Deck 35: Market Failures Public Goods, Market Power, and Externalities

Question 1

Whats defention of terms:
-ability-to-pay principle

Answer 1

the idea that people with higher income should pay proportionately more taxes than poor people because they can afford to

Question 2

Whats defention of terms:
-benefits-received principle

Answer 2

people should pay higher taxes if they receive higher benefits from government programs

Question 3

Whats defention of terms:
-exclusion principle

Answer 3

a person using a private good can exclude others from using it

Question 4

Whats defention of terms:
-externality

Question 5

Whats defention of terms:
-market failure

Question 6

Whats defention of terms:
-negative externality

Question 7

Whats defention of terms:
-positive externality

Question 8

Whats defention of terms:
-public good

Question 9

Whats defention of terms:
-rival consumption

Question 10

Whats defention of terms:
-allocative efficiency

Question 11

Whats defention of terms:
-Coase theorem

Question 12

Whats defention of terms:
-free rider

Question 13

Whats defention of terms:
-transactions costs

Question 14

Define and describe different types of market failures.
-Early in the chapter, it was suggested that there is a market failure if ice cream consumers are not aware of the high fat content of ice cream. Suppose that the government requires all ice cream producers to label the fat content of their ice cream and a stern warning that high-fat diets can lead to heart disease. Some people would ignore the warnings and continue to consume mass quantities of both Ben and Jerry's Cherry Garcia and Häagen-Dazs's macadamia nut ice cream on a regular basis. Does this mean that the labeling did not eliminate the market failure? Why or why not?

Question 15

Distinguish between private and public goods, and explain why government allocation of public goods is necessary.
-What are the two main attributes that distinguish public goods from private goods? What conditions must hold for optimal allocation of public goods?

Question 16

Distinguish between private and public goods, and explain why government allocation of public goods is necessary.
-Identify the public good attributes of each of the following. Also, explain how (and if) these goods could be efficiently provided by the private sector.
a. lighthouse
b. an income redistribution plan
c. universal health care
d. snow removal service
e. cable television
f. broadcast television

Question 17

Distinguish between private and public goods, and explain why government allocation of public goods is necessary.
-The national parks received millions of visitors annually, and there is often a bumper-to-bumper traffic jam on the roads throughout the parks. Do you think this would be true if the national parks were sold to private business? Would you favor such a sale? Why or why not? Can you think of an alternative solution to the crowding problem in the national parks?

Question 18

Explain how government policies are used to deal with external costs and benefits.
-What policies can be used to internalize externalities? Draw diagrams to illustrate your answer.

Question 19

Explain how government policies are used to deal with external costs and benefits.
-Suppose that a factory currently dumps waste into the river. Explain how taxes could be used to solve this problem.

Question 20

Understand the principles of taxation.
-Define the benefits-received and the ability-to-pay principles of taxation. How do these principles relate to tax efficiency and tax equity? What are earmarked taxes?

Question 21

Understand the principles of taxation.
-In many states, property taxes are earmarked for public schools. There is the perennial argument that property owners who do not have children should pay less or even be exempt from property taxes. Explain why this argument may be fallacious.

Question 22

Understand the principles of taxation.
-Many states have policies that tuition at public universities is set at a fixed fraction-?often 20 or 25 percent-of the state's cost of providing the education. Is this a reasonable program? Why or why not?

Question 23

Define the free rider problem and why it happens.
-Is free riding always something that is "bad?" As part of your answer, define free riding and give examples.

Question 24

Define the free rider problem and why it happens.
-What is it about goods that are not subject to the exclusion principle and non-rival consumption that lead to free riding? Explain.

Question 25

Describe allocative efficiency and why it breaks down.
-Define allocative efficiency. What are two complications that arise when applying the concept of allocative efficiency?

Question 26

Describe allocative efficiency and why it breaks down.
-What are some methods that can be used to fund public goods?

Question 27

Discuss the problems with government provision and allocation of public goods.
-Is the distinction between public and private goods always clear? Explain and give examples.

Question 28

Define the Coase theorem, and describe how it will solve externalities.
-Explain how application of the Coase theorem would make pollution taxes unnecessary.

Question 29

Define the Coase theorem, and describe how it will solve externalities.
-Do you think assigning private property rights would get rid of all pollution? Explain.

Question 30

Discuss the real-world problems in the application of the Coase theorem.
-What might be some problems in assigning private property rights?

Question 31

Discuss the real-world problems in the application of the Coase theorem.
-What are transactions costs and how to they make the application of the Coase theorem more difficult?

Question 32

of "market failure," occurs when

A) markets fail to reach equilibrium.
B) there is a shortage
C) there is a surplus.
D) market outcomes are not optimal or desirable.

Question 33

A market failure may be due to the existence of

A) high prices.
B) perfect competition.
C) excess demand.
D) externalities

Question 34

The two important differences between a private and a public good are

A) Private goods are subject to the exclusion principle and rival consumption; public goods are not.
B) Private goods are subject to externalities and market failures; public goods are not.
C) Private goods are goods owned by individuals and businesses; public goods are owned by the government.
D) Private goods are subject to the equity principle and the ability-to-pay principle; public goods are not.

Question 35

Which of the following is an example of an earmarked tax?

A) Income taxes used to fund various federal government programs.
B) Sales taxes used to fund state and local governments.
C) Gasoline taxes used to fund highway construction.
D) Property taxes used to fund public education.

Question 36

The "ability-to-pay" principle and the "benefits-received principle" are

A) two ways to measure the efficiency of taxation.
B) two ways to measure the equity of taxation.
C) two ways to measure market failures.
D) two ways to analyze externalities.

Question 37

What is one measure of tax efficiency?

A) Whether taxes are progressive or regressive.
B) Whether taxes are inexpensive to collect .
C) Whether people who receive higher benefits pay also pay higher taxes.
D) Whether taxes are sufficient to cover government expenditures.

Question 38

Which of the following is an example of a positive externality?

A) a paper mill dumps dioxin into a river.
B) your Aunt Sue insists on smoking when riding in your car.
C) a new restaurant opens downtown and installs 3 new street lights
D) the government imposes an emission tax on large firms.

Question 39

What's the difference between explicit and implicit costs?

A) explicit costs are known in advance; implicit costs arise later.
B) explicit costs require an actual outlay of money; implicit costs allow the use of credit cards.
C) explicit costs require an actual outlay of money; implicit costs are opportunity costs.
D) explicit costs are costs paid by the firm; implicit costs are costs paid by others.

Question 40

Why is education subsidized by governments in most industrialized nations?

A) because education is too expensive for many households to pay for without assistance.
B) because education generates positive externalities.
C) because education generates negative externalities.
D) because education is a public good.

Question 41

What does rival consumption mean?

A) that two people cannot simultaneously consume the same good.
B) that obtaining a good is the outcome of a contest between rivals.
C) that it is not possible to prevent people from consuming a good.
D) that it is not possible to obtain all of the benefits from consuming a good.

Question 42

A good is excludable if

A) it is privately owned.
B) it is owned by the government.
C) it cannot be consumed unless it is paid for.
D) it can be consumed even if not paid for.

Question 43

What is a free rider?

A) a person who receives benefits from public goods, but does not pay for them.
B) a person who receives benefits from private goods, but does not pay for them.
C) a person who refuses to pay income taxes.
D) a person who rides for free at an amusement park.

Question 44

Why is national defense a public good?

A) because it provides protection for the public.
B) because it is provided by the government.
C) because it is nonexcludable and nonrival.
D) because it promotes economic prosperity in the military armaments industry.

Question 45

Coase's theorem says that externalities do not lead to resource misallocation as long as

A) the government steps in to ensure that those who generate the external costs also pay for them.
B) there is a well defined system of property rights.
C) there is a perfectly competitive market.
D) that external costs are outlawed by state and local laws.

Question 46

In opinion of Ronald Coase, pollution problems can best be resolved by

A) effective enforcement of pollution laws.
B) private bargaining between the polluters and those harmed by the pollution.
C) adaptation of human beings to higher levels of toxic waste.
D) an intervention to stop the polluters actions staged by affected parties and a skilled professional.