Question 1

Which of the following statements might be used by an economist to argue that the government, rather than the market, should finance the provision of certain economic goods and services?

Accepted Answer

This statement highlights the market failure associated with public goods, which are non-excludable and non-rivalrous. Private firms may under-supply such goods due to the free-rider problem, which can be addressed through government financing.

Question 2

Why is national defence commonly provided by the government, while food is NOT?

Accepted Answer

National defense is a public good that is non-excludable and non-rivalrous, meaning it's difficult to exclude individuals from benefiting from it even if they don't pay, leading to a free-rider problem. This makes it inefficient for private entities to provide. Food, on the other hand, is excludable and rivalrous; individuals can be prevented from consuming it if they don't pay, making it suitable for private provision.

Question 3

What kinds of goods are nonrivalrous in consumption and are unable to exclude nonpaying consumers from using the goods?

Accepted Answer

Public goods are nonrivalrous in consumption because their use by one person does not diminish the amount available for others to use. Additionally, they are unable to exclude nonpaying consumers from using the goods because it is difficult to control who benefits from their provision.

Question 4

Consider two goods-one that generates external benefits and another that generates external costs. What would a competitive market economy tend to produce?

Accepted Answer

In a competitive market economy, producers are motivated to maximize their profits by producing until their marginal cost equals their marginal revenue. However, they do not take into account the external costs or benefits associated with their production. Therefore, for the good that generates external benefits, producers will likely produce too little because they do not receive the full social benefit of their production. For the good that generates external costs, producers will likely produce too much because they do not bear the full social cost of their production. Thus, a competitive market economy tends to produce too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs.

Question 5

Which of the following is an example of a public good?

Accepted Answer

A public good is a good that is non-excludable and non-rivalrous. National defence is an example of a public good because it is available to all citizens and cannot be consumed by one person without also being available to others. The other options listed have elements of excludability or rivalry, such as the need to pay for electricity, the limited capacity of a bus, or the need to have access to a telephone line in order to use the service.

Question 6

What is a public good?

Accepted Answer

A public good is a good or service that is non-excludable and non-rivalrous, meaning that it can be consumed without reducing its availability for others to consume as well. Therefore, both paying and non-paying individuals can consume it, making option D the best choice. Option A is incorrect because private individuals do not finance public goods, and option B is incorrect because not all goods produced by the government are public goods. Option C is also incorrect because a characteristic of public goods is that they are difficult to exclude nonpaying customers from consumption.

Question 7

When city beautification programs are funded privately, which of the following is likely to result?

Accepted Answer

When city beautification programs are funded privately, both free riders and contributing citizens are likely to benefit from a more beautiful city. Free riders benefit without paying, while contributing citizens benefit and pay for the program. This is because there is no mechanism to exclude non-contributors from enjoying the benefits of the program. Hence, private funding will lead to positive externalities as both contributing citizens and free riders can enjoy the benefits of the program.

Question 8

Which of the following goods is least likely to be provided by the private sector?

Accepted Answer

The good characterized by nonrivalry in consumption from which paying customers cannot be excluded is known as a public good. Private sector firms are unlikely to provide public goods because they cannot charge customers for their use and therefore cannot make a profit. Private firms are more likely to provide goods where they can charge customers and make a profit (such as in option A, a good for which the marginal private benefit to an individual exceeds the marginal cost of producing the good).

Question 9

London Mayor Anne Marie DeCicco believes strongly that education provides great benefits to the community and urges the provincial government to provide the city with more money. What does this say about Mayor DeCicco?

Accepted Answer

Mayor DeCicco's belief that education provides great benefits to the community shows that she acknowledges the positive external benefits associated with education, such as improved civic engagement, increased economic productivity, and decreased crime rates.

Question 10

Many in the public are unwilling to contribute money toward neuromuscular disease research until members of their own families suffer from a neuromuscular ailment. If left strictly to the private market, what is the likely outcome?

Accepted Answer

The public's unwillingness to contribute money toward neuromuscular disease research until they are directly affected by it creates a situation where the private market is unlikely to allocate sufficient resources to research and development in this area. This is because the private market tends to focus on areas where there is a higher likelihood of profit, and neuromuscular diseases may not be profitable enough to attract private funding. Therefore, there is likely to be an underallocation of resources to neuromuscular disease research, relative to the efficient level, if left strictly to the private market.

Question 11

FIGURE 6-3
 
-Refer to Figure 6-3. What area (bounded by letters) represents the associated efficiency loss resulting when there are external benefits associated with education?

Accepted Answer

The area represented by a, b, c in such diagrams typically illustrates the efficiency loss or deadweight loss due to the underproduction or underconsumption of a good with positive externalities, like education. This area shows the social benefits that are not realized when the market produces less than the socially optimal quantity.

Question 12

If consumers were able to receive the full social benefits associated with the consumption of goods involving positive externalities, other things being equal, which of the following would likely occur?

Accepted Answer

When consumers are able to receive the full social benefits associated with the consumption of goods involving positive externalities, they are incentivized to consume more, leading to an increase in consumption. This happens because the social benefits are now reflected in the private benefits received by the consumer, making it more favorable for them to consume that product. This increase in consumption can lead to a greater allocation of resources towards the production of that product, which can have positive effects on the economy. A decrease in market price may or may not occur, and misallocation of resources is less likely as the consumption is now aligned with the social benefits. Therefore, C is the correct answer.

Question 13

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

Accepted Answer

The external benefit of getting a winter flu shot is that it reduces the likelihood that others will catch the flu from the vaccinated individual, thus contributing to public health by reducing the spread of the virus.

Question 14

Which of the following is the best example of a private good?

Accepted Answer

A can of soda is an example of a private good because it is excludable (only the person who purchases it can consume it) and rival (once it is consumed, it cannot be consumed by someone else).

Alternatively, D could also be a correct answer as an outdoor fireworks display can be made excludable by having a ticketed entry. However, it's less clear-cut since it is less common to have excludable outdoor fireworks displays.

Question 15

Which of the following is the best example of a public good?

Accepted Answer

City street lights are a public good, as they benefit society as a whole and their use by one person does not diminish their availability to others. Telephone service and an amusement park are both privately owned and do not fall under the category of public goods. A national system of healthcare is a public service, but not necessarily a public good in the sense that its use by one person could potentially limit its availability to others.

Question 16

As an additional consumer obtains the benefits of a public good such as national defence, what happens to the benefits to existing consumers?

Accepted Answer

The benefits of a public good are non-rivalrous, which means that the consumption benefits of an additional consumer do not diminish the benefits to other consumers already enjoying the public good. The benefits to existing consumers remain the same even as more people begin to enjoy the public good.

Question 17

If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer understates the relative importance of this product to society. In order to move towards efficiency, what should happen to output?

Accepted Answer

Since the private benefit understates the social value, society would benefit from an increase in output. By increasing output, the external benefits associated with the consumption of the product will be better reflected in the overall value of the product to society.

Question 18

If the production of a particular good involves significant external benefits, what might the government do to force the externality to be internalized?

Accepted Answer

By offering a subsidy, the government can incentivize production of the good with external benefits. This makes it easier for those who generate the external benefits to capture the value that they create. As a result, the market will produce more of the good than it otherwise would, which will help to internalize the externality.

Question 19

FIGURE 6-3
 
-Refer to Figure 6-3. Suppose that education provides spillover benefits to the community as illustrated in the above diagram. Based on this information, which of the following statements is the most accurate?

Accepted Answer

The answer of FIGURE 6-3
 
-Refer to Figure 6-3. Suppose...

Question 20

Which of the following statements describes the best way to internalize a positive externality?

Accepted Answer

Providing a subsidy to the consumers of a good equal to the external benefit resulting from the production or consumption of the good is the best way to internalize a positive externality. This incentivizes consumers to consume more because they receive a benefit, and the subsidy can be financed by the government.

Quiz 6: Market Efficiency and Market Failure