MICROECONOMICS FINAL EXAM PART 2

explain why economists consider it to be one of the economic functions of government to provide a legal system

A market economy relies heavily on contracts and property rights. Property rights must be defined and protected if people are going to make investments in resources, and if people are going to exchange assets. Contracts must also be enforced. By providing a legal system, the government can ensure that a market system will function better

an externality can best be defined as

a consequence of a transaction that spills over to affect third parties

a negative externality is a situation in which

a cost is associated with an economic activity is borne by a third party

an external cost, such as the cost generated by pollution, is

a cost paid by a third party or by society at large

under present U.S. law, cocaine is an example of

a demerit good

an economic activity that, from the perspective of society, results in too few or too many resources going to a specific economic activity once external benefits or costs are taken into account is called

a market failure

which of the following is an example of the free-rider problem?

a neighbor who refuses to help pay for a street light that is intended to help reduce crime

a friend of yours receives a voucher for an apartment in a public housing project. this apartment represents

a private good

which of the following goods is NOT subject to the free-rider problem?

a public transit system

a situation for which a benefit or cost associated with an economy activity spills over to third parties is called

an externality

the principle feature of private goods is that

consumption by one person reduces the quantity available to others

a transfer payment is a payment

for which no services or goods are rendered

society is likely to over-allocate resources to produce goods that

generate negative externalities

an effluent fee

gives the firm a right to pollute if it pays a tax on what it discharges

under present U.S. law, which one of the following is a demerit good?

heroin

when an external cost exists, firms tend to

overproduce the good

which law specifically mandated the federal government's responsibility for economy-wide stability?

the employment act of 1946

which event was most important in promoting the belief that the U.S. government should work to ensure economy-wide stability?

the great depression

the legal system in the United States tends

to promote competition

how do public goods differ from private goods?

A private good is characterized by the principle of rival consumption, which means that one person's consumption of a good reduces the amount available for someone else. A public good is not characterized by the principle of rival consumption. Public goods can be used by more people at no additional cost. Further, once the good is produced, it is usually impossible, or at the very least difficult, to exclude anyone from consuming it.

how does the government carry out income redistribution?

Income redistribution can be carried out by a combination of progressive taxation and transfer payments. Transfer payments are money payments made by the government to people for which no goods or services are rendered. Transfers can also be "in-kind," that is, in the form of a good or service.

explain what market failure is. how does market failure relate to the price system? how does market failure relate to the role of government

Market failure is a situation in which a market economy either allocates too few or too many resources to a specific economic activity. That is, it is a situation in which a market economy does not achieve economic efficiency. The price system achieves economic efficiency as long as there are not any market failures. But, when there are market failures, an unregulated price system does not achieve economic efficiency, and there is a potential role for government to intervene in some way to bring about an efficient situation.

suppose a valley periodically floods. a dam can be built in the river that would prevent the flooding. explain how flood control provided by building the dam fits the four characteristics of a public good

The dam would be indivisible since it must be a certain size in order to be effective. Once flood control is provided, new homes can be protected at no additional cost. Any one home's protection does not reduce the protection from flooding for any other home. Finally, it would be impossible to exclude someone from the benefits of the flood control. Hence, flood control is a public good.

a government action that can help correct positive externalities is

a subsidy to consumers of the good that provides external benefits

a negative externality such as pollution can be corrected by

a tax on producers

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?

an external benefit is associated with good X

when a paper producer pollutes the air, economists argue that there is

an external cost

pollution is caused by a market failure, in an industry in which there is

an over-allocation of resources in production

market failure occurs when

an unrestrained market economy leads to too few or too many resources going to a specific economic activity

to protect the competitive economic system by restricting the formation of monopolies, the government has passed and enforced

antitrust laws

functions of government include which of the following?

both correcting for externalities and promotion competition

which of the following is a transfer payment?

both social security and unemployment benefits

federal antitrust laws in the United States are enforced

by the department of justice and by the federal trade commission

a fundamental aspect of public gods is that they

can be consumed jointly by many people simultaneously

one characteristic of a public good is that it

can be consumed simultaneously by many individuals

all of the following illustrate how government can correct for positive externalities EXCEPT

charging effluent fees

which of the following is an example of a demerit good?

cigarettes

which of the following would be classified as a private good?

clothing

one of the most important characteristics of the price system is that

consumers are the ones who ultimately decide what is produced

what are the three goals of the employment act of 1946?

correcting externalities

subsidies paid to the health care industry for medicare patients are paid by

current taxes

in the U.S. economy, which of the following is NOT a generally accepted economic function of government?

distributing consumer goods

the economic role of the legal system might best be described as

establishing the "rules of the game" and acting as a referee when disputes arise among market participants

which of the following leads to an underallocation of resources to a specific economic activity?

external benefits

public education is priced below market price largely as a result of

government subsidy programs

social security and medicare are clear examples of

governmental intervention in the market

when comparing market and collective (public sector) decision making, which statement is NOT true?

in both decision making sectors, majority rule is how things are done

as a share of total national income, government spending generally has

increased over the last fifty years

government can correct for negative externalities by

increasing taxes or regulation

according to your text, which of the following represents the largest source of tax receipts for the federal government?

individual income taxes

which of the following often involves positive external benefits?

inoculation programs

the U.S. legal system mainly engages in activities that

involve defining and protecting property rights

by definition, a merit good

is a good that is deemed socially desirable

in the United States, the idea that the federal government should undertake actions to stabilize business activity

is a relatively new idea that developed in the years during and after the Great Depression

an example of an in-kind transfer is

low-cost public housing

U.S. antitrust laws view monopolies as undesirable because

monopolies restrain trade and promote inefficiencies

which of the following is an example of a public good?

national defense

public goods are

neither exclusive nor rival

public goods are characterized by the free-rider problem because

no one can be excluded from the benefits of public goods once they are produced

public goods are unlikely to be provided by the private sector because

no one can be excluded from the consumption of the good

suppose that rapper Eminem decides to perform in Chicago's grand park. the concert promoters rightly believe that the only way the concert can be given in the park is if the concert is free. this conclusion is based on the assumption that the concert would be

nonexcludable in consumption

public goods are essentially

nonrival in consumption

which of the following is best characterized as a public good?

police protection

a subsidy is sometimes used by the government to correct the problems associated with

positive externalities

market failures

prevent the price system from attaining economic efficiency

federal antitrust laws in the United States are intended to

promote competition by prohibiting monopolies

to correct for the underproduction of products with positive externalities, the government must

provide the incentives for the private sector to produce the good

public goods are

provided to additional users at no additional cost

which of the following is NOT an ECONOMIC function of government?

providing demerit goods

in the absence of government,

public goods are likely to be underprovided

which one of the following is NOT a characteristic of public goods?

public goods are subject to the principle of rival consumption

suppose that the XYZ industry produces a product that results in negative external costs to society. this information suggests that

resources are over-allocated to the industry

which of the following does NOT involve transfers in kind?

salaries of government employees

examples of transfer payments are

social security checks and unemployment insurance payments

an externality exists when

some of the benefits or costs associated with a good are borne by third parties

the free-rider problem is encountered when

someone benefits from the consumption of a public good without paying his or her full share

the goal of medicare is to

subsidize medical expenses for the elderly

assume the production of a good gives rise to external benefits. the government may increase efficiency by

subsidizing the production of the good

if the production of a product results in significant external costs, an appropriate government policy might be to

tax the producer and thus shift the supply curve to the left

when the production of one good spills benefits over to third parties, the government should consider all of the following EXCEPT

taxing the production or consumption of the good

private goods are those goods

that can only be consumed by one individual at a time

the do-good company produces goods that provide benefits to society-at-large. if consumers of do-good's products fail to take external benefits into account,

the demand curve will be too far to the left

the economics functions of government differ from the political functions of government in that

the economic functions involve things that affect the way exchange is carried out while the political functions include policies that affect income redistribution

which of the following does NOT generate positive external benefits to society?

the haphazard disposal of industrial wastes

if production of an item results in negative external costs, then

the market price is below the socially preferred price that reflects the external costs

a demerit good is a good which

the political process has deemed socially undesirable

a merit good is one that

the political process has determined socially desirable

a result of a positive externality in the production of a good is that

the price system will under-allocate resources to the production of that good or service

the distinguishing characteristic of private goods is that

their use is exclusive to the people who purchase them

when economies are sovereign

they have the freedom to decide what they wish to purchase

when an Australian citizen enjoys military protection in Australia without contributing to the cost of Australia's defense budget, then

this citizen is a free rider

a government subsidy is typically used

to encourage a positive externality

a firm that has a great deal of control over the price of a good is said

to have monopoly power

which of the following does NOT describe the intended purpose of the antitrust laws of the United States?

to prohibit certain economic activities that promote trade

the purpose of antitrust legislation is

to reduce the power of monopoly

suppose that a per-unit subsidy is granted to each individual who consumes a product providing external benefits to society at large. each individuals demand curve will shift _________, and the market demand curve for the product will shift __________

to the right; to the right

money payments made by governments to individuals for which no services or goods are concurrently rendered are known as

transfer payments

which of the following statements is TRUE?

transfer payments are money payments made by the government for which no goods or services are currently received

when a good causes positive external benefits to accrue to third parties, an unfettered market will

under-allocate resources to the good causing the benefit

the opportunity cost of providing a public good to an additional individual is

zero