CH 5

Economic efficiency occurs when

(1) all activities generating more benefit than cost are undertaken (2) no activities for which the cost exceeds the benefit are undertaken

Which of the following explain situations when a market may fail to achieve ideal economic efficiency? Check all that apply. a. Externalities b. Absence of competition c. Poor information d. Public goods e. Too low interest rates f. Perfect competition

-Externalities - Absence of competition -Poor information -Public goods

In the following table, indicate which of the following are public goods. a. Mosquito abatement programs b. Electricity c. A fire department d. Elementary schools e. National defense

-Mosquito abatement programs -National defense

Public Goods

-goods for which (1) rivalry in consumption is absent and (2) it is difficult to exclude those who do not pay. -Goods, such as clean air and clean water, that everyone must share.

nonrival in consumption

-if more than one person can consume the same unit of the good at the same time -consumption of the good by one person does not decrease the ability of other people to consume the good

What is market failure? a. A situation in which the structure of incentives is such that the political process, including democratic political decision-making, will encourage individuals to undertake actions that conflict with economic efficiency. b. A situation in which government must protect individuals and their property against aggression and provide a legal system for the enforcement of contracts and settlement of disputes. c. A situation in which the structure of incentives is such that markets will encourage individuals to undertake activities that are inconsistent with economic efficiency. d. A situation in which external costs are present and output is too large.

A situation in which the structure of incentives is such that markets will encourage individuals to undertake activities that are inconsistent with economic efficiency.

Why are public goods difficult for markets to allocate efficiently? a. It is difficult to restrict the consumption of public goods to those who pay b. The structure of incentives is such that markets will encourage individuals to undertake activities that are inconsistent with economic efficiency. c. It is difficult to provide consumers with full information about public goods d. The availability of a good to one consumer does not reduce its availability to others

It is difficult to restrict the consumption of public goods to those who pay

Which of the following best explains the sources of external costs? a. The great variety of goods and the large numbers of consumers b. Excessive water pollution c. Poorly defined and imperfectly enforced property rights d. The scarcity of clean air

Poorly defined and imperfectly enforced property rights

The government decides that it will cut taxes in an attempt to move the economy out of a severe recession. a. Productive function whereby the government promotes economic stability through fiscal policies b. Productive function whereby the government redistributes income from rich to poor c. Productive function whereby the government maintains market competition d. Protective function whereby the government enforces property rights

Productive function whereby the government promotes economic stability through fiscal policies

Families with annual incomes under $20,000 receive monthly transfer payments from the government. a. Reallocating resources b. Maintaining competition c. Promoting stability d. Redistributing income

Redistributing income

Antonio was willing to contribute $50 this year to his local college radio station. However, after learning that the radio station had already met its goal of raising $500,000, he decides not to contribute, because he knows he can listen to it without contributing. This is an example of which of the following? a. A deadweight loss b. An external cost c. An opportunity cost d. The free-rider problem

The free-rider problem

English philosopher John Locke argued that the protection of each individual's person and property (acquired without the use of violence, theft, or fraud) was the primary function of government. Which of the following best explains why such protection is important to the efficient operation of an economy? a. When people are assured that they will be able to enjoy the benefits of their efforts, they will be more productive b. When people are assured that they will be able to enjoy the benefits of their efforts, their productive behavior is undermined.

When people are assured that they will be able to enjoy the benefits of their efforts, they will be more productive

When would a government intervention be considered economically inefficient? a. When buyers or sellers are poorly informed b. When there is a lack of competition c. When political choices lead to outcomes that conflict with the efficient allocation of resources d. When prices are high

When political choices lead to outcomes that conflict with the efficient allocation of resources

An external cost

a cost imposed on a third party not directly involved in the activity in question.

free rider

a person who receives the benefit of a good but avoids paying for it

Market failure

a situation in which the structure of incentives is such that markets will encourage individuals to undertake activities that are inconsistent with economic efficiency

positive externality

beneficial side effect that affects an uninvolved third party

Which of the following is true regarding externalities? a.Externalities can only be corrected with government regulation. b.Externalities always involve external costs. c.Externalities occur when the actions of an individual or group spill over onto others, without their consent. d.Externalities generally enhance the rate of economic growth.

c.Externalities occur when the actions of an individual or group spill over onto others, without their consent.

When external costs are present, a.democratic political decision-making can be counted on to improve the efficiency of resource allocation. b.market allocation will achieve idealized economic efficiency. c.the conditions implied by Idealized efficient allocation of resources will be absent, but it does not follow that political action will improve the situation. d.democratic political decision-making will never be able to improve the efficiency of resource allocation.

c.the conditions implied by Idealized efficient allocation of resources will be absent, but it does not follow that political action will improve the situation.

In response to the terrorist attacks of September 11, 2001, airline security screening increased dramatically. As a result, the travel time of airline passengers has increased substantially. Economics suggests, that at some point, the marginal improvements from dedicating more and more resources to preventing attacks will ______ , while the marginal costs will _________.

decline, rise

negative externality

harmful side effect that affects an uninvolved third party

nonexcludable good

it is not possible to prevent an individual from using this good

External costs arise because

property rights are poorly defined or imperfectly enforced. Although it makes sense to improve the definition and enforcement of property rights, the nature of some goods renders defining and enforcing property rights extremely difficult.

Consumer information problems will be lowest for which of the following products or services? a. Trucks b. International flights c. Ice sculptures d. shampoo

shampoo

A deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

An opportunity cost

the value of the highest-valued forgone choice.