, a price system allows all resources to move from lower-valued uses to higher-valued uses via voluntary exchange, by which mutually advantageous trades take place.

Suppose​ that, as part of an expansion of its State Care health​ system, a state government decides to offer a​ $50 subsidy to all people​ who, according to their​ physicians, should have their own blood pressure monitoring devices. Prior to this governmental​ decision, the market clearing price of blood pressure monitoring devices in this state was​ $50, and the equilibrium quantity purchased was​ 20,000 per year. After the government expands its State Care​ plan, people in this state desire to purchase​ 40,000 devices each year. Manufacturers of blood pressure monitoring devices are willing to provide​ 40,000 devices at a price of​ $60 per device. In this case the​ out-of-pocket price each consumer pays for a blood pressure monitoring device is ​$__ The dollar amount of the increase in total expenditures on blood pressure monitoring devices in this state following the expansion in the State Care program is ​$__ million. Following the expansion of the State Care​ program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is __​%. The percentage of total expenditures paid by the consumers of these devices is __​%).

In this case the​ out-of-pocket price each consumer pays for a blood pressure monitoring device is ​$10 The dollar amount of the increase in total expenditures on blood pressure monitoring devices in this state following the expansion in the State Care program is ​$1.4 million. Following the expansion of the State Care​ program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is 83​%. The percentage of total expenditures paid by the consumers of these devices is 17​%).

Antitrust legislation

Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.

Transfer payments

Money payments made by governments to individuals for which no services or goods are rendered in return. Examples are Social Security old-age and disability benefits and unemployment insurance benefits.

Third parties

Parties who are not directly involved in a given activity or transaction.

Transfers in kind

Payments that are in the form of actual goods and services, such as food stamps, subsidized public housing, and medical care, and for which no goods or services are rendered in return.

The avowed aim of antitrust legislation is to reduce the power of ___—firms that can determine the market price of the goods they sell.

The avowed aim of antitrust legislation is to reduce the power of monopolies—firms that can determine the market price of the goods they sell.

Principle of rival consumption

The recognition that individuals are rivals in consuming private goods because one person's consumption reduces the amount available for others to consume.

Property rights

The rights of an owner to use and to exchange property.

Theory of public choice

The study of collective decision making.

Incentive structure

The system of rewards and punishments individuals face with respect to their own actions.

Political Functions of Government: At least two functions of government are political or normative functions rather than economic ones like those discussed in the first part of this chapter.

These two areas are: 1. the provision and regulation of government-sponsored and government-inhibited goods. 2. income redistribution.

Suppose the government adopts a policy that forces pesticide producers to bear the social costs of groundwater contamination associated with the use of their product. This policy will ___ the price of pesticides.

This policy will increase the price of pesticides. A government policy that forces pesticide producers to bear the social costs of pesticide use will push the price of pesticide upward.

Subsidizing medical services through Medicare A. raises the price per unit of medical care received by producers. B. makes the quantity demanded of medical services smaller than the quantity supplied. C. lowers the price per unit of medical care received by producers. D. makes the quantity supplied of medical services smaller than the quantity demanded.

A. raises the price per unit of medical care received by producers.

Four economic functions of government.

1. Providing a Legal System 2. Promoting Competition 3. Providing Public Goods 4. Ensuring Economy-wide Stability

According to your​ text, one reason for flat or falling achievement scores even in the face of substantially higher education subsidies may be that A. some of the funds are going to social services rather than to enhance learning activities. B. students are so unmotivated that no amount of spending will ever improve scores. C. the additional funds are being siphoned off by dishonest school board members. D. most parents do not support the schools or their​ children's educational activities.

A. some of the funds are going to social services rather than to enhance learning activities.

Which of the following is an example of a transfer payment​? A. Subsidized public housing. B. Social Security. C. Medicare. D. food stamps.

B. Social Security.

Full-Employment Act

It established three goals for government stabilization policy: full employment, price stability and economic growth.

Monopoly

A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.

Government-sponsored good

A good that has been deemed socially desirable through the political process. Museums are an example.

According to your​ text, which of the following represents the largest source of tax receipts for the Federal ​government? A. individual income taxes B. property taxes C. corporate income taxes D. sales taxes

A. individual income taxes

Market failures A. prevent the price system from attaining economic efficiency. B. weaken the argument for government intervention in the economy. C. result in quantities and prices that are socially desirable. D. strengthen economic efficiency by forcing unprofitable firms to close.

A. prevent the price system from attaining economic efficiency.

Since 1965, that concern has been reflected in the existence of the ___ program, which pays hospital and physicians' bills for U.S. residents over the age of 65 (and for those younger than 65 in some instances). In return for paying a tax on their earnings while in the workforce (2.9 percent of wages and salaries, plus 3.8 percent on certain income for high-income households), retirees are assured that the majority of their hospital and physicians' bills will be paid for with public monies.

Since 1965, that concern has been reflected in the existence of the Medicare program, which pays hospital and physicians' bills for U.S. residents over the age of 65 (and for those younger than 65 in some instances). In return for paying a tax on their earnings while in the workforce (2.9 percent of wages and salaries, plus 3.8 percent on certain income for high-income households), retirees are assured that the majority of their hospital and physicians' bills will be paid for with public monies.

The fundamental problem of ___ goods is that the private sector has a difficult, if not impossible, time providing them. Individuals in the private sector have little or no incentive to offer public goods. It is difficult for them to make a profit doing so, because it is too costly and, hence, infeasible to exclude nonpayers.

The fundamental problem of public goods is that the private sector has a difficult, if not impossible, time providing them. Individuals in the private sector have little or no incentive to offer public goods. It is difficult for them to make a profit doing so, because it is too costly and, hence, infeasible to exclude nonpayers. Consequently, true public goods must necessarily be provided by government.

Expropriation

Which means that if you refuse to pay your taxes, your bank account and other assets may be seized by the Internal Revenue Service. In fact, you have no choice in the matter of paying taxes to governments.

Proportional rule

A decision-making system in which actions are based on the proportion of the "votes" cast and are in proportion to them. In a market system, if 10 percent of the "dollar votes" are cast for blue cars, 10 percent of automobile output will be blue cars.

Free-rider

A problem that arises when individuals presume that others will pay for public goods so that, individually, they can escape paying for their portion without causing a reduction in production.

Market failure

A situation in which the market economy leads to too few or too many resources going to a specific economic activity.

Which of the following is not a difference between market and collective decision​ making? A. Government goods are costless to​ produce, while private goods have production costs. B. Money payments can signal intensity of desire for a​ product, but voting cannot. C. Government goods are often provided free of​ charge, while market goods have a price. D. The government can use expropriation to extract​ payments, but private firms cannot.

A. Government goods are costless to​ produce, while private goods have production costs.

Which of the following is an example of a transfer in kind? A. Unemployment insurance benefits B. Food stamps C. Disability benefits D. Social Security

B. Food stamps

Which of the following is not an economic function of​ government? A. Providing a legal system. B. Income redistribution. C. Promoting competition. D. Ensuring​ economy-wide stability.

B. Income redistribution. A relatively recent political function of government has been the explicit redistribution of income.

Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the U.S. government except A. the profit motive of physicians and hospitals. B. consumers of Medicare tend to only consume the high valued medical services. C. total medical spending​ (number of consumers times the price of medical​ services) has risen rapidly in the U.S. D. government planners failed to correctly estimate the increase in consumption of medical services.

B. consumers of Medicare tend to only consume the high valued medical services. There is no evidence that consumers of Medicare services tend to consume only high valued medical services. In​ fact, they tend to consume a large quantity of services. Since the marginal utility of services falls as more are​ consumed, they consume low valued services that are extremely costly to provide.

Other than correcting​ externalities, other economic functions of government include A. deciding what to​ produce, how to produce it and for whom to produce for all sectors of the economy. B. providing a legal​ system, allocating public​ goods, promoting​ competition, and stabilizing the economy. C. deciding which states may or may not impose income​ taxes, charge fees and enforce contracts. D. income redistribution and the regulation and provision of merit and demerit goods.

B. providing a legal​ system, allocating public​ goods, promoting​ competition, and stabilizing the economy.

Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A. black market payments. B. transfer payments. C. ​government-sponsored payments. D. ​government-inhibited payments.

B. transfer payments.

Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A. black market payments. B. transfer payments. C. demerit payments. D. merit payments.

B. transfer payments. Any payment for which the recipient has concurrently produced no good or service is called a transfer payment.

What is one result of the Medicare​ subsidy? A. The elderly population in the United States receives a lower quality of medical care than what is provided for the elderly population in other countries. B. The number of physicians in the United States has declined. C. Patients may elect to have some treatments that are of low value to them but that are costly to provide. D. The health care industry is more efficient than it otherwise would be.

C. Patients may elect to have some treatments that are of low value to them but that are costly to provide.

A good that has been deemed socially desirable through the political process is known as A. a demerit good. B. a positive externality. C. a​ free-rider. D. a merit good.

D. a merit good. The designation of certain goods as merit goods is entirely subjective and is done within the political process. Some examples of merit goods in our society are sports​ stadiums, museums,​ ballets, plays, and concerts.

Subsidizing medical services through Medicare A. makes medical services available to a large percentage of the​ population, who otherwise could not afford them. B. drives a wedge between the price received by providers and the price perceived by consumers. C. is a relatively low percentage of U.S. GDP compared to other nations. D. All of the above are true. E. Only A and B are true.

E. Only A and B are true.

Government, or political, goods

Goods (and services) provided by the public sector; they can be either private or public goods.

Public goods

Goods for which the principle of rival consumption does not apply and for which exclusion of nonpaying consumers is too costly to be feasible. They can be jointly consumed by many individuals at no additional cost and with no drop in quality or quantity. Furthermore, no one who fails to help pay for the good can be denied benefits.

Private goods

Goods that can be consumed by only one individual at a time. Private goods are subject to the principle of rival consumption.

Collective decision making

How voters, politicians, and other interested parties act and how these actions influence nonmarket decisions.