ch. 5 practice exam

The difference between the economic and political functions of government is that

the economic function is concerned with correcting for market failures while the political function is not.

An example of a public good is

the fire department.

A characteristic of a public good is

the free-rider problem.

Many nations are consistently accused of enjoying the benefits of membership in the United Nations, yet they provide few or no funds to support the organization. This is an example of

the free-rider problem.

The concept that Mr. Jones is going to enjoy the benefits of police protection even though he no longer pays taxes is called

the free-rider problem.

The provision of a legal system is an important economic function of the government because

the legal system affects how exchange takes place through its enforcement of contracts.

A government-inhibited good is a good which

the political process has deemed socially undesirable.

A government-inhibited good is one that

the political process has determined is socially undesirable.

A government-sponsored good is one that

the political process has determined socially desirable.

Receiving a voucher for an apartment in a public housing project would be an example of a good that satisfies

the principle of rival consumption.

Which of the following functions of government gives property owners the incentive to use their property efficiently?

the protection of property rights

The economic problem with Medicare financing is that

there is a built-in incentive to consume more services.

Consumers are sovereign when

they have the freedom to decide what they wish to purchase.

A government subsidy is typically used

to correct a positive externality.

The purpose of an effluent fee imposed on a firm is

to reduce output by increasing production costs thereby reducing resources used.

When government intervenes in the production process because external benefits exist, it typically attempts

to shift the industry's demand curve 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 there is an external benefit, the unregulated market

underproduces the good or service.

An example of a transfer payment is

unemployment insurance benefits.

A government-inhibited good is one that

has been deemed socially undesirable via the political process.

A government-sponsored good is often

subsidized

Education in the United States is

subsidized mainly by state and local governments.

A lighthouse that serves a dangerous coastal area is built. The lighthouse cost $2 million to build and serves 200 ships a month. If the shipping in the area increases so that 400 ships pass by a month, the increase in additional costs of providing the light to these new ships is

$0

Which of the following is an example of a negative externality?

A new hotel ruins the view of the ocean for a few homeowners.

When government intervenes in the production process because external costs exist, it typically attempts to shift the industry's

supply curve to the left.

What is the consequence of a positive externality in a market? What is the consequence of a negative externality? Why those consequences occur?

A positive externality leads to the equilibrium quantity of goods in a market that is less than the efficient amount from the society's perspective. A negative externality leads to the equilibrium quantity of goods in a market that is more than the efficient amount. A positive externality is not taken into account by consumers and hence is not reflected in the position of the market demand curve. This leads to an equilibrium market quantity below the socially preferred level. In contrast, a negative externality is not taken into account by producers and hence is not reflected in the position of the market supply curve. This leads to an equilibrium market quantity above the socially preferred level.

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.

A government-inhibited good is often

taxed.

Which of the following is a major reason why the Medicare program is in such financial trouble?

Because medical services are subsidized by the government, both consumption by the elderly and the cost of services have increased.

Which of the following is FALSE about public-sector decision making?

Decisions involve no opportunity cost.

Which of the following statements is TRUE of external costs?

External costs should only be corrected for if the correction will not increase the market price. External costs should not be corrected since people will bear the costs whether they are corrected or not. Correct Answer When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources. There are no good ways to correct for the external costs.

Is there any common characteristic shared by government-inhibited goods and government-sponsored goods? Explain briefly.

Government-inhibited and government-sponsored goods do not have any inherent characteristics that qualify them as such; instead, through the political process, people collectively make judgments about which goods and services are "good" for society and which are "bad."

What type of policy does the government adopt in dealing with government-inhibited goods?

It taxes, regulates, or prohibits their use.

Explain what economic efficiency is. How does a price system lead to economic efficiency?

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.

Use the concept of supply and demand to explain why an increase in Medicare subsidies can lead to an increase in health care spending by the government.

Medicare reduces the price that the elderly people have to pay for health services, so that an increase in the subsidy will lead to an increase in the quantity demanded of health services. As a result, the government ends up paying more in total health care spending.

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.

Which of the following statements about public education is TRUE?

Over the last 40 years there has been no decline in any of the measures of student performance in public education. Over the last 40 years, there has been a decrease in public spending for public education, while there has not been a significant increase in performance. Most of the increases in public spending on public education have gone into programs that have increased student learning. Correct Answer Over the last 40 years, there has been an increase in spending for public education, while there has not been a significant increase in performance.

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

Public goods are subject to the principle of rival consumption.

Examples of transfer payments are

Social Security checks and unemployment insurance payments.

What happens in public schools when government funds subsidize education?

The cost of providing the education is more than what the students pays.

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 arguably fits the 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. It would be impossible to exclude someone from the benefits of the flood control, so flood control arguably is a public good.

Which of the following checks issued by the government represents a transfer payment?

The federal government pays a retiree her Social Security benefits.

What is the free-rider problem, and how is it related to public goods?

The free-rider problem arises from the exclusion principle. Since no one can be excluded from the benefits of a public good, even if they don't contribute towards paying for the good, people have an incentive to let other people pay for the good and to not contribute themselves. If everyone free rides, the good will not get produced. Hence, public goods usually are provided by the government and paid for by taxes.

List and explain the four key assumptions in the theory of public choice.

The key assumptions in the theory of public choice are (1) individuals are motivated by self-interest, which implies individuals will act within the political process to maximize their individual (not collective) well-being, (2) opportunity costs exist, which means every government action has an opportunity cost, (3) competition is present, which implies elected representatives will always be in competition for available government funds and (4) individuals in government face an incentive structure, which means if a bureaucrat provides poor representation, the organization's owners-the taxpayers-have no immediate mechanism for expressing their dissatisfaction.

Which of the following is TRUE about the political and market systems of voting?

The political voting system functions according to majority rule, while the market voting system functions according to proportional rule.

Briefly explain the similarities and differences of decision making by the market sector and the public sector.

The similarities of the two sectors include the presence of opportunity costs, competition by serving individual interests, and an incentive structure. The main differences between decisions by the two sectors are that the public sector often makes decisions on goods at zero price, by use of force, and by a majority voting system instead of "dollar votes."

According to the textbook, what are the two key political functions of government in a market economy?

The two functions of government that are political rather than economic include (1) the regulation and provision of government-sponsored and government-inhibited goods, and (2) income redistribution.

Which of the following is an example of a negative externality?

There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.

Which of the following statements is TRUE?

Transfers in kind include Welfare, Social Security, and unemployment insurance benefits. Correct Answer Transfer payments are money payments made by the government for which no goods or services are currently received. Education is the largest category of federal government expenditures. Government spending as a percent of total national income has continuously decreased since the 1950s.

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.

In the spring, I enjoy the fragrance coming from my neighbors' flowers. The fragrance is is an example of

a free rider problem.

An effluent fee is an example of

a government policy to correct for an external cost.

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

a government-inhibited good.

Graphically, the effects of an external cost can be shown as

a leftward shift of the market supply curve.

An example of third parties in the market of automobiles is

a pedestrian that is affected by the polluted air from automobiles.

When a person throws a cigarette out of a car window and starts a brush fire, this is

an example of an external cost.

An economic activity in which benefits or costs affect 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.

Federal antitrust laws in the United States are enforced

by the Department of Justice and by the Federal Trade Commission.

One characteristic of a public good is that it

can be consumed simultaneously by many individuals.

To correct for negative externalities, the government

can impose a tax.

In the United States, which of the following is an example of a government-inhibited good?

cigarettes

External costs can be defined as

the cost associated with private production, but partially borne by society.

Providing public goods is a(n)

economic function of government.

A free rider is someone who

enjoys the flowers I have planted and does not compensate me for them.

Costs that spill over to third parties are called

external costs.

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

flood control

An effluent fee

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

A difference between the market and the public sector is that

government can use force, while the market does not.

When state and local governments provide public schools with a per-unit subsidy to provide educational services, the price that the schools providing these services receive is

greater than the market clearing price without the subsidy.

The current Medicare system is designed so that it actually encourages

higher costs of medical services.

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

involve defining and protecting property rights.

By definition, a government-sponsored good

is a good that is deemed socially desirable.

When positive externalities exist, the private market equilibrium represents a

market price which is too high and a market quantity which is too low.

My brother decides to leave his empty soda can on someone's lawn. This is an example of a

negative externality.

When costs spill over to third parties, there is a(n)

negative externality.

Public goods are

neither exclusive nor rival.

Public goods are basically

nonrival in consumption.

When an external cost exists in the production of a good, firms tend to

over-produce the good.

Which of the following is NOT an example of a negative externality?

playing a boom box loudly in a crowded park rush hour traffic Correct Answer inoculation against disease pollution

If U.S. consumers increase their spending on hybrid cars by 60 percent, and 60 percent more hybrid cars are produced, this is known as the

proportional rule.

Public goods are

provided to additional users at no additional cost.

Which of the following is heavily subsidized by state and local governments?

public education

In the absence of government

public goods are likely to be underprovided.

By subsidizing the provision of public education, the government

pushes the per-unit price that consumers pay for educational services below the market clearing price. Correct Answer All of these pushes the per-unit price that producers of educational services receive above the market clearing price. generates an increase in the quantity of educational services demanded.

Which of the following might be a method that the government could use to promote the production of a good that generates positive externalities?

regulations financing additional production subsidies Correct Answer All of these are correct.