Quiz 4 & 5 Market Failures and the Role of the Government

In response to the financial crisis that began in 2007, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future. This illustrates:

the moral hazard problem.

Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the third unit of a public good. Also, assume that the marginal cost of the third unit is $17. We can conclude that:

the third unit should be produced.

As it applies to insurance, the moral hazard problem is the tendency for:

those who buy insurance to take less precaution in avoiding the insured risk.

(Consider This) Government passes a law requiring all domestic clothing factories to pay workers at least $20 per hour. As a result, domestic clothing companies move their operations overseas, leaving domestic workers unemployed. This situation illustrates the problem of:

unintended consequences.

Chronic budget deficits can be attributed to:

voters wanting government programs but not wanting to pay taxes.

he pursuit through government of a "transfer of wealth" at someone else's expense refers to: logrolling.

rent-seeking behavior.

At the optimal quantity of a public good:

marginal benefit equals marginal cost.

Government fiscal policy involves changing which of the following?

Taxes and government spending.

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences:

a consumer surplus of $9 and Nathan experiences a producer surplus of $3.

Owners of defective used cars have more information about the condition of their vehicles than potential buyers of those used cars. This is an example of:

asymmetric information.

"Earmarks" refer to:

authorized expenditures benefiting a narrow, specifically designated group that are included in more comprehensive spending legislation.

Where there is asymmetric information between buyers and sellers:

markets can produce inefficient outcomes.

(Consider This) Suppose that a large tree on Betty's property is blocking Chuck's view of the lake below. Betty accepts Chuck's offer to pay Betty $100 for the right to cut down the tree. This situation describes:

the Coase theorem.

As it relates to corporations, the principal-agent problem is that:

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).

Because of the free-rider problem:

the market demand for a public good is nonexistent or understated.

At the output level defining allocative efficiency:

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.