Macroeconomics Chapter 5

In a free market system, competition generates economic efficiency only when A) individuals take into account the full opportunity cost of their actions. B) consumers are motivated by a sense of the greater good, not their own self-interest. C) firms are motivated by a sense of the greater good, not their desire for profit. D) economic decisions are taken out the hands of individuals and placed in the hands of government officials.

A

Market failure occurs when A) the price system fails to generate an efficient allocation of resources. B) the price system fails to generate an equal distribution of income. C) the price system fails to generate an equal distribution of wealth. D) the price system allows consumers to make their own decisions.

A

Effluent Fee

A pollution tax

Public Goods

Can be jointly consumed by many individuals simultaneously

The Other Economic Functions of Government PPPE

Providing a legal system Promoting competition Providing public goods Ensuring economywide stability

Medicaid

Subsidizes people with lower incomes

When resources of the production of a good are misallocated , it is a A) market failure. B) government failure. C) legislative failure. D) productive failure.

A

Monopoly

A firm that can determine the market price, in the extreme case is the only seller of a good or service

Market Failure

A situation in which the unrestrained market economy leads to too few or too many resources going to a specific economic activity Prevents economic efficiency and individual freedom Is addressed by public policy (government)

Government Outlays

All federal, state and local spending

Exclusion Principle

Anyone can enjoy the benefits of a public good, even if they have not paid for it

Free-Rider Problem

Arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods

Costs that spill over to third parties are called A) opportunity costs. B) external costs. C) variable costs. D) public costs.

B

Medicare

Began in 1965 Pays hospital and physicians' bills for U.S. residents over 65 with public monies 2.9% of earnings taxed Second biggest domestic program in existence

In its most ideal form, a price system allows A) firms to act in such a way that they eliminate scarcity. B) consumers to satisfy all their wants. C) resources to move from lower-valued uses to higher-valued uses through voluntary exchange. D) government policy makers to allocate resources to the uses which they consider to be in the best interests of society.

C

Market failures take place when A) a market fails to have the goods that consumers want. B) an underground market develops. C) market transactions lead to underproduction or overproduction of a good. D) producers stop production.

C

What would happen in a free market system when production of a good generates negative externalities? A) There is a shortage of the good. B) There is a surplus of the good. C) The equilibrium quantity of the good is less than the efficient amount. D) The equilibrium quantity of the good is more than the efficient amount.

D

Resource misallocations of externalities External costs External benefits

External costs—market overallocates External benefits—market underallocates

Merit Goods

Goods deemed socially desirable through the political process EX. Museums

Demerit Goods

Goods deemed socially undesirable Illegal substances

Proportional Rule

If 10% of "dollar votes" cast for blue cars, 10% of output is blue

Antitrust Legislation

Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices

Externalities

Occur when the consequences of an economic activity spill over to affect third parties Externalities are examples of market failures

Third Parties

Parties who are not directly involved in a given activity or transaction

Principal of Rival Consumption

Recognizes individuals are rivals in consuming private goods

Property Rights

Rights of an owner to use and exchange property

Theory of Public Choice

The study of collective decision making

Incentive Structure

The system of rewards and punishments individuals face with respect to their actions