Question 1

Government failure occurs when:

Accepted Answer

A)   government fails to implement policy designed to correct a market failure.
B)   government intervention in the market to improve a market failure succeeds.
C)   government intervention in the market to correct a market failure makes things worse.
D)   there is no need for government intervention into the market because there is no market failure.

Question 2

Which of the following is an argument an economist would use to argue against market regulation designed to protect consumers?

Accepted Answer

A)   Information is costless and readily available, and so it is up to consumers to beware.
B)   When a brand name product is found unsafe, the value of the brand is reduced, which gives companies with brand names an incentive to produce high-quality products.
C)   Manufacturers have no incentive to stop the sale of counterfeit products.
D)   Government is more likely to have consumers' interest in mind than does the market.

Question 3

In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide emissions, giving electric utilities an allowance of a set amount of emissions and allowing the utilities to trade their allowances. This type of plan is:

Accepted Answer

A)   more efficient than direct regulation because utilities that receive a high marginal benefit from emissions can gain additional allowances through trade.
B)   more efficient than direct regulation because it forces each utility company to reduce sulfur dioxide emissions by the same amount.
C)   less efficient than direct regulation because utilities that receive a high marginal benefit from emissions can gain additional allowances through trade.
D)   less efficient than direct regulation because it forces each utility company to reduce sulfur dioxide emissions by the same amount.

Question 4

Government failure is likely to occur for all of the following reasons except:

Accepted Answer

A)   special interest groups might lobby government to the detriment of the public good.
B)   individuals have better information about a situation that affects them than does government.
C)   intervention in markets is always simpler than it initially seems.
D)   the bureaucratic nature of government intervention does not allow fine-tuning.

Question 5

An externality is present in a free market whenever:

Accepted Answer

A)   a monopolist spends funds to keep potential competitors out of the market.
B)   an activity generates costs or benefits that are not reflected in market prices.
C)   firms hire employees from outside the firm to fill positions normally filled by promotion from within the firm.
D)   a tax is imposed on the supplier of a good.

Question 6

An individual with a highly elastic demand for gasoline will:

Accepted Answer

A)   cut consumption more than an individual with a highly inelastic demand when price goes up.
B)   cut consumption less than an individual with a highly inelastic demand when price goes up.
C)   refuse to cut consumption for any reason.
D)   stop using gasoline entirely if a tax is imposed.

Question 7

Government provides secondary education because of its private good aspects.

Accepted Answer

A) True 
 B)False

Question 8

If employers were made responsible for injuries suffered by employees while working at home:

Accepted Answer

A)   there might be an adverse selection problem since employees have better information about the safety conditions of their own homes than employers do.
B)   employers would never permit employees to work at home.
C)   more employees would be able to work safely at home.
D)   there might be an adverse selection problem since employers have better information about the safety conditions of their employees than the employees have themselves.

Question 9

Opponents of government intervention argue that government makes decisions based on:

Accepted Answer

A)   marginal social costs and marginal social benefits.
B)   marginal political costs and marginal political benefits.
C)   irrational choices.
D)   total costs and total benefits.

Question 10

Which of the following is the best example of an adverse selection problem?

Accepted Answer

A)   Once individuals are insured, they are less likely to take efficient precautions.
B)   Individuals are unlikely to pay for something if they can receive the benefits for free.
C)   When a firm pollutes the air, families living nearby suffer the consequences.
D)   Individuals who seek to purchase health insurance have better information about their health than do insurance companies.

Question 11

Basic research is more likely to be funded by the federal than by state and local government because basic research:

Accepted Answer

A)   is usually conducted by oligopoly, the market structure that is most conducive to preliminary research.
B)   has negative externalities that are passed on to those who live outside the state.
C)   is largely a public good; benefits flow to the whole world, not just the state.
D)   has informational problems that cause adverse selection.

Question 12

If air pollution control is a public good, it follows that:

Accepted Answer

A)   the efficient output of air pollution control is zero.
B)   additional persons can benefit from a given amount of air pollution control without reducing the benefits enjoyed by others.
C)   the efficient output of air pollution control can be attained by selling it by the unit in a market.
D)   the more air pollution control enjoyed by any one person, the less is available to others.

Question 13

Refer to the graph shown, which shows the demand and supply for a new vaccine against the common cold. Once vaccinated, a person cannot catch a cold or give a cold to someone else. If government does not subsidize the production of this vaccine:

Accepted Answer

A)   the number of workers hired to produce the vaccine will be less than the socially efficient level.
B)   the firm producing the vaccine will use too much capital in producing the vaccine.
C)   the vaccine will be overproduced because consumers will not take into account the fact that many of their neighbors and co-workers will consume the vaccine.
D)   no positive externality can be created.

Question 14

Economists tend to believe that market incentive plans are generally more efficient than direct regulation.

Accepted Answer

A) True 
 B)False

Question 15

Economists believe that if government provides information about product quality:

Accepted Answer

A)   there will be less incentive for consumers to pay extra for quality guarantees supplied by firms.
B)   consumers will be forced to pay for information when otherwise it would have been available for free.
C)   the overall quality of products sold will increase substantially, eliminating the information problem.
D)   the cost of providing information will be zero.

Question 16

Milton Friedman argues that medical licensure benefits doctors because it:

Accepted Answer

A)   allows them to restrict supply, increase prices, and significantly increase their incomes.
B)   protects them from malpractice suits.
C)   ensures that they will not have to compete against one another for patients.
D)   prevents other doctors from advertising and stealing their patients.

Question 17

All of the following are considered sources of market failure except:

Accepted Answer

A)   public goods.
B)   imperfect information.
C)   profit-maximizing behavior.
D)   externalities.

Question 18

Adverse selection is most likely to be a problem when:

Accepted Answer

A)   one side of the market, either buyer or seller, has better information than the other side.
B)   there are public goods involved.
C)   the good being exchanged has negative externalities.
D)   the good being exchanged has free rider problems.

Question 19

Which of the following is not a question raised by critics of medical licensure?

Accepted Answer

A)   Why, if licensed medical treatment is so great, do we even need formal restrictions to keep other types of medicine from being practiced?
B)   Whom do these restrictions benefit: the general public or the doctors who practice mainstream medicine?
C)   What have the long-run effects of licensure been?
D)   Why does the public need to have accurate information about a doctor's competency?

Question 20

If medical insurers could use information contained in DNA to predict the likelihood of major medical illnesses, the most likely outcome is that:

Accepted Answer

A)   there would be an adverse selection problem and average insurance rates would rise.
B)   there would be an adverse selection problem and average insurance rates would fall.
C)   the adverse selection problem would be decreased and average insurance rates would rise.
D)   the adverse selection problem would be decreased and average insurance rates would fall.

Exam 8: Market Failure Versus Government Failure

Government failure is likely to occur for all of the following reasons except:

Correct AnswerverifiedShow Answer

An individual with a highly elastic demand for gasoline will:

Correct AnswerverifiedShow Answer

Basic research is more likely to be funded by the federal than by state and local government because basic research:

Correct AnswerverifiedShow Answer

An externality is present in a free market whenever:

Correct AnswerverifiedShow Answer

Which of the following is an argument an economist would use to argue against market regulation designed to protect consumers?

Correct AnswerverifiedShow Answer

Economists believe that if government provides information about product quality:

Correct AnswerverifiedShow Answer

Government provides secondary education because of its private good aspects.

Correct AnswerverifiedShow Answer

Adverse selection is most likely to be a problem when:

Correct AnswerverifiedShow Answer

Opponents of government intervention argue that government makes decisions based on:

Correct AnswerverifiedShow Answer

If air pollution control is a public good, it follows that:

Correct AnswerverifiedShow Answer

Which of the following is the best example of an adverse selection problem?

Correct AnswerverifiedShow Answer

Economists tend to believe that market incentive plans are generally more efficient than direct regulation.

Correct AnswerverifiedShow Answer

In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide emissions, giving electric utilities an allowance of a set amount of emissions and allowing the utilities to trade their allowances. This type of plan is:

Correct AnswerverifiedShow Answer

Which of the following is not a question raised by critics of medical licensure?

Correct AnswerverifiedShow Answer

If medical insurers could use information contained in DNA to predict the likelihood of major medical illnesses, the most likely outcome is that:

Correct AnswerverifiedShow Answer

Milton Friedman argues that medical licensure benefits doctors because it:

Correct AnswerverifiedShow Answer

If employers were made responsible for injuries suffered by employees while working at home:

Correct AnswerverifiedShow Answer

All of the following are considered sources of market failure except:

Correct AnswerverifiedShow Answer

Refer to the graph shown, which shows the demand and supply for a new vaccine against the common cold. Once vaccinated, a person cannot catch a cold or give a cold to someone else. If government does not subsidize the production of this vaccine:

Correct AnswerverifiedShow Answer

Government failure occurs when:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified