Microeconomics Ch 8

Suppose a person has income of $100,000. If this person has a marginal tax rate of 20% on income over $20,000 and a zero tax rate on the first $20,000 of income, what is the person's average tax rate? 16% 20% 30% 4%

16% Use the formula [Y-$20,000].20/Y. The result using algebra is .20 -.04 = .16. Multiply .16 by 100 to get a percentage.

The auto insurance industry relies on people to pay for more coverage than they actually need. be risk averse. be risk neutral. be socially conscientious.

be risk averse. The insurance market will break down if people take significantly greater risks. If driver's are risk lovers they will self insure.

A taxpayer pays _____________tax rate on additional income if the tax system is progressive, ___________ tax rate on additional income if the tax system is proportional, and ______________ tax rate on additional income if the tax structure is regressive. a higher; a lower; the same a lower; a higher; the same the same; a higher; a lower a higher; the same; a lower

a higher; the same; a lower Progressive: tax rates increase on marginal income; proportional: tax rates remain the same on marginal income; regressive: tax rates fall on marginal income.

If you are willing to pay more than the expected value of an opportunity, you are considered a risk lover. risk averse. risk neutral. a risk manager.

a risk lover. The type of risk taker you are depends on your willingness to 'risk' not getting at least what you invested.

If the consumption of a good by one person reduces the amount of the good that can be consumed by others, economists say that the good is exclusive. non-exclusive. a rival good. a non-rival good.

a rival good. This defintion is for a rival good. Examples would be a hamburger (exclusive) or a park (non-exclusive).

If third parties bear part of the cost of an externality, the Coase theorem corollary says that there will be no solution. the government may have to impose a solution. the third parties have to be included in the negotiation. the solution will ignore the third parties.

the government may have to impose a solution. If third parties bear part of the cost of an externality, the negotiation may become too complicated for the original parties to work out. If that is the case, it may be more cost effective for the government to impose a solution on the parties.

The internalization of a negative externality from a particular production process will cause the market demand curve to shift to the right. the market demand curve to shift to the left. the market demand curve to stay the same. There is not enough information to answer the question.

the market demand curve to stay the same. Internalization in production will affect the supply curve. Costs at all levels of output increase and the supply curve shifts inward. The demand curve is unaffected.

A market failure is any economic outcome in which prices are too high for most consumers. there is a shortage or surplus of a good or service. the market does not provide the optimal outcome for a particular good. the market provides a poor quality good or service.

the market does not provide the optimal outcome for a particular good. Economists assume that markets provide the most efficent outcomes. When they do not do this, economists call the situation a market failure.

Internalizing a negative externality refers to the government absorbing the cost of correcting a problem. the producer bearing the cost of correcting a problem. the affected party correcting the problem. ignoring the problem.

the producer bearing the cost of correcting a problem. Internalization means that the party producing the externality must bear all private and social costs.

Public choice theory assumes that those involved in the public sector are generally motivated by a desire to serve the public. generosity. the desire to achieve efficient production of public goods. the same factors that motivate them in the private sector.

the same factors that motivate them in the private sector. Public choice theory assumes that people act in their own self interest no matter what the setting.

If an externality affects only a few people, then a government solution may provide the best solution. then imposition of taxes would provide the best outcome. then it is likely that a private solution could occur. then it is likely that a private solution would be difficult.

then it is likely that a private solution could occur. When only a few parties are affected, negotiations usually become more productive and the likelihood of a successful outcome is enhanced. When many people are affected, the government may have to provide a solution.

The main problem about negative externalities is that they overstate the cost of production. they maximize the cost of production. they understate the cost of production. they minimize the cost of production.

they understate the cost of production. Production costs are private costs. The real social cost is the private cost plus the external costs that have to be borne by others. Private production costs understate the true social cost because they do not capture the external cost.

Producers would be willing to pay for perfect information. T/F

true Perfect information would reduce the risk of making a bad decision. Therefore, information has a market and a price in the market.

Usually the cost of preventing an external cost is less than the cost of correcting it after it has occurred. T/F

true Total economic value is usually greater when incentives are provided to prevent an external cost than if sanctions are imposed after the fact.

An example of a positive externality (external benefit) is vaccinating your dog for rabies. driving a car with a hole in the muffler. speeding. going to work when you are grumpy.

vaccinating your dog for rabies. A positive externality creates a benefit for another party. Vaccinating your dog protects not only the dog, but also other pets and people who may come into contact with the dog.

In a market experiencing a negative externality, quantity should __________ and price should __________. fall, fall. fall, rise. rise, fall. rise, rise.

fall, rise. Production creates a negative externality. If all social costs are accounted for, price must rise and quantity must fall until the true social cost equals the social benefit.

The "principle of second best" is the idea that the best way to internalize a negative externality is to force the producer to correct the effects of the externality after it has occurred. T/F

false The "principle of second best" means that the externality should be corrected in a way that most closely corrects the original problem. Correcting after the externality has occurred is usually not a method that closely corrects the original problem.

To obtain a market demand curve for a public good, one has to horizontally sum the demand of individual consumers. T/F

false You have to vertically sum the demand for public goods; private goods are horizontally summed.

Which of the following would create an external benefit? smoking in a restaurant watching television planting a flower garden B and C.

planting a flower garden External benefits provide positive values for others at little or no cost.

Methods used by life insurance companies to avoid the problem of moral hazard include all but premium discounts for non-smokers. premium discounts for certain age groups. premium increases for motorcycle owners. premium discounts for regular physical examinations.

premium discounts for certain age groups. Moral hazard refers to situations means that some individuals would take an unobservable action to gain at the expense of the other. Age is an observable trait that policyholders would find difficult to conceal.

If the production of a good results in negative externalities, then production will occur at socially optimal levels. production will be greater than the socially optimal output. production will be less than the socially optimal output. there will be a shortage of the good.

production will be greater than the socially optimal output. A negative externality is a cost that the producer does not have to pay. The producer tends to overproduce the good because all costs are not internalized.

You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If you are risk neutral, which of the following prices would you be willing to pay? $50 $15 $5 You would not be willing to purchase one at all.

$5 To calculate expected value, you multiply the odds of winning by its payoff and the odds of losing by its payoff and sum the two. A risk-neutral person will pay up to the expected value of the payoff. The expected value in this problem is 1% × $500 = $5.00.

You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If you are risk inclined, how much would you be willing to pay for a ticket? $4 $5 $6 None of the above.

$6 The expected value of the raffle ticket is $5 (1% × $500). A risk-inclined person would pay more than the expected value for the ticket.

What type of economy would we expect to have the highest incidence of moral hazard? A market economy A socialist economy A planned economy A transitional economy

A planned economy In Marxist societies, most incentives to produce were eliminated. A lack of incentives tend to increase moral hazards in that people are rewarded whether or not they produce.

Which of the following would not be an example of a problem associated with moral hazard? A senior citizen more willing to take prescription drugs because they are subsidized by Medicaid. A traveler leaving his valuables in sight in a hotel room because she has travel insurance. A salesman ordering an expensive meal on a business trip because his company pays his expenses. All of the above are examples of moral hazard.

All of the above are examples of moral hazard. A senior citizen more willing to take prescription drugs because they are subsidized by Medicaid. A traveler leaving his valuables in sight in a hotel room because she has travel insurance. A salesman ordering an expensive meal on a business trip because his company pays his expenses. Moral hazard provides an incentive to act recklessly at someone else's expense. It involves a party taking an unobservable action to gain advantage over another party.

Which of the following statements is not true? Establishing property rights may be a way to internalize an externality. Internalizing an externality is not the same as inducing the producer of an externality to consider both private and social costs in production decisions. If the producer produces the socially optimal output level, the externality is internalized. The producer calculates all costs and benefits into production decisions.

Internalizing an externality is not the same as inducing the producer of an externality to consider both private and social costs in production decisions. An internalization of an externality means that the producer accounts for all costs and benefits, and then produces at the socially optimal level.

Which of the following would be considered a solution to automobile air pollution by applying the principle of the second best? The government imposes an excise tax on each automobile. The government fines the automobile manufacturers for the cost of cleaning up the pollution. The government requires automobile manufacturers to put anti-pollution devices on automobiles. The government sells tradable pollution permits.

The government sells tradable pollution permits. The imposition of a tax, a fine, or a regulation only approximates the cost of the pollution. The problem is not the automobiles but pollution. Tradable pollution permits reduce the information costs and more closely reflect costs.

"Lemon laws" are a possible solution to moral hazards. adverse selection. externalities. public goods.

adverse selection. Adverse selection is a problem when a transaction exhibits asymmetric information. They allow purchasers to return defective merchandise after a purchase.

A positive externality can be unintentional. intentional. aesthetic. all of the above

all of the above unintentional. intentional. aesthetic. Positive externalities are the same as external benefits. They can be intentional, unintentional., and are often aesthetic.

Government subsidies of day care can be explained by government's attempt to internalize a _________________ associated with ______________________. cost, crime. benefit, well-adjusted children. cost, educated children. benefit, crime.

benefit, well-adjusted children. The government may subsidize day care because mothers often work. Day care is perceived as a social benefit because children who are cared-for are healthier and better adjusted and in the long run, exhibit fewer anti-social behavior traits.

A risk averse person would not be expected to buy health insurance. put money in treasury bills. buy a lottery ticket. get a flu shot.

buy a lottery ticket. A risk-averse person is willing to pay less than his expected return on any gamble. The expected value of a lottery ticket is less than the price of the ticket. A risk averse person would not pay for a lottery ticket.

Assymetric information exists in any transaction when both parties have all all relevant information. a nonexcludable good is being sold in a market. each party to a trade differ in the amount of knowledge they have of the good being traded. neither party has much information about the good being traded.

each party to a trade differ in the amount of knowledge they have of the good being traded. Assymetric information means that one party has more information than the other party, and is able to use that information to an advantage.

Coase believes all of the following except government intervention never effectively deals with externalities. people respond to positive incentives. people respond to negative incentives. private solutions can work even without identifiable property rights.

government intervention never effectively deals with externalities. Coase believes that if the parties cannot reach a settlement, the government can assist with a solution through taxes or subsidies.

Public choice theory is concerned with relative prices of goods and services. government policy decisions. marketing techniques. measuring consumer confidence in the economy.

government policy decisions. Public choice theory concerns itself with public sector or government choices.

The main feature of a progressive tax system is that the higher one's income, the _______________ one pays. more taxes higher the tax rate one pays. less taxes lower the tax rate

higher the tax rate one pays. A progressive system is one in which the tax rate rises as income rises.

In a majority voting system, a public project will always be approved if the total benefits exceed the total costs. always accounts for intensity of preferences. will always be approved if the total costs exceed the total benefits. may be approved even if the total benefits are less than the total costs.

may be approved even if the total benefits are less than the total costs. Simple majority voting fails to account for intensity of preferences. We can use intensity of preferences to sum the total benefits and total costs. Sometimes costs may exceed benefits but when each participant has one vote, the public project may be approved.

If an economic outcome results in a social cost, negative externalites are probably involved in the production of the good. the socially optimal level of production is being provided. producers would probably be willing to cut production. none of the above.

negative externalites are probably involved in the production of the good. Negative externalities are not reflected in the market supply curve, and producers tend to overproduce. The market supply curve would shift to the left if social costs were included, thus raising the price and decreasing equilibrium output.

Which of the following kinds of monopoly represent a market failure? A monopoly due to a patent or copyright. A monopoly due to economies of scale. A monopoly due to a governmental license for only one firm to operate. All the above are market failures.

All the above are market failures. A monopoly of any type is a market failure. The source of the monopoly does not matter.

Which of the following could not cause market failure? An uneducated person who does not value an education. A person who is so poor that he / she cannot bid for an item at its actual value. The unintended consequences of someone's actions. The existence of a natural monopoly.

An uneducated person who does not value an education. Market failures can occur because of externalities, wealth effects, or natural monopolies. However, only the individual can value the worth of any good.

Which of the following is least likely to generate an external cost? Smoking a cigar. Reading a book. Wearing cologne. Talking on a cell phone in a store.

Reading a book. Reading a book generates only a private benefit and a private cost. The other activities have the potential for generating external costs: many people are allergic to smoke or cologne and using a cell phone in public forces others to hear the conversation.

An unintended effect of a action that adversely affects others is called a complementary good. a substitute good. a negative externality (external cost). a positive externality (external benefit).

a negative externality (external cost). A negative externality is an adverse effect on third parties that is caused by the original transaction.

A free rider is a a consumer who consumes a private good and pays only what she is willing to pay. a public good and pays only what she is willing to pay. a public good and may be unwilling to pay anything for it. a public good but pays more than he would be willing to pay if the good were private.

a public good and may be unwilling to pay anything for it. Free riders take advantage of the non-exclusive nature of public goods: they can use the good without paying for it.

All of the following could be reasons that pollution exists except preventing pollution can cost more than paying the fine. fines are relied upon to generate tax revenues. consumers continue to buy products from companies which pollute. all of the above could be reasons that pollution exists.

all of the above could be reasons that pollution exists. preventing pollution can cost more than paying the fine. fines are relied upon to generate tax revenues. consumers continue to buy products from companies which pollute. Pollution is a negative externality but eliminating entails cost. If society chooses lessen pollution, the benefits will have to outweigh the costs. Sometimes society must provide incentives to producers of negative externalities.

It appears that cigarette companies may have had an advantage in information over consumers until recent years. If consumers had had the same information cigarrette consumption would have been lower. cigarette prices would have been lower. consumption and prices would have been about the same. both a and b.

both a and b. cigarrette consumption would have been lower. cigarette prices would have been lower. If consumers had had complete information about the health effects, the demand curve would have shifted to the left (a decrease in demand), thus decreasing quantity demanded and price.

Because of asymmetric information, buyers offer low prices to guard against the potential risks. buyers will only buy inexpensive items to guard against potential risks. sellers offer low prices to protect buyers from risks. sellers will not be able to sell higher priced items.

buyers offer low prices to guard against the potential risks. Consumers may be reluctant to buy high quality, expensive items because of the increased risk. Therefore, the market for high quality products may disappear.

When positive externalities are in a market, the market succeeds, because it is producing the socially optimal output. fails, because it overproduces the good. succeeds, because it overproduces the good that creates the positive externality. fails, because it underproduces the good that creates the positive externality.

fails, because it underproduces the good that creates the positive externality. The market failure occurs because all benefits are not captured by the market. Producers may find some transactions unprofitable, although society would benefit from the transaction.

In the automobile insurance industry, deductibles are meant to increase the moral hazard associated with a claim. T/F

false A deductible forces the insured to pay part of the claim. It makes the insured a co-insurer, thus raising the cost to the insurer of filing a false claim.

A sales tax on all retail sales is a progressive tax system because higher income taxpayers spend more money. T/F

false Lower income taxpayers spend a larger percentage of their incomes on retail purchases and a smaller percentage of their incomes on saving. For this reason, a sales tax becomes regressive.

The Coase theorem suggests that government policy is the most effective way of solving externality problems. T/F

false The Coase theorem suggests that the parties involved can often work out a more effective solution than the government solution. Coase suggests that the government should be used when the parties are unable to find a solution.

The impossibility theorem states that we can always achieve consistent results in societal preference ordering if we properly aggregate individual preferences. T/F

false The impossibility therorem says that there is no way to aggregate individual choices and achieve consistent results for social choices.

When a per-unit tax is imposed on a polluter, the marginal social cost curve shifts to the right. T/F

false The marginal social cost curve is the producers' supply curve. Imposing a tax on a producer shifts it to the left, a decrease in supply.

The true social cost of any transaction is the private cost and the external cost, minus the true social benefits. T/F

false The true social cost of a transaction is the sum of the private and external costs only. Subtracting the true social benefit from the true social cost yields the total economic value.

Asymmetric information refers to a situation in which both parties in a transaction have equal information and can calculate the expected value of the outcome of the transaction. T/F

false This statement is false. Asymmetric information exists when one party in a transaction has more knowledge about the quality of a product than the other party.

A market failure exists if average total cost is not minimized in the long run. if economic profit is zero in the long run. if an economic outcome fails to maximize economic value. if the situation for one person could be improved without hurting anyone else.

if an economic outcome fails to maximize economic value. Market failure means that the market does not maximize economic value. The solution is often a nonmarket solution.

Negative externalities (external costs)that arise from the production of a good equalize private and social costs. impose unfair costs on parties outside the production. cause a decrease in demand for the good. cause an increase in demand for the good.

impose unfair costs on parties outside the production. Negative externalities are often production costs that a producer successfully passes to third parties, thereby reducing the producers costs.

Negative externalities lead to maximum efficiency. inefficiency. minimum efficiency. compensation.

inefficiency. Markets are most efficient in the absence of externalities. Negative externalities may cause socially undesirable transactions to take place because the producer can pass some costs to others.

Market failures are caused by all of the following except imperfect information inferior products natural monopolies externalities

inferior products Market failures can occur because of externalities, wealth effects, market power, or asymmetric information. Poor products are not a source of market failure. Poor products may indicate market success if they are eliminated from the market.

One of the main potential problems caused by moral hazards in insurance markets is that insurance markets may break down. insurance companies may lose money. dishonest people may get away with a crime. deductibles will be raised.

insurance markets may break down. Insurance markets could break down completely because insurance companies would be unwilling to take any risk if the incidence of false claims became too high. Insurance companies would move resources to more profitable areas and honest policyholders would be left uninsured.

Which of the following examples describe both risk-averse and risk-loving behavior? insuring your house and having an alarm system starting your own business and entering a sweepstakes insuring your car and betting on horses buying travel insurance and taking kick-boxing lessons

insuring your car and betting on horses A risk-averse person would seek a secure situation; a risk lover would be willing to take a chance on transactions. People are capable of both types of behavior in different situations.

School lunch programs in which the government pays part of the cost of some students' lunches is an example of how the government attempts to internalize a benefit. externalize a cost. unfairly subsidize a group. force a solution.

internalize a benefit. When poor children receive a lunch at school, society perceives this as an external benefit because the children perform better in school. To externalize this benefit, the government often subsidizes the cost of the lunch.

If the producer of a negative externality considers the cost to third parties when the producer makes cost-benefit analyses involving the production, the externality is said to be institutionalized. magnified. subsidized. internalized.

internalized. Internalization means that the producer has in some way borne the costs. If the cost is internalized, the producer will produce the socially optimal level of output.

The Coase theorem suggests that finding an efficient solution to a negative externality is contingent upon who owns the property rights to the resource in question. is helped by government involvement in the process. is helped by application of a tax. is not dependent upon the ownership of property rights to the resource.

is not dependent upon the ownership of property rights to the resource. The Coase theorem provides a solution, regardless of who owns the property rights. The Coase theorem is based on negotiated prevention of the externality. The property rights will affect who bears the costs, but it does not affect the efficiency of the outcome.

The Coase theorem is important because it indicates that market externalities can be corrected without resorting to government solutions. it claims that there are no transaction costs associated with correcting externalities. it shows that government solutions often work better than market solutions. it shows that governments always end up solving an externality.

it indicates that market externalities can be corrected without resorting to government solutions. Coase showed that markets can provide a solution to externalities. The parties may be able to negotiate a market settlement to a market externality.

A good is non-exclusive if it is not possible to prevent people from obtaining the benefits of the good once it has been provided. its consumption by one person does not reduce the consumption by another. the good is free: everyone can get all they want at zero price. none of the above.

it is not possible to prevent people from obtaining the benefits of the good once it has been provided. This is the defintion of a public good. Once provided, the good is available to everyone.

If third parties are involved in an externality, the parties will have more complicated negotiations. there can be no solution. the third party cannot be part of a Coase solution. it may be less expensive to have the government determine a solution.

it may be less expensive to have the government determine a solution. If the transaction costs of getting the groups to the bargaining table are high, the government may be able to negotiate a settlement more cost effectively than the groups.

If property rights for the right to pollute the air were established, there would probably be more air polution. less air pollution. no change in air pollution. worse weather.

less air pollution. If a marketwere established with tradeable rights to pollute, there would likely be less airpolllution. Producers would have to consider all costs in their production decisions. An externality is really a missing market.

Which of the following economic systems could prevent market failure? A pure capitalist economy. A socialist economy. A barter economy none of the above.

none of the above. Market failures occur in all societies and in all types of economic organization. The causes of market failures are unrelated to the type of economic organization.

Assume your neighbor throws trash in his yard. He gets $50 worth of benefit from littering, which imposes a $90 cost to you. According to Coase, you should pay your neighbor $40 to clean up his yard. offer to clean his yard for $40. deal with it. offer him between $51 and $90 if he will keep his yard clean.

offer him between $51 and $90 if he will keep his yard clean. You should be willing to pay more than his value and up to yours. Since he already gets $50 benefit from littering, he will not accept less than that to clean the yard. Your cost is $90 so you would be willing to offer up to $90 to clean it. The solution will depend on negotiations.

If your neighbor's barking dog annoys you, a possible Coase solution would be to offer to train the dog not to bark. move. sue the neighbor to force him to build a fence. sound-proof your house.

offer to train the dog not to bark. A Coase solution would involve some negotiation with the neighbor. The outside party must bear part of the cost and offer the owner a solution to which she has an incentive to agree.

The Coase Theorem suggests that people want to cooperate. people working in their own best interest can privately negotiate to solve an externality. people will not respond to incentives. government intervention is necessary to deal with externalities.

people working in their own best interest can privately negotiate to solve an externality. Coase suggests externalities can be handled among involved parties through negotiation.

Years after the invention of Tang, the space program began using the drink in its heavily advertised space flights. This is an example of a moral hazard social cost positive externality negative externality

positive externality Years after the invention of Tang by a food maker, the space program used the product in some of its heavily advertised space flights. This is an example of a positive externality because the space program benefited from information or knowledge brought about by the invention of Tang after the drink became more easily accessible.

The effects of an action that increases the well-being of third parties is called a positive externality (external benefit). negative externality (external cost). enhancement. inverse relationship.

positive externality (external benefit). A positive externality creates unintended benefits to others. The parties receiving these benefits do not pay for them.

You are considering buying a raffle ticket. If you win, you will receive $500. If you lose, you will receive nothing. There is a 1% chance that you will win. If raffle tickets cost $5, which individuals would buy the tickets? risk lovers and risk averse individuals. risk neutral and risk averse individuals risk neutral individuals and risk lovers risk lovers only

risk neutral individuals and risk lovers A risk-averse person would pay less than the expected value. Risk lovers would pay higher than the expected value and risk neutral people would only pay the expected value.

Good information is of value to sellers only. buyers only. sellers and buyers. neither because bad information evens out transactions.

sellers and buyers. Quality of information affects all aspects of a transaction. Transactions based on perfect information would present no risks for either of the groups involved, and markets would operate more efficiently.

All the following are possible methods of correcting a negative externality except taxing the producer. taxing the recipients of the externality and using the revenue to correct the problem. forcing the producer to correct the results of the externality. forcing the producer to pay the recipients the cost of the externality.

taxing the recipients of the externality and using the revenue to correct the problem. The recipients of a negative externality are third parties who are bearing the costs of an externality. To tax the recipients would cause them to bear even more costs of the externality.

An externality refers to the actions of one person affecting another person. the negative side-effects of some production process. government intervention in the market. firms differentiating their product by providing added services.

the actions of one person affecting another person. An externality is any external cost or benefit that can be passed to others who are not a part to the original transaction.

In some coastal areas of the country, oceans are being over-fished resulting in rapid depletion of the fish population and a scarcity of certain varieties of fish. The reason for over-fishing is that there is more demand for fish than beef these days. the fishing areas are unowned and unregulated. government policy subsidizes fishing. European demand for fish encourages fish producers to over-fish.

the fishing areas are unowned and unregulated. The coastal fishing waters demonstrate the tragedy of the commons. When a public area is unowned and open to everyone, there is a tendency to overuse it.

A method of correcting air pollution that most closely corrects the original problem is to tax each firm a per-unit tax for the right to pollute. to force each polluting firm to install emission-cleaning equipment. to subsidize the individuals who have to breathe the polluted air. to pass emissions standards and then allow local communities to enforce them.

to tax each firm a per-unit tax for the right to pollute. A per-unit tax most closely attacks the original problem, because it taxes the pollution and not the production. Pollution is the problem.

If perfect information were a reality, all firms would be able to maximize profits. sellers would bear all risks. transactions would be risk free. all firms would be able to minimize costs.

transactions would be risk free. Perfect information means that everyone has full product knowledge and full knowledge of future payoffs. There would be no risk for either party involved in a transaction based on perfect information.

An external benefit created by a transaction is any benefit that accrues to a party outside that transaction. T/F

true The benefit that groups or parties outside the transaction get from the transaction between others is an external benefit.

A method that could be used to internalize an external benefit would be to subsidize the producer of the benefit. T/F

true The government could subsidize the production of a good that creates social value but is unprofitable. The subsidy would then induce producers to produce the good.

When externalities are present, the market will not maximize economic value. T/F

true The market fails to account for external costs and benefits.

If transaction costs in finding a solution are high, a government-imposed solution to an externality may be the most efficient solution. T/F

true Transaction costs increase when the number of affected parties increase. If the transaction costs are high, it is often more efficient for the government to find a solution.

Three voters will use a simple majority vote to determine whether a public service will be funded. Each persons share of the tax is $25. Person 1 receives $30 worth of benefits, person 2 receives $26 worth of benefits, and person 3 receives $5 worth of benefits. Therefore ______ person (s)will vote in favor, _____ person(s) will vote against, and the outcome will be ____________. one; two; inefficient two; one; inefficient two; one; efficient one; two; efficient

two; one; inefficient Costs exceed benefits. The result is that the project is approved and the outcome is inefficent.