Chapter 5 Questions

An effluent fee refers to a government regulation which specifies a maximum allowable rate of pollution.

false

Suppose that the market price of good X equals the firm's cost of producing that good, but it does not reflect any costs imposed on society. Which of the following is FALSE? Resources are over-allocated in the production of good X. The good is priced too low. Too much of good X is being produced. An external benefit is associated with good X.

An external benefit is associated with good X.

A government subsidy is typically used to provide a government-inhibited good. to reduce inflation. to correct a negative externality. to correct a positive externality.

to correct a positive externality.

Medicare and Social Security are examples of programs that do not respond to rational economic incentives. transfer payment programs. the efficient allocation of resources under a free market system. public goods.

transfer payment programs.

Government spending as a percent of national income peaked during World War II. peaked during the Reagan administration. has been steadily climbing since 1850. has been almost constant this century.

peaked during World War II.

Public goods are desired because they make supply equal to demand for private goods. they came in small units. we want the government to spend our tax dollars. people want and value them but the private sector will not make them available.

people want and value them but the private sector will not make them available.

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. Postal service. B. Highways where tolls are collected. C. Flood control. D. Tax collection.

C. Flood control.

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

C. Income redistribution

Ms. Smith is given a voucher for an apartment in a public housing project. The apartment is not a public good. is subject to the exclusion principle. is not subject to the principle of rival consumption. has widespread benefits and concentrated costs.

is not a public good.

A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account. Refer to the above figures. An external cost exists. This will lead to a(n) overproduction equal to Q1 minus Q2. underproduction equal to Q1 minus Q2. underproduction equal to Q4 minus Q3. overproduction equal to Q4 minus Q3.

overproduction equal to Q1 minus Q2.

Over the past 40 years, there has been an increase in spending on public education without a significant increase in student performance. One explanation given by economists on why student performance has not improved is that not enough funds have been spent on public education. the quantity of educational services has not increased beyond the pre-subsidy equilibrium. schools are providing high-priced services that are not valued by parents. too much competition for educational services.

schools are providing high-priced services that are not valued by parents.

A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account. Refer to the above figures. A negative externality exists that has not been corrected. Price and quantity will be P2 and Q2. P3 and Q3. P4 and Q4. P1 and Q1.

P1 and Q1.

Refer to the above figure. Medicare subsidies have increased the price of medical services to Ps. The quantity demanded of medical services is QM. Q0. Qd. undetermined without more information.

QM.

Which of the following is not a political function of the government that leads to involvement in the​ economy? A. ​In-kind transfers. Your answer is not correct. B. Public goods. C. Merit and demerit goods. D. Income redistribution.

B. Public goods.

An example of a market failure is unemployment. a firm is dumping toxic waste that is making people sick. when not everyone who wants to see a major league football game can. when there is an increase in demand and a shortage develops.

a firm is dumping toxic waste that is making people sick.

All of the following are ways that the government can correct for positive externalities EXCEPT producing the good itself. by assessing an effluent fee. by subsidizing the consumption of the good. by regulation.

by assessing an effluent fee.

External ______ lead to an overallocation of resources to the specific economic activity. Two possible ways of correcting these spillovers are ______ and ______.

costs; taxation; regulation

If the production of ukuleles creates a negative externality that is not corrected for by the government, the equilibrium quantity of ukuleles is at a optimal level. efficient. lower than optimal. higher than optimal.

higher than optimal. (external cost so gov't overallocates resources)

Public goods are provided only by the capitalistic system. any goods or services produced by the government. provided only by the communist system. provided to additional users at no additional cost.

provided to additional users at no additional cost.

To correct for negative externalities, the government should allow the price system do the correction. should create a public good. can impose a tax. can provide a subsidy to consumers.

can impose a tax.

Refer to the above figure. In the absence of a subsidy, the quantity Qo and price Po would prevail in the market. Qd would be demanded and QM would be supplied. the price Pd would be charged and quantity QM demanded. None of the above is correct.

the price Pd would be charged and quantity QM demanded.

1. 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​ $60 per device. In this case the​ out-of-pocket price each consumer pays for a blood pressure monitoring device is ​$____. ​(enter your response as a whole number​). 2. 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. ​(enter your response rounded to one decimal place​). 3. Following the expansion of the State Care​ program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is ____% ​(enter your response rounded to the nearest whole percentage​). 4. The percentage of total expenditures paid by the consumers of these devices is ____% ​(enter your response rounded to the nearest whole percentage​).

1. $10 2. $1.4 million 3. 83% 4. 17%

Scans of internal organs using magnetic resonance imaging​ (MRI) devices are often covered by subsidized health insurance programs such as Medicare. Consider the table to the right illustrating hypothetical quantities of individual MRI testing procedures demanded and supplied at various​ prices, and then answer the questions that follow. ​Note: Throughout this exercise all responses should be entered as whole numbers. 1. In the absence of a​ government-subsidized health​ plan, the equilibrium price of MRI tests is ​$_____ and the amount of​ society's total spending on MRI tests is ​$_____ million. 2. Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price​ (that is,​ out-of-pocket cost) to the individual of​ $100 per test. In this case people will consume _________ MRI tests. 3. The​ per-unit price that induces producers to provide the amount of MRI tests demanded at the government guaranteed price of​ $100 is ​$______ and​ society's total spending on MRI tests becomes ​$______ million. 4. Under the​ government's coverage of MRI​ tests, the​ per-unit subsidy it provides is ​$_____ and the total subsidy that the government pays to support MRI testing at its guaranteed price is ​$_____ million.

1. $500; 40 million 2. 100,000 3. $700; 70 million 4. 600; 60 million

1. The conditions in the market for residential Internet access in a U.S. state are displayed in the figure to the right. The government of this state has determined that access to the Internet improves the learning skills of​ children, which it has concluded is an external benefit of Internet access. The government has also concluded that if these external benefits were to be taken into​ account, 3 million residences would have Internet access. Suppose that the state​ government's judgments about the benefits of Internet access are correct and that it wishes to offer a​ per-unit subsidy just sufficient to increase total Internet access to 3 million residences. The​ per-unit subsidy it should offer is ___ dollars per month. ​(Enter your response as a whole​ number.) 2. Using the line drawing tool​, illustrate how the provision of a subsidy to producers would affect conditions in the​ state's market for residential Internet access. Properly label this line. Carefully follow the instructions​ above, and only draw the required objects.

1. 20 2. see diagram

1. Consider the market for a health care service displayed in the figure to the​ right, in which the government currently pays a​ per-unit subsidy, M. If the government raises the value of M to a larger dollar amount per unit of​ service, what will happen to the​ out-of-pocket price paid by​ consumers, the price required to induce suppliers to provide​ services, and the quantity of services​ provided? Will the​ government's total expense for this health care service rise or​ fall? The ​per-unit subsidy,​ M, that the government currently provides for the​ health-care service is equal to the difference between _______ 2. Using the rectangle drawing​ tool, show how much the government currently spends on the health care service. Label this area​ "Current expense." Carefully follow the instructions​ above, and only draw the required object. 3. If the government raises the value of M to a larger dollar amount per unit of​ service, the​ out-of-pocket price paid by consumers will _____, the price required to induce suppliers to provide services will _____, the quantity of services provided will _____, and the​ government's total expense for this health care service will _____.

1. Ps and Pd 2. see diagram 3. fall; rise; rise; rise.

1. Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in virtually all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges. The diagram to the right depicts the unregulated market for oranges. Using the line drawing ​tool, draw the supply curve that takes into account both the private cost and the social cost of orange production. Properly label your line. Carefully follow the instructions​ above, and only draw the required objects. 2. Which of the following government policies might be effective in achieving the amount of orange production that fully reflects all social​ costs? A. A tax on growers commensurate with the cost to third parties. B. Government financing or production of oranges. C. Regulations that limit the use of pesticides. D. Both A and C are viable policies. E. Both A and B are viable policies.

1. see diagram 2. C. Both A and C are viable policies

1. A​ nation's government has determined that mass​ transit, such as bus​ lines, helps alleviate traffic​ congestion, thereby benefiting both individual auto commuters and companies that desire to move products and factors of production speedily along streets and highways. ​Nevertheless, even though several private bus lines are in​ service, commuters in the city are failing to take the social benefits of the use of mass transit into account. The figure to the right shows the market demand and market supply curves for bus rides. ​1.) Using the line drawing​ tool, determine how the​ market's outcome with respect to output would be impacted if commuters did take into account the social benefits associated with bus ridership. Properly label this line. ​2.) Using the point drawing​ tool, indicate the new equilibrium point. Label the point ​'E2​'. Carefully follow the instructions​ above, and only draw the required objects. 2. The socially efficient use of bus services may be achieved by which of the following government​ policies? A. Regulations. B. Subsidies. C. Government financing​ and/or production. D. Any of the above E. None of the above

1. see diagram 2. D. any of the above

1. Suppose that the figure to the right applies to​ Pennsylvania's steel market. The demand curve for steel is D. The supply​ curve, S1​, includes only the costs that the firms in the market have to pay. Market equilibrium occurs at point​ E, with a price of​ $800 per ton and a quantity of 110 million tons per year. Producing​ steel, however, also involves externalities. If producers had to pay these external​ costs, the supply curve would shift to S2​, the equilibrium quantity would fall to 90 million tons per​ year, and the price would rise to ​$990 per ton. Equilibrium would shift from E to E1. Now suppose that steel manufacturers in this state adopt a new technique for producing steel that entails a smaller external cost. If​ Pennsylvania's government aims to correct the steel​ market's negative externality via an effluent​ fee, is the appropriate fee higher or lower now that steel producers have adopted the new​ technique? ​1.) Using the line drawing​ tool, draw either a new demand curve ​(D1​) or a new supply curve ​(S3​) that shows how an improved production technique affects the market for this good. Properly label your line. ​2.) Using the point drawing tool​, indicate the new equilibrium price and quantity. Label this point ​' Upper E 2 E2​.' Carefully follow the instructions​ above, and only draw the required objects. 2. With the new​ steel-manufacturing technique in​ place, the appropriate effluent fee imposed by the Pennsylvania government would __________ because the new production technique results in a _________ external cost.

1. see diagram 2. be lower; smaller

1. Suppose that the figure to the right applies to​ Pennsylvania's steel market. The demand curve for steel is D. The supply​ curve, S1​, includes only the costs that the firms in the market have to pay. Market equilibrium occurs at point​ E, with a price of​ $800 per ton and a quantity of 110 million tons per year. Producing​ steel, however, also involves externalities. If producers had to pay these external​ costs, the supply curve would shift to Upper S2​, the equilibrium quantity would fall to 90 million tons per​ year, and the price would rise to ​$990 per ton. Equilibrium would shift from E to E1. Now suppose that steel manufacturers in this state adopt a new technique for producing steel that entails a smaller external cost. In the absence of any government action to correct the negative externality from steel​ production, would the overallocation of resources to steel production in Pennsylvania be larger or smaller following the adoption of the new​ steel-manufacturing technique? ​1.) Using the line drawing​ tool, draw either a new demand curve ​(D1​) or a new supply curve ​(S3​) that shows how an improved production technique affects the market for this good. Properly label your line. ​2.) Using the point drawing tool​, indicate the new equilibrium price and quantity. Label this point ​'E2​.' Carefully follow the instructions​ above, and only draw the required objects. ​2. So, in the absence of any government action to correct the negative externality from steel​ production, the overallocation of resources to steel production in Pennsylvania would ____________ following the adoption of the new​ steel-manufacturing technique.

1. see diagram 2. be smaller

1. Inoculations against communicable diseases generate external benefits. As shown in the figure to the​ right, if each individual ignores these external​ benefits, the demand curve for inoculations would be D1​, and together with the supply​ curve, S, the market clearing quantity would be 150 million.​ However, if buyers of inoculations took the external benefits into​ account, the demand curve would shift to D2. The new equilibrium quantity would be 190 ​million, and the equilibrium price​ of an inoculation would rise from​ $10 to ​$14. Now assume that a careful study of the likely transmission of influenza in light of a changed population distribution has revealed that the external benefits from inoculations are greater than those currently displayed in the graph. In light of this​ information, if the government aims to correct the positive externality in the inoculation market via a​ per-unit subsidy to consumers in the wake of the​ study, is the appropriate​ per-unit subsidy higher or lower than​ before? ​1.) Using the line drawing​ tool, draw either a new demand curve ​(D3​) or a new supply curve ​(S1​) that shows how higher external benefits from inoculations affect the market for this good. Properly label your line. ​2.) Using the point drawing tool​, indicate the new equilibrium price and quantity. Label this point ​'E3​.' Carefully follow the instructions​ above, and only draw the required objects. 2. If the government aims to correct the positive externality in the inoculation market via a​ per-unit subsidy to​ consumers, the​ per-unit subsidy would need to be _______________ before the study because the study found the external benefits to be ________.

1. see diagram 2. higher than; higher

1. Inoculations against communicable diseases generate external benefits. As shown in the figure to the​ right, if each individual ignores these external​ benefits, the demand curve for inoculations would be D1​, and together with the supply​ curve, S, the market clearing quantity would be 150 million.​ However, if buyers of inoculations took the external benefits into​ account, the demand curve would shift to D2. The new equilibrium quantity would be 190 ​million, and the equilibrium price​ of an inoculation would rise from​ $10 to ​$14. Now assume that a careful study of the likely transmission of influenza in light of a changed population distribution has revealed that the external benefits from inoculations are greater than those currently displayed in the graph. In light of this​ information, is the underallocation of resources to the provision of​ flu-vaccine inoculations larger or smaller than indicated in the​ figure? ​1.) Using the line drawing​ tool, draw either a new demand curve (D3​) or a new supply curve (S1​) that shows how higher external benefits from inoculations affect the market for this good. Properly label your line. ​2.) Using the point drawing tool​, indicate the new equilibrium price and quantity. Label this point ​'E3​.' Carefully follow the instructions​ above, and only draw the required objects. ​2. Thus, in light of the findings of the new​ study, the underallocation of resources to the provision of​ flu-vaccine inoculations is ______________ indicated in the figure.

1. see diagram 2. larger than

1. Many people who do not smoke cigars are bothered by the odor of cigar smoke. Use the accompanying figure showing the market for cigars to illustrate the implications of a failure of the market cigar supply curve to reflect the social or spillover costs of cigar smoking. Using the line drawing tool​, locate the approximate position of the true supply curve ​(the one reflecting both private and social ​costs). Properly label this line. Carefully follow the instructions​ above, and only draw the required objects. 2. In the absence of any government involvement in the market for​ cigars, will too many or too few cigars be produced and​ consumed? 3. From​ society's point of​ view, will the market price of cigars be too high or too​ low?

1. see diagram 2. too many 3. too low

Which of the following types of goods is subject to the free-rider problem? A public good A private good A product that creates a positive externality A product that creates a negative externality

A public good

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. national defense is not a public good in Canada. B. ​Canada's tax system is less efficient than other industrial nations. C. Canadians perceive national defense as generating external costs rather than as a public good. D. Canada is able to​ free-ride on the defense spending of the United States.

D. Canada is able to free-ride on the defense spending of the United States.

Refer to above figure in which negative externality existed. The government imposes a $1.00 pollution tax on the producer. Supply shifts leftward. This tax will be borne entirely by the producer. The amount of the tax shifted to the consumer depends on the consumer's reaction. This tax will be shifted entirely to the consumer. The tax will be divided into equal amounts between consumer and producer.

The amount of the tax shifted to the consumer depends on the consumer's reaction.

Why are public goods provided by the government, rather than by the private sector? because they are large-scale projects that require the kind of financing only governments can generate through the issuance of bonds because no one really benefits from public goods because it would be difficult for a private sector firm to make a profit providing a public good, since consumers who benefit would not have to pay for it because private sector firms do not have the foresight to plan for public goods

because it would be difficult for a private sector firm to make a profit providing a public good, since consumers who benefit would not have to pay for it

The theory of public choice suggests that the goods provided by government, whether public or private goods, are not scarce. you can lower your tax bill if you are careful not to consume too many government resources, regardless of what your neighbors do. government agencies tend to be inefficient because they are subject to institutional arrangements in which managers do not have an incentive to be efficient. government agencies tend to be inefficient because the people running them do not understand the concept of opportunity cost.

government agencies tend to be inefficient because they are subject to institutional arrangements in which managers do not have an incentive to be efficient.

Medicare subsidizes the consumption of medical care by the​ elderly, thus increasing the amount of such care consumed. People tend to purchase large amounts of _____-value, _____-cost services in publicly funded health care programs such as​ Medicare, because they do not directly bear the full cost of their decisions.

low; high

Basic economic analysis indicates that higher subsidies for public education have widened the differential between​ parents' and​ students' relatively _____ per-unit valuations of the educational services of public schools and the ________ costs that schools incur in providing those services.

low; higher

All of the following generate positive externalities EXCEPT lower marginal tax rates. public health programs. requiring proof of inoculation before entering elementary school. requiring proof of inoculation before entering college.

lower marginal tax rates.

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...

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.