Economics PS8

Which of the following best describes the process of regulatory​ capture? a. Bank of America encourages the​ FDIC-Federal Deposit Insurance​ Corporation- to make banks with less than​ $50 million of deposits pay a higher percentage into the insurance fund​ "for the protection of​ consumers." b. Major League Baseball spends money lobbying members of congress to keep its​ anti-trust exemption. c. Michigan decides to lower its sales tax rate while increasing the income tax rate on incomes above​ $200,000. d. An Alabama senator agrees to vote for a Kentucky​ senator's bridge​ project, in hopes that the Kentucky senator will vote for the Alabama​ senator's electric dam project.

a. Bank of America encourages the​ FDIC-Federal Deposit Insurance​ Corporation- to make banks with less than​ $50 million of deposits pay a higher percentage into the insurance fund​ "for the protection of​ consumers."

What is free​ riding? a. Free riding is benefiting from a good without paying for it. b. Free riding is benefiting from a good because it is rival. c. Free riding is paying less for a good than it is worth. d. Free riding is paying for a good but not benefiting from it. e. Free riding is benefiting from a good and paying for it.

a. Free riding is benefiting from a good without paying for it.

The public choice model can be used to examine voting models that contrast the manner in which collective decisions are made by governments​ (state, local, and​ federal) and the manner in which individual choices are made in markets. Which of the following descriptions is consistent with the difference between collective decision-making and decision-making in​ markets? a. Individuals are less likely to see their preferences represented in the outcomes of government policies than in the outcomes of markets. b. Everyone who votes must agree with a decision made collectively through​ government, but in markets individuals can make their own choices. c. The cost of a government policy is determined by a majority vote of members of the​ public; decisions made in markets are based on individual willingness to pay. d. Choices made through government policies are more important than decisions individuals make through markets.

a. Individuals are less likely to see their preferences represented in the outcomes of government policies than in the outcomes of markets.

What is the focus of a​ command-and-control approach to reducing​ pollution? a. The government imposing quantitative limits on the amount of pollution firms are allowed to generate. b. The government imposing taxes intended to bring about an efficient level of output in the presence of externalities. c. The government trading emissions allowances to pollute for cash payments. d. The government offering subsidies intended to bring about an efficient level of output in the presence of externalities.

a. The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

Which of the following is not an example of​ rent-seeking behavior? a. engaging in aggressive advertising that slams a​ competitor's product b. lobbying the government to impose tariffs on certain imported products c. competition for the exclusive right to import a product d. competition for subsidies

a. engaging in aggressive advertising that slams a​ competitor's product

An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following​ observation: "It was important... to understand the ways that government could fail​ systematically." In this​ context, government failure means a. politicians making bad decisions for their own selfish reasons. b. the most popular ideas are not realized. c. the government is spending more money than it taking in from taxes. d. the President investigating congressmen for sleeping with interns. Public choice theory helps us to understand how government could fail systematically because it recognizes that policymakers are a. different than consumers or managers of firms and are unlikely to pursue their own​ self-interest, even when their​ self-interest conflicts with the public interest. b. elected and are bound by the interests of consumers. c. no different than consumers or managers of firms and are likely to pursue their own​ self-interest, even if their​ self-interest conflicts with the public interest. d. elected and are bound by the interests of producers. The same article notes​ that: ​"Rent-seeking is a very useful concept to have around when thinking about​ policy." Rent seeking is a. finding the least cost areas in which to locate. b. the use of government action to make everyone better off. c. lobbying or bribing politicians to gain favorable legislation or regulations. d. running advertising in order to change public opinion. Rent seeking can be useful in understanding why government policies a. infringe upon our civil rights and right to privacy. b. sometimes produce results that are inefficient and harmful to the people. c. often result in unfair tax policies that punish the most productive people. d. often result in very inexpensive outcomes.

a. politicians making bad decisions for their own selfish reasons. c. no different than consumers or managers of firms and are likely to pursue their own​ self-interest, even if their​ self-interest conflicts with the public interest. c. lobbying or bribing politicians to gain favorable legislation or regulations. b. sometimes produce results that are inefficient and harmful to the people.

Examples of transaction costs include ​(check all that​ apply): a. the cost of monitoring an agreement. b. the time required to negotiate an agreement. c. the difference between the private costs and social costs of production. d. the cost of the externality. e. the cost of drafting a contract or agreement.

a. the cost of monitoring an agreement. b. the time required to negotiate an agreement. e. the cost of drafting a contract or agreement.

One important difference between the political process and the market process is that a. the political process results in collective actions in which everyone is obliged to participate while in the market process individuals are free to participate or not. b. the political process results in collective actions in which everyone is made better off while the market process results in actions that favor some groups only. c. the political process results in collective actions that maximize economic surplus while the market process may lead to efficiency losses. d. the political process results in collective actions in which not everyone is required to participate while in the market process individuals are obliged to participate.

a. the political process results in collective actions in which everyone is obliged to participate while in the market process individuals are free to participate or not.

A producer or a consumer will internalize an externality because a. they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive. b. they are driven by their individual moral codes. c. they are compelled by law. d. they face government regulation.

a. they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.

Your neighbor John has a barking dog. Which of the following statements is​ true? a. It does not create any externalities because you do not own the dog. b. It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders. c. It does not create any externality because John bought the dog from a shelter. d. It creates only a negative externality by disrupting your sleep.

b. It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders.

The public choice model a. shows government intervention improves efficiency. b. applies economic analysis to government decision making. c. states the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle. d. shows the democratic system of voting will consistently represent the underlying preferences of voters. e. explains the choices of households and firms.

b. applies economic analysis to government decision making.

The parties involved in an externality have an incentive to reach an efficient solution because a. government regulations compel private parties. b. both parties become better off when an efficient solution is reached. c. the party that causes negative externality does not have any legal right to do so. d. it is morally the right thing to do.

b. both parties become better off when an efficient solution is reached.

Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and​ lakes, causing substantial environmental damage. By imposing a tax on toilet​ paper, the government will cause a. consumers to internalize the externality causing the equilibrium price of toilet paper consumed to decrease. b. consumers to internalize the externality causing the equilibrium quantity of toilet paper consumed to decrease. c. consumers to internalize the externality causing the equilibrium quantity of toilet paper consumed to increase. d. consumers to internalize the externality causing the equilibrium price of toilet paper consumed to stay the same.

b. consumers to internalize the externality causing the equilibrium quantity of toilet paper consumed to decrease.

The Coase Theorem states that a. if transaction costs are​ low, private deals will create externalities and result in inefficient outcomes. b. if transaction costs are​ low, private bargaining will result in an efficient solution to the problem of externalities. c. if transaction costs are​ low, the government will regulate an efficient solution to the problem of externalities. d. if transaction costs are​ low, private markets will create externalities and result in efficient outcomes. e. if imposed on free​ markets, government regulations will result in inefficient outcomes and create deadweight loss.

b. if transaction costs are​ low, private bargaining will result in an efficient solution to the problem of externalities.

Traffic congestion is an example of a​ ________. a. pecuniary externality b. negative externality c. positive externality d. free-rider problem

b. negative externality

Barney subscribes to the NFL Sunday​ Ticket, a program package offered by DirecTV that allows Barney to watch every regular season NFL game played on Sundays.​ (Barney can watch Sunday Night Football without subscribing to the Sunday​ Ticket.) The subscription price for the Sunday Ticket is in addition to the fee paid for​ Barney's DirecTV package. Barney invites two friends who work with him to watch football on Sundays at his home. Considering that Barney can watch any football game broadcast on​ Sundays, including those games not shown on his local television​ stations, he is a. a free rider because Barney invites two friends who work with him to watch football on Sundays at his home. b. not a free rider because Barney pays for the program package. c. a free rider because Barney can watch Sunday Night Football without subscribing to the Sunday Ticket. d. not a free rider because Barney can watch Sunday Night Football without subscribing to the Sunday Ticket. Barney's friends are a. free riders because because they benefit from watching Sunday games without paying for them. b. not free riders because they benefit from watching Sunday games without paying for them. c. free riders because Barney can watch Sunday Night Football without subscribing to the Sunday Ticket. d. not free riders because Barney invited them to watch Sunday Night Football.

b. not a free rider because Barney pays for the program package. a. free riders because because they benefit from watching Sunday games without paying for them.

William Easterly in The White​ Man's Burden shares the following account by New York University Professor Leonard Wantchekon of how Professor​ Wantchekon's village in​ Benin, Africa, managed the local fishing pond when he was growing​ up: To open the fishing​ season, elders performed ritual tests at​ Amlé, a lake fifteen kilometers from the village. If the fish were large​ enough, fishing was allowed for two or three days. If they were too​ small, all fishing was​ forbidden, and anyone who secretly fished the lake at this time was​ outcast, excluded from the formal and informal groups that formed the​ village's social structure. Those who committed this breach of trust were often shunned by the whole​ community; no one would speak to the​ offender, or even acknowledge his existence for a year or more. The village elders were trying to prevent the economic problem of a free riding. b. the tragedy of the commons. c. the overuse of a public good. d. a positive externality. The solution of the village elders to outcast those who committed the breach of trust by fishing in the pond when it was forbidden is an example of a assigning property rights to solve the problem which would have been effective given that it was a small village. b. a​ "Pigouvian tax" which was not likely to be effective because it was very difficult to design the proper tax rate. c. using a​ "cap-and-trade" system which could not be very effective because it was too complex for the villagers to understand. d. using community norms to solve the problem. The solution would most likely be effective because it was used in a small community.

b. the tragedy of the commons. d. using community norms to solve the problem. The solution would most likely be effective because it was used in a small community.

The presence of a positive externality in a market leads to​ ________. a. a fall in consumer surplus b. underproduction of the good c. a deadweight loss d. overproduction of the good

b. underproduction of the good

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods, quasi-public goods, or common resources. A television broadcast of the World​ Series: a. A private good b. A​ quasi-public good c. A public good d. A common resource Mail​ delivery: a. A private good b. A​ quasi-public good c. A public good d. A common resource Education in a public school​ (Grades K through​ 12): a. A private good b. A​ quasi-public good c. A public good d. A common resource Education in a private school​ (Grades K through​ 12): a. A private good b. A​ quasi-public good c. A public good d. A common resource Hiking in a large park​ (no congestion) surrounded by a​ fence: a. A private good b. A​ quasi-public good c. A public good d. A common resource Hiking in a large park​ (no congestion) not surrounded by a​ fence: a. A private good b. A​ quasi-public good c. A public good d. A common resource An apple: a. A private good b. A​ quasi-public good c. A public good d. A common resource

c. A public good a. A private good d. A common resource a. A private good b. A​ quasi-public good c. A public good a. A private good

Farmer Owens has an apple orchard that must be pollinated by bees in order to bear fruit. Farmer​ Owens's neighbor,​ Maude, owns beehives with bees that can pollinate the apple trees. Suppose the benefit of the bees to Farmer Owens is ​$1,000 per year. Suppose the bees provide no benefit to Maude but she must pay ​$2,000 per year to maintain the hives. If Farmer Owens and Maude engage in Coase​ bargaining, what would likely​ result? a. Farmer Owens would not be willing to pay Maude an amount such that she would maintain the hives. b. Farmer Owens would pay Maude between​ $0 and ​$1,000 to maintain the hives. c. Farmer Owens would pay Maude between $ 1,000 and $2,000 to maintain the hives. d. Farmer Owens would pay Maude at least ​$2,000 to maintain the hives. e. Maude would pay Farmer Owens between ​$1,000 and ​$2,000 to maintain the hives.

c. Farmer Owens would pay Maude between $ 1,000 and $2,000 to maintain the hives.

Jess practices her electronic keyboard every evening for an upcoming musical concert. The sound disturbs​ Felix, who usually works on his college assignments around the same time. The value of the practice to Jess is​ $100, while the cost of the practice to Felix is​ $80. According to​ George, a student of​ economics, Jess should pay Felix​ $80 to continue her practice for the musical concert. Which of the following assumptions is being made by​ George? a. He assumes that Felix and Jess are friends. b. He assumes that​ Felix's cost of a college education is more than​ $100. c. He assumes that Felix has the right to quiet studying conditions. d. He assumes that this is the only concert Jess has this year. e. He assumes that​ Jess's income from the concert would be less than​ $80.

c. He assumes that Felix has the right to quiet studying conditions.

The advanced machinery used for limestone quarrying in a particular region leads to noise pollution and affects the hearing ability of people residing in the neighborhood. The quarrying activity also results in soil erosion. According to an environmental research​ group, the market price and output of limestone in this region is much higher than the socially efficient​ level, as the limestone producers do not include the social cost of production in their output decision. The group formally requests the government to impose a tax on limestone production to internalize the externality. Suppose the government responds by imposing a tax on the production of limestone. After the tax is​ imposed, total production of limestone declines by the amount the environmental research group had estimated. This convinces them that limestone production is now socially efficient. Which of the following conclusions can most reasonably be drawn from the given​ information? a. The social cost of reducing the production level equals the economic benefit of the goodwill generated as a result of this. b. Production in the cement​ industry, a major consumer of​ limestone, has decreased by 5 percent. c. The marginal private cost of producing limestone at this quarry is now equal to the marginal social cost as estimated by the research group. d. The reduced production caused unemployment in the region to reach unprecedented levels. e. Since the demand for limestone is highly​ inelastic, limestone manufacturers are able to shift the entire burden of the tax to consumers.

c. The marginal private cost of producing limestone at this quarry is now equal to the marginal social cost as estimated by the research group.

Why is a typical person likely to gather more information when buying a new car than when voting for a member of​ Congress? a. because it is less costly to acquire information about consumer items than it is about political candidates b. because the effects of buying a car are long term while a member of Congress has e relatively short tenure c. because buying a new car affects a person more immediately and personally compared to voting for a member of Congress. In the​ latter, a​ person's vote is only one of many voters and​ therefore, not likely to have a large impact on the outcome. d. because a​ person's preferences are more likely to be met with little effort in the political sphere but this is not the case when buying a car in the private marketplace

c. because buying a new car affects a person more immediately and personally compared to voting for a member of Congress. In the​ latter, a​ person's vote is only one of many voters and​ therefore, not likely to have a large impact on the outcome.

A corrective subsidy induces the​ ________ to the socially optimal level. a. consumers of a negative externality to increase the quantity consumed b. producers of a negative externality to increase the quantity produced c. consumers of a positive externality to increase the quantity consumed d. producers of a positive externality to reduce the quantity produced

c. consumers of a positive externality to increase the quantity consumed

An individual producer or a consumer​ "internalizes an​ externality" when a. they lobby against any government action related to the externalities caused by their actions. b. they ignore the externalities created by their actions. c. in their own decisions they take into account the external effects of their actions. d. they keep knowledge of the externalities private to them.

c. in their own decisions they take into account the external effects of their actions.

Are policymakers susceptible to​ rent-seeking behavior? Explain. ​Rent-seeking behavior a. does not succeed because government failure may reduce economic efficiency. b. may succeed when voters are not rationally ignorant. c. may succeed when policymakers engage in logrolling. d. may succeed when policymakers are not subject to regulatory capture. e. does not succeed because policymakers are not allowed to accept campaign contributions from firms seeking special interest legislation.

c. may succeed when policymakers engage in logrolling.

Rent seeking is an attempt to a. use the government for individual benefit at the expense of others with logrolling. Regulatory capture seeks to achieve the same objective with rational ignorance. b. represent underlying voter preferences with majority voting. Regulatory capture is an attempt to represent underlying voter preferences with government regulations. c. use the government for individual benefit at the expense of others. Regulatory capture is an example of​ this, where a regulatory agency makes decisions benefiting the firm being regulated. d. use the government to improve economic efficiency. Regulatory capture is an example of​ this, where a regulatory agency improves economic efficiency. e. use the government to improve economic efficiency. Regulatory capture is an example of government​ failure, where the government reduces economic efficiency.

c. use the government for individual benefit at the expense of others. Regulatory capture is an example of​ this, where a regulatory agency makes decisions benefiting the firm being regulated.

The public choice model raises questions about the​ government's ability to regulate economic activity efficiently. Which of the following statements represents the views of most economists with regard to the role of​ government? a. U.S. citizens can afford more government regulation if the cost of this regulation is borne mostly by taxpayers with the highest incomes. b. Congress should abolish the Food and Drug​ Administration, the Environmental Protection​ Agency, and other agencies and commissions because the costs of their actions exceed the benefits they provide to the public. c. Government should do more to regulate markets. The public choice model has shown that rent seeking and rational ignorance affect more markets than are currently subject to regulation. d. Agencies such as the Food and Drug Administration and the Environmental Protection Agency can serve a useful​ purpose, but we need to take the costs of regulation into account along with the benefits.

d. Agencies such as the Food and Drug Administration and the Environmental Protection Agency can serve a useful​ purpose, but we need to take the costs of regulation into account along with the benefits.

What are the sources of externalities and market​ failure? a. incomplete property rights b. the difficulty of enforcing property rights in certain countries c. a lack of understanding of the market system d. Both​ (a) and​ (b).

d. Both​ (a) and​ (b).

A Pigovian tax is a. a tax that creates deadweight loss. b. a cost that parties incur in the process of agreeing to and carrying out an exchange of goods and services. c. a tax to completely eliminate externalities. d. a tax to bring about an efficient level of output in the presence of externalities. e. a tax that creates an externality.

d. a tax to bring about an efficient level of output in the presence of externalities.

Jeff and James have different opinions regarding the amount the U.S. government should spend on national defense. Jeff believes that more should be spent in order to ensure that the​ country's enemies will not challenge the United States militarily. James believes that a lot of defense spending is wasted on overpriced military equipment and that the United States​ "should not be the​ world's policeman." Suppose that instead of the U.S. Congress and the president having the authority to determine the amount the military has to​ spend, this authority is turned over to the private sector. A privately owned firm conducts a survey to determine the willingness of people to pay for national defense. In response to the​ survey, both Jeff and James state that they are not willing to pay anything for national defense. If Jeff and James made this response they would a. not be free riders because private provision of national defense suffers from nonexcludability. b. be free riders because private provision of national defense suffers from excludability. c. not be free riders because they would still receive the same amount of protection as everyone else whether or not they pay. d. be free riders because they would still receive the same amount of protection as everyone else whether or not they pay.

d. be free riders because they would still receive the same amount of protection as everyone else whether or not they pay.

How is free riding related to the tendency of a public good to create market​ failure? Free riding results in a. the market producing a quantity of public goods that is inefficiently low because they are nonrival. b. the government providing a quantity of public goods that is inefficient because they are nonexcludable and nonrival. c. the market producing a quantity of public goods that is inefficiently high because they are nonexcludable. d. the market producing a quantity of public goods that is inefficiently low because they are nonexcludable. e. the market producing a quantity of public goods that is efficient because they are nonexcludable and nonrival.

d. the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

By market​ failure, the author means a. a situation in which a cost is present that affects someone who is not directly involved in the production of a good or service. b. the tendency for a common resource to be underused. c. a situation that occurs when one​ person's consumption of a unit of a good means no one else can consume it. d. benefiting from a good without paying for it. e. a situation in which the market fails to produce the efficient level of output.

e. a situation in which the market fails to produce the efficient level of output.

When are we likely to see private solutions to the problem of​ externalities? a. When transaction costs are low. b. When the parties involved have information about the externality. c. When the number of parties involved is small. d. both a and b. e. all of the above.

e. all of the above.

At what level must a Pigovian tax be set to achieve​ efficiency? A Pigovian tax must be set equal to a. the market equilibrium price. b. the marginal private cost of production. c. the transaction cost associated with Coase bargaining. d. the marginal social cost of production. e. the cost of the externality.

e. the cost of the externality.

Every year at the beginning of flu​ season, many​ people, including the​ elderly, get a flu shot to reduce their chances of contracting the flu. One result is that people who do not get a flu shot are less likely to contract the flu. Getting a flu shot results in a ______________ externality.

positive