Study Guide 2
In the U.S. economy, which of the following is NOT a generally accepted economic function of government?
Distributing consumer goods
Which of the following is NOT an ECONOMIC function of the U.S. government?
Encouraging production of demerit goods
Which of the following leads to an underallocation of resources to a specific economic activity?
External benefits
What are the three goals of the Employment Act of 1946?
Full employment, price stability, and economic growth
The Employment Act of 1946 reflects which one of the following functions of government?
Improving economy-wide stabilization
Which of the following does NOT involve transfers in kind?
Salaries of government employees
A subsidy is sometimes used by the government to correct the problems associated with
positive externalities.
Functions of government include which of the following?
Both A and B are correct.
Which of the following is best characterized as a public good?
Police protection
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 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.
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.
A friend of yours receives a voucher for an apartment in a public housing project. This apartment represents
a private good.
One of the most important characteristics of the price system is that
consumers are the ones who ultimately decide what is produced.
Society is likely to over-allocate resources to produce goods that
generate negative externalities.
An effluent fee
gives a firm the right to pollute if it pays a tax on what it discharges.
The economic 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.
A firm that has a great deal of control over the price of a good is said
to have monopoly power.
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.
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.
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 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.
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.
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
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.
Which of the following is an example of a public good?
National defense
Which of the following is NOT an ECONOMIC function of government?
Providing demerit goods
Which one of the following is NOT a characteristic of public goods?
Public goods are subject to the principle of rival consumption.
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
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.
Which of the following does NOT generate positive external benefits to society?
The haphazard disposal of industrial wastes
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
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.
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.
When a paper producer pollutes the air, economists argue that there is
an external cost.
A situation in which a benefit or a cost associated with an economic activity spills over to third parties is called
an externality.
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.
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.
All of the following illustrate how government can correct for positive externalities EXCEPT
charging effluent fees.
Subsidies paid to the health care industry for Medicare patients are paid by
current taxes.
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.
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.
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.
The U.S. legal system mainly engages in activities that
involve defining and protecting property rights.
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.
Public goods are
neither exclusive nor rival.
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.
resources are over-allocated to the industry.
overproduce the good.
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.
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.
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 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 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.
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.
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 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.
When consumers 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.
The legal system in the United States tends
to promote competition.
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.
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.
