1.
"Market failures" in general occur when
A.
the production of goods is not at socially-optimal levels.
B.
buyers and sellers cannot get together.
C.
buyers and sellers get together but cannot settle on an equilibrium price.
D.
buyers and sellers settle on an equilibrium price, but not on the amount to be exchanged at that price.
E.
governments intervene to affect the outcome of a private market.


2.
Market failures
A.
can be remedied either privately or through government intervention.
B.
can be remedied only through private market arrangements.
C.
are slowly eliminated through technological progress.
D.
can be created only by government intervention.
E.
cannot be corrected and must be accepted as a cost of having a market economy in an imperfect world.


3.
Market failures in the United States
A.
are addressed with varying degrees of success by government intervention.
B.
are not subject to government policies as in most other nations, but only
C.
have never been successfully remedied by governments, despite numerous
D.
are routinely corrected by government policy intervention.
E.
are caused when governments, for various reasons, force markets from socially-optimal positions.


4.
When governments attempt to correct market failures,
A.
they may have their progress offset by the negative side-effects of levying the necessary taxes.
B.
they nearly always succeed at this routine task.
C.
they nearly always succeed if they can raise sufficient tax revenue to fund the
D.
they have little chance of success and usually must turn the problem back over to the private sector.


5.
An "externality" occurs if private consumption or production
A.
imposes involuntary economic costs or benefits on others.
B.
is supported by government transfers or subsidies.
C.
is performed by the joint cooperation of private consumers or producers.
D.
involves our exporting and importing.
E.
occurs without opportunity costs to it.


6.
There is a term sometimes used as a synonym for externalities, because it vividly expresses their natur
A.
nonrivalry effects.
B.
spillover effects.
C.
reciprocity effects.
D.
free-rider effects.
E.
subsidy effects.


7.
An "external cost" of producing electricity would be
A.
the coal that must be consumed to do so.
B.
its emission of smoke that imposes clean-up costs on people who do not buy its
C.
not being able to produce other things with the same resources that go into
D.
paying for the transmission of the electricity away from the generating plant.
E.
the lost profits from having its selling price set by a public utility commission.


8.
"Social" costs and benefits are
A.
those above and beyond internal and external costs and benefits.
B.
internal plus external costs and benefits.
C.
internal minus external costs and benefits.
D.
external minus internal costs and benefits.
E.
internal divided by external costs and benefits.


9.
Efficiency requires for each good that
A.
marginal external costs and benefits be equalized.
B.
marginal social costs and benefits be equalized.
C.
marginal internal costs and benefits be equalized.
D.
the marginal social benefits reach zero.
E.
the marginal social costs reach zero.


10.
When an electric utility emits pollution that imposes external costs, this externality is depicted as
A.
an upward shift of their horizontal price line.
B.
a social marginal cost curve lying above the private marginal cost curve.
C.
a downward shift of their horizontal price line.
D.
an upward shift of private marginal cost.
E.
a downward shift of private marginal costs.


11.
On an electric utility's price/cost diagram, the negative externality it imposes at every output level is the
A.
the vertical distance up to the social marginal cost curve.
B.
horizontal distance between the social and private marginal cost curves.
C.
vertical distance between the social and private marginal cost curves.
D.
the vertical distance up to the private marginal cost curve.
E.
the vertical distance between the social marginal cost curve and the horizontal price line.


12.
At its privately-optimal output, the electric utility that pollutes produces
A.
too little electricity and too much pollution.
B.
too little electricity but the optimum amount of pollution.
C.
too much electricity and too much pollution.
D.
the optimum amount of electricity but too much pollution in doing it.
E.
too much electricity but the optimum amount of pollution.


13.
The socially-optimal level of producing any output occurs when
A.
social marginal benefit equals social marginal cost.
B.
social marginal cost equals zero.
C.
private marginal cost equals zero.
D.
social marginal benefit equals private marginal cost.
E.
social marginal cost equals private marginal cost.


14.
In moving from the privately-optimal to the socially- optimal level of producing electricity, the amount of pollution externality
A.
remains constant but comes from less electric generation.
B.
falls to zero.
C.
is reduced but remains positive.
D.
remains constant but comes from more electric generation.
E.
increases, but only because more electricity is generated, with less pollution


15.
The diagram represents an electric power plant emitting a pollution externality. Private marginal cost at each level of output is read along
A.
curve C1.
B.
curve C2.
C.
curve P.
D.
the line segment AE.
E.
the line segment DF.


16.
The diagram represents an electric power plant emitting a pollution externality. Social marginal cost at each level of output is read along
A.
curve C1.
B.
curve C2.
C.
curve P.
D.
the line segment AE.
E.
the line segment DF.


17.
The diagram represents an electric power plant emitting a pollution externality. The amount of power produced by this plant at its private optimum is
A.
Q1Q2.
B.
0Q1.
C.
0Q2.
D.
FD.
E.
FC.


18.
The diagram represents an electric power plant emitting a pollution externality. The external cost of the last unit of electricity generated at the private optimum is
A.
0Q2.
B.
EB.
C.
DF.
D.
CD.
E.
CF.


19.
The diagram represents an electric power plant emitting a pollution externality. The socially-optimal amount of power for this plant to generate is
A.
0Q2.
B.
EA.
C.
EB.
D.
Q1Q2.
E.
0Q1.


20.
The diagram represents an electric power plant emitting a pollution externality. The total external cost of producing the socially optimal quantity of electricity is
A.
area GAB.
B.
zero, by definition.
C.
area OGBE.
D.
area HAG.
E.
area HDG.


21.
The diagram represents an electric power plant emitting a pollution externality. With the marginal cost relationships shown, the socially-optimum level of electricity is
A.
800 units per period.
B.
1,100 units per period.
C.
950 units per period.
D.
50 units per period.
E.
40 units per period.


22.
The diagram represents an electric power plant emitting a pollution externality. In moving from the privately-optimal to the socially-optimal level of output, the plant will ______ sales revenues of ________.
A.
gain, $15,000 per period
B.
lose, $15,000 per period
C.
gain, $40,000 per period
D.
lose, $40,000 per period
E.
lose, $8,000 per period


23.
The diagram represents an electric power plant emitting a pollution externality. In moving from the privately-optimal to the socially-optimal level of output, the plant will _______ profits of ________.
A.
lose, $15,000 per period
B.
gain, $450 per period
C.
lose, $450 per period
D.
lose, $1,500 per period
E.
gain, $150 per period


24.
The diagram represents an electric power plant emitting a pollution externality. In moving from the privately- optimal to the socially- optimal level of output, external costs to society are reduced by
A.
$1,500 per period.
B.
$100 per period.
C.
$300 per period.
D.
$4,500 per period.
E.
$6,000 per period.


25.
When Tamara tends to her garden, not only does the market value of her house rise, but so do those of her neighbors. Tamara's private decision on gardening is sub-optimal because
A.
the social marginal benefit curve lies above her private marginal benefit curve.
B.
the social marginal cost curve lies below her private marginal cost curve.
C.
the social marginal cost curve lies above her private marginal cost curve.
D.
the social marginal benefit curve lies below her private marginal benefit curve.


26.
On a marginal cost/marginal benefit diagram, an activity displays a social marginal benefit curve lying above the private marginal benefit curve. We can say that this activity produces a _______ externality, and the privately-optimal level of activity is _________ that of the socially-optimal level.
A.
beneficial, below
B.
harmful, below
C.
beneficial, above
D.
harmful, above


27.
When the producer of an externality assumes the costs or collects the benefits that come from it, this is called
A.
internalizing the externality.
B.
a class-action suit.
C.
reciprocating the externality.
D.
entitling the externality.
E.
an injunction.


28.
A polluter may have more to worry about if his pollution affects few people rather than many, because of the _______ problem of group action.
A.
free rider
B.
Coase
C.
reciprocity
D.
nonrivalry
E.
liability rule


29.
Voluntary agreements between the producer of an externality and those it affects become less likely as
A.
the number of affected parties grows.
B.
the number of affected parties shrinks.
C.
the financial size of the producer is smaller.
D.
the producer initiates a class-action suit.
E.
the courts have ruled on the assignment of property rights.


30.
"Free riding" is the ___________ decision of an individual, as part of a group, to______________.
A.
irrational, separately "bribe" the producer of an externality
B.
rational, avoid the cost of contributing to the common group benefit
C.
irrational, avoid the cost of contributing to the common group benefit
D.
rational, persuade the group to appeal to the government for help
E.
rational, separately "bribe" the producer of an externality


31.
A used-car dealer has a policy of accepting cars back for a full refund within ten days. She is doing this as a way of _________ the information that her cars are of __________ quality.
A.
revealing, low
B.
revealing, high
C.
hiding, high
D.
hiding, low


32.
You are shopping for a used car at a dealer that offers a ten-day full-refund policy. Because of that policy, you should ___________________ on his cars, since the dealer is plainly _________________.
A.
hold out for a low price, luring you into buying a lemon
B.
be willing to pay a higher price, allowing you to shift some of the risk to him
C.
hold out for a low price, allowing you to shift some of the risk to him
D.
be willing to pay a higher price, luring you into buying a lemon


33.
Between cane sugar and cordless telephones, you are more likely to see "signaling" on behalf of _________ as a way of _____________.
A.
cordless telephones, compensating for uniform quality
B.
cordless telephones, conveying their relative quality
C.
cane sugar, compensating for uniform quality
D.
cane sugar, lowering the price to the consumer
E.
cane sugar, getting bulk shipments to large purchasers more promptly


34.
The process of "search" is necessary when a particular good
A.
has uniform quality and a uniform price.
B.
is available at various qualities and prices.
C.
is not being advertised.
D.
is rare and difficult to find.
E.
is highly standardized.


35.
If Mary believes she can find a certain calculator at two different prices, she is better off searching for it at the ___________, because that location ____________.
A.
old department store downtown, lowers the marginal cost of searching
B.
giant suburban shopping mall, raises the marginal benefit of searching
C.
giant suburban shopping mall, lowers the marginal cost of searching
D.
old department store downtown, raises the marginal benefit of searching


36.
Mary walks into her local 400-store shopping mall, hoping to find a certain calculator at $25 instead of $30. Walking from store to store will eventually tire her out. The theory of search would say that since Mary faces a ___________ of search, she will continue turning down $30 calculators until ___________.
A.
falling marginal benefit, she has visited every store that sells calculators
B.
rising marginal benefit, she has visited every store that sells calculators
C.
rising marginal cost, her trip to the next store has an opportunity cost
D.
falling marginal benefit, her trip to the next store has an opportunity cost exceeding $5


37.
Within a typical city hotel, you will probably pay $or more for a can of soda from a vending machine. Because the search costs of travelers in a strange city are very ________, the vendor is able to obtain an unusually _________________.
A.
low, high number of sales
B.
high, high number of sales
C.
high, high revenue per sale
D.
low, low revenue per sale


38.
The explosive growth of suburban shopping malls at the expense of downtown shopping has probably acted to ________ search costs and thus ______ the range of prices we may find on particular goods.
A.
reduce, increase
B.
increase, reduce
C.
reduce, reduce
D.
increase, increase


39.
Price advertising tends to ________ the price variability of a good because _____________.
A.
raise, advertising is very costly
B.
lower, advertising is very costly
C.
lower, it lowers the cost of consumer search
D.
raise, it lowers the cost of consumer search
E.
lower, it raises the cost of consumer search


40.
"Asymmetric information" means that
A.
information about a product has no influence on its market.
B.
no information about a product is known to anyone.
C.
all information about a product is known to all.
D.
all information about a product is known to one party of a trade, and none to
E.
more information about a product is known to one party of a trade than the


41.
In used-car parlance, a customer wants to avoid buying a "lemon" and hopes to buy a "cream puff." Economist George Akerlof, in his famous article on the used-car market, states that because information in that market is usually _________, the market tends to fill with _______.
A.
asymmetric, even numbers of lemons and cream puffs
B.
symmetric, lemons
C.
symmetric, cream puffs
D.
asymmetric, cream puffs
E.
asymmetric, lemons


42.
"Co-insurance" __________ the moral-hazard problems of insurance because the insured party ___________.
A.
increases, retains some of the risk of her behavior
B.
reduces, obtains two insurance policies that together totally eliminate risk
C.
reduces, shifts all of her risk to the insurer
D.
increases, shifts all of his risk to the insurer
E.
reduces, retains some of the risk of his behavior


43.
Marlo the aerobics instructor is in superb physical condition. A large health insurance firm which charges fairly uniform premiums would _________ as a customer because she ____________.
A.
not want her, would have to pay large premiums to obtain insurance
B.
want her, can be charged at the high end of the premium schedule
C.
want her, will not be susceptible to the moral hazard problem
D.
not want her, has relatively little chance of needing medical attention
E.
want her, helps absorb the losses from insuring high-risk individuals


44.
A judge decides to settle a class-action suit against an air polluter by a property ruling that will assign property rights to the air to one of the parties. The Coase Theorem suggests that
A.
assigning the air rights to the parties affected by pollution completely
B.
assigning the air rights to the polluter will result in no reduction of pollution, output.
C.
assigning the air rights to the parties affected by pollution will result in no
D.
the air rights can be assigned to either party in order to achieve the same


45.
If a utility emits a pollution externality, its output can be changed from the private to the social optimum by assessing, either privately or publicly, a charge per unit of production equal to
A.
the vertical gap between the social marginal cost curve and the horizontal price
B.
the vertical gap between the social marginal cost curve and the horizontal price
C.
the vertical gap between the social and private marginal cost curves at the
D.
the vertical gap between the social and private marginal cost curves at the
E.
the horizontal gap between social and private marginal cost curves at the regulated price.


46.
If a utility is assessed a charge per unit of production to compensate for a pollution externality, this shifts the
A.
social marginal cost curve down.
B.
horizontal price line down.
C.
horizontal price line up.
D.
private marginal cost curve up.
E.
private marginal cost curve down.


47.
The diagram shows the price and marginal cost curves of a electric power plant that chooses to produce electricity level Q2 while emitting a pollution externality. The damage caused by the pollution produced by the Q2th unit of electric generation is
A.
CD.
B.
JF.
C.
DJ.
D.
CF.
E.
DF.


48.
The diagram shows the price and marginal cost curves of a electric power plant that chooses to produce electricity level Q2 while emitting a pollution externality. If the government levies a tax on the utility in order to cause it to produce at the socially-optimal level, that tax should be __________ per unit of electric generation.
A.
CD
B.
AB
C.
DJ
D.
CJ
E.
DA


49.
The diagram shows the price and marginal cost curves of a electric power plant that chooses to produce electricity level Q2 while emitting a pollution externality. An optimal tax to correct a pollution externality has the effect on the firm of shifting
A.
the price line from P to P'.
B.
the effective private marginal cost curve from C2 to C1.
C.
the effective private marginal cost curve from C1 to C3.
D.
the price line from P' to P.


50.
The diagram shows the price and marginal cost curves of a electric power plant that chooses to produce electricity level Q2 while emitting a pollution externality. If a court assigns the property right to the polluted air to those harmed by the pollution, they as a group can bring electric generation to the socially-optimum level by assessing a fee on the power plant of _______ per unit of electricity it generates.
A.
DJ
B.
DA
C.
CJ
D.
AB
E.
CD


51.
The diagram shows the price and marginal cost curves of an electric power plant that chooses to produce electricity level Q2 while emitting a pollution externality. In this diagram, the Coase Theorem can be expressed as the result that
A.
private arrangements bring us to either point H or point G, where pollution has been eliminated.
B.
government policies alone can lower output from Q2 to Q1.
C.
private arrangements alone can lower output from Q2 to Q1.
D.
private arrangements bring us to either point A or point D, both at the same price of electricity.
E.
private arrangements bring us to either point A or point B, both at socially-optimal output level Q1.


52.
Imposing a per-unit tax on a polluter to try to obtain the socially-optimal output
A.
is a complicated matter that usually drives governments to settle on shortcut policy methods.
B.
is highly effective, since the Coase Theorem states that any tax rate chosen has the same effect on changing output.
C.
is a simple matter, once marginal cost data has been collected from the polluter.
D.
is simply a matter of finding out from the public how much of a per-unit subsidy they would be willing to pay the polluter, and doubling that to derive the optimal tax rate.


53.
Putting aside theoretical models for just a minute, how do most local governments attempt to control pollution?
A.
by direct regulation of the quantity of pollution
B.
by a per-unit tax on output production
C.
by giving property rights to the affected private citizens to get them to charge damages to the polluter
D.
by giving property rights to the polluter and having them collect subsidies to reduce pollution


54.
Private markets are most likely to provide the efficient level of goods that are
A.
rivalrous and excludable
B.
rivalrous and nonexcludable.
C.
nonrivalrous and nonexcludable.
D.
nonrivalrous and excludable.


55.
A "nonrivalrous" good is one
A.
where one person's consumption does not prevent or reduce any other's.
B.
that no one can be prevented from or charged for using.
C.
with a quantity demanded of zero at the current price.
D.
with a quantity demanded of zero at a zero price.
E.
with no close substitutes.


56.
A "nonexcludable" good is one
A.
that no one can be prevented from or charged for using.
B.
where one person's consumption does not prevent or reduce any other's.
C.
with perfect substitutes available.
D.
that is normally consumed jointly with others, such as salt.
E.
produced in perfectly competitive markets.


57.
A clear example of a good that is both nonrivalrous and nonexcludable is
A.
a textbook.
B.
national defense.
C.
a rock concert.
D.
a hamburger bun.
E.
electric power.


58.
A good that is ___________ is the type of good most likely to require at least partial provision by government.
A.
nonrivalrous
B.
nonexcludable
C.
rivalrous
D.
excludable


59.
What feature of a supply-and-demand model occurs only in the case of a nonrivalrous good?
A.
The supply curve is horizontal.
B.
The marginal benefit curves of individuals are summed vertically to derive total demand.
C.
The marginal benefit curves of individuals are downward-sloping.
D.
The marginal benefit curves of individuals are summed horizontally to derive total demand.
E.
The supply curve is vertical.


60.
The diagram shows the market for a nonrivalrous public good in a two-consumer society. The unique feature of the market diagram for a public good is:
A.
The marginal benefit curves of individuals are summed vertically to derive total demand.
B.
The supply curve is horizontal.
C.
The marginal benefit curves of individuals are downward-sloping.
D.
The marginal benefit curves of individuals are summed horizontally to derive total demand.


61.
The diagram shows the market for a nonrivalrous public good in a two-consumer society. The efficient level of output of this good is
A.
G1.
B.
G3.
C.
G2.
D.
0.


62.
The diagram shows the market for a nonrivalrous public good in a two-consumer society. At output level G2, the provision of one more unit of the good results in a marginal benefit to society of
A.
FE.
B.
0.
C.
FE + FD.
D.
ED.
E.
FD.


63.
The diagram shows the market for a nonrivalrous public good in a two-consumer society. At output level G2, we conclude that one more unit of the good produces a marginal benefit
A.
to person 1 less than the marginal cost of its provision, so at G2 the good is being over provided.
B.
to person 2 equal to the marginal cost of provision, so at G2 the good is being efficiently provided.
C.
to persons 1 and 2 jointly greater than the marginal cost of its provision, so at G2 the good is being over provided.
D.
to persons 1 and 2 jointly greater than the marginal cost of its provision, so at G2 the good is being under provided.


64.
Certain goods are of a type economists call "congestible", which suggests that they display
A.
pure rivalrousness at all times.
B.
fluctuations in their degree of nonexcludableness.
C.
fluctuations in their degree of nonrivalrousness.
D.
pure excludability at all times.
E.
appearances and disappearances from the market.


65.
A basic economic difference between broadcast television and cable television is that broadcast TV is _________ and cable TV is not.
A.
rivalrous
B.
excludable
C.
nonexcludable
D.
nonrivalrous


66.
The free-rider problem enters the analysis of public goods by pointing out the difficulties a market has in providing __________ goods.
A.
nonrivalrous
B.
rivalrous
C.
nonexcludable
D.
excludable


67.
An argument for the public provision of charitable giving is that an efficient level of private giving is not possible given its
A.
rivalrousness and excludeableness.
B.
nonrivalrousness and nonexcludableness.
C.
nonrivalrousness and excludableness.
D.
rivalrousness and nonexcludableness.


68.
Which of the following statements concerning a pure public good is false?
A.
It is impossible to exclude nontaxpayers from the receipt of the public good.
B.
All benefits associated with the production and use of a public good are received by the government.
C.
The availability of a public good to one person simultaneously makes it available to all members of society.
D.
The private sector does not have an economic incentive to produce a socially optimal amount of a public good.


69.
The market demand curve for a public good:
A.
is derived in the same manner as demand curves for private goods.
B.
is derived by horizontally summing all individual demand curves.
C.
shows the total value that all individuals place on each unit of the good.
D.
shows the total number of units that would be produced by the private sector at each possible price.


70.
A good which is nonrivalrous might be provided privately if it is
A.
a "mixed" good.
B.
produced by the government.
C.
excludable
D.
subject to the free-rider problem.
E.
nonexcludable.


71.
From the economist's perspective, "market failures" basically arise when:
A.
the quantity demanded for a good or service is greater than the quantity supplied of the good or service.
B.
the quantity supplied of a good or service is greater than the quantity demanded for a good or service.
C.
demand and supply do not accurately reflect all the benefits and all the costs of production.
D.
the market system is unable to adapt to or to accommodate change.


72.
Which is an example of a market failure?
A.
There are not enough tickets available to concerts of extremely popular performers.
B.
The price of medical care has risen dramatically as a result of the introduction of sophisticated equipment and techniques.
C.
Polio shots and chest x-rays provide widespread benefits to the community as a whole as well as to the individuals who get them.
D.
Extensive decreases in the prices of electronic equipment resulted in large numbers of bankruptcies in the computer industry.


73.
To internalize the external costs of pollution is to:
A.
levy taxes on manufacturing firms located in crowded urban areas.
B.
auction off pollution rights to those willing to pay the most for them.
C.
make the polluter pay all of the costs associated with the polluting activity.
D.
require that private citizens rather than taxpayers pay for the harmful effects of pollution.


74.
To reduce sulfur dioxide emissions, the Clean Air Act of 1990:
A.
subsidized companies that installed "maximum achievable control technologies" by the year 2000.
B.
limited the emissions of automobiles in major U.S. cities with air pollution problems.
C.
set stricter limits on pollution contributing to ozone depletion.
D.
created a market for pollution rights among firms in an area.


75.
Which would be an example of where the government has intervened to correct a market failure caused by inadequate information about sellers?
A.
providing unemployment compensation insurance
B.
sponsoring legislation to reduce pollution
C.
licensing of medical doctors and surgeons
D.
requiring car drivers to buy auto insurance


76.
If a person drives with less care after purchasing auto insurance, this situation would be an example of a(n):
A.
Coase theorem problem.
B.
negative externality problem.
C.
adverse selection problem.
D.
moral hazard problem.


77.
Which would be an example of an adverse selection problem?
A.
a person in ill health who purchases disability insurance
B.
a person who buys a product that contributes to pollution
C.
a person who purchases home insurance and then is less careful
D.
a person who lobbies for government intervention to settle a property rights dispute


78.
Which would be an example of a moral hazard problem?
A.
a person in poor health who purchases life insurance
B.
a person who is taxed on the purchase of a carton of cigarettes
C.
a person who purchases auto insurance and then drives more recklessly
D.
a person who receives a subsidy from the Federal government to insulate a home


79.
There is an adverse selection problem in the market for used cars because:
A.
owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars.
B.
owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
C.
most people prefer new cars, but the high prices for new cars force most of them to buy used cars.
D.
government actions to pass "lemon" laws have reduced information on used cars.


80.
In a free-market economy, a product which entails a spillover benefit will be:
A.
overproduced.
B.
underproduced.
C.
produced at the optimal level.
D.
associated only with goods and services provided by the government.


81.
If some activity creates external (spillover) benefits as well as private benefits, then economic theory suggests that the activity ought to be:
A.
taxed.
B.
prohibited.
C.
subsidized.
D.
left alone.


82.
If a good that generates spillover costs were priced to take into account these spillover costs, then its:
A.
price would decrease and its output would increase.
B.
output would increase but its price would remain constant.
C.
price would increase and its output would decrease.
D.
price would increase but its output would remain constant.


83.
If thee are external or spillover benefits associated with consumption and production of a product, it can be said that the:
A.
government should consider placing a special tax on producers.
B.
government should consider prohibiting the production of the commodity.
C.
supply curve for the product lies too far to the right to provide an efficient allocation of resources.
D.
demand curve understantes the total benefit from the product and resources are underallocated to its production.


84.
If there are external or spillover benefits associated with the consumption of a good or service:
A.
the private demand curve will overestimate the true demand curve.
B.
the private demand curve will underestimate the true demand curve.
C.
consumers will be willing to pay for all these benefits in private markets.
D.
the market demand curve will be the vertical summation of the individual demand costs.


85.
Suppose that the ABC industry produces a product which results in significant spillover costs to society. Such production suggests that:
A.
resources are underallocated to the industry.
B.
resources are overallocated to the industry.
C.
the firms in this industry aren't maximizing profits.
D.
at the market price, quantity demanded is less than quantity supplied.


86.
Near an ocean beach, a high-rise building is being constructed that will block the scenic view of the ocean by the residents of a low-rise building. The Coase theorem suggests that this type of dispute between the owners of high-rise and low-rise buildings would best be resolved by:
A.
the owners themselves.
B.
city government officials.
C.
a zoning ordinance restricting high-rise buildings.
D.
a government fine for the builder of the high-rise.


87.
The tendency of society to overuse and abuse common property resources to which no one holds property rights is referred to as:
A.
an asymmetric information problem.
B.
the law of conservation of matter.
C.
the tragedy of the commons.
D.
the trading of pollution rights.


88.
The overgrazing of cattle on public range lands would be an example of:
A.
a moral hazard problem.
B.
an adverse selection problem.
C.
the tragedy of the commons.
D.
the market for pollution.


89.
If Congress decreases the amount of government insurance on bank deposits, then this action would:
A.
create a moral hazard problem.
B.
reduce a moral hazard problem.
C.
create an adverse selection problem.
D.
reduce an adverse selection problem.


90.
A good example of a government action that creates a moral hazard problem would be the:
A.
Clean Air Act of 1990.
B.
Superfund law of 1980.
C.
provision of unemployment compensation insurance.
D.
establishment of standards for weights and measures.


91.
When the production of a product creates external costs greater than external benefits, a market economy will:
A.
not produce the product without government intervention.
B.
produce a socially optimal allocation of resources.
C.
allocate too few resources to production of the product.
D.
allocate too many resources to production of the product.


92.
Which is an example of a spillover cost?
A.
an increase in the value of land you own when a nearby development is completed
B.
the costs paid by a company to build an automated factory
C.
decreased property values in a neighborhood where several houses are burglarized
D.
the higher price you pay when you buy a heavily advertised product


93.
In a market economy with well-defined property rights, the potential threat of a lawsuit or a liability judgment against a firm will give firms an incentive to:
A.
decrease negative externalities from production.
B.
increase negative externalities from production.
C.
increase positive externalities from production.
D.
turn to the government to provide public goods.


94.
The tragedy of the commons is the tendency of:
A.
consumers to overconsume scare resources that are in limited supply.
B.
government to overregulate common property resources.
C.
private companies to use bribes and corruption of government officials to pollute the environment.
D.
society to overuse common property resources to which no one holds property rights.


95.
A market for pollution rights can be expected to:
A.
eliminate all pollution.
B.
produce a shortage of pollution.
C.
encourage potential polluters to increase emissions.
D.
provide potential polluters with a monetary incentive to reduce emissions.


96.
By requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. This will lead to the equilibrium price of cars:
A.
decreasing and the quantity increasing.
B.
decreasing and the quantity decreasing.
C.
increasing and the quantity increasing.
D.
increasing and the quantity decreasing.


97.
The air pollution policy of the United States has historically been one of:
A.
taxation of products that produce air pollution.
B.
government subsidies to reduce emissions from factories.
C.
direct controls in the form of uniform emission standards.
D.
the internal and external trading of pollution rights in a market.


98.
The optimal level of pollution in society occurs whenever:
A.
there is no pollution.
B.
the marginal benefit of pollution control equals the marginal cost.
C.
the total benefit of pollution control equals the total cost of pollution.
D.
the average cost of cleaning up the pollution is greater than the marginal cost of cleanup.


99.
Which action would counteract the tendency for poor-quality products to drive out high-quality products in a market?
A.
the increased use of the market to sell products
B.
the availability of transferable warranties for products
C.
less information from the government
D.
less information from sellers


100.
The moral hazard problem arises primarily because of:
A.
individual bargaining.
B.
negative externalities.
C.
asymmetric information.
D.
poorly defined property rights.



STOP This is the end of the test. When you have completed all the questions and reviewed your answers, press the button below to grade the test.