Question 1

When the government tries to control pollution through cap and trade, it _____.

Accepted Answer

A)  issues permits that enables the owners of the permit to pollute.
B)  strictly mentions the amount of pollutants that can be emitted by a particular firm.
C)  levies tax on the polluting firm.
D)  gives subsidies to the firms who adopt clean production technologies.
E)  takes legal actions against the firms who pollute beyond the specified level.

Question 2

The good for which neither the principle of mutual excludability nor the principle of rivalry applies is referred to as a:

Accepted Answer

A)  public good.
B)  commons good.
C)  club good.
D)  normal good.
E)  private good.

Question 3

When consumers have perfect information about the quality of the products they purchase, the problem of adverse selection is likely to arise.

Accepted Answer

A) True 
 B)False

Question 4

Which of following would help minimize moral hazard in the financial market?

Accepted Answer

A)  Raising the interest rate on loans
B)  Decreasing the down payment on a loan
C)  Eliminating the need for a borrower to provide collateral
D)  Requiring an insurance policyholder to carry a deductible
E)  An insurance company increasing the premium and reducing the deductible

Question 5

Higher the economic freedom in a country:

Accepted Answer

A)  lower is the standard of living of the people.
B)  higher is the life expectancy.
C)  greater is the bureaucratic freedom and red-tapism.
D)  lower is the level of education due to lack of government schools.
E)  lower is the literacy rate. B

Question 6

When negotiation is costly, it makes a difference where liability is placed in terms of reaching an efficient solution to a negative externality problem.

Accepted Answer

A) True 
 B)False

Question 7

A good that is both excludable and rivalrous is a(n) :

Accepted Answer

A)  public good.
B)  club good.
C)  private good.
D)  inferior good.
E)  necessary good.

Question 8

The European Union Emission Trading Scheme is an example of:

Accepted Answer

A)  a pollution tax.
B)  a pollution subsidy.
C)  a command approach.
D)  cap and trade.
E)  a direct government control on private firms.

Question 9

Which of the following statements is true?

Accepted Answer

A)  In the case of positive externalities, a private market will produce too little of the good compared with the socially efficient level of output.
B)  In the case of positive externalities, a private market will produce too much of the good compared with the socially efficient level of output.
C)  Negative externalities occur when benefits accrue to individuals not directly involved in the transaction.
D)  Positive externalities occur when costs are imposed on individuals not directly involved in the transaction.
E)  In the case of negative externalities, a private market will produce too little of the good compared with the socially efficient level of output.

Question 10

The existence of externalities in a market implies that:

Accepted Answer

A)  resources are being used efficiently.
B)  there is no other allocation of resources that would make society as a whole better off.
C)  consumers cannot be excluded from consuming the good once it is provided.
D)  resources are not being used in their highest valued activity.
E)  the societal welfare as a whole is maximized.

Question 11

When economic activity imposes costs on others not directly involved in the transaction:

Accepted Answer

A)  a negative externality exists.
B)  a positive externality exists.
C)  then the market, will produce too little of the good.
D)  the tragedy of commons problem arises.
E)  a free rider problem arises.

Question 12

Why are cows and chickens less prone to become extinct?

Accepted Answer

A)  They are usually consumed in huge numbers
B)  They are mainly privately owned
C)  They are a part of common resources
D)  Poaching these animals for their meat is banned by the government
E)  They are not used for commercial purposes

Question 13

Why do externalities arise?

Accepted Answer

A)  The costs of production are not borne by the producer
B)  An economic activity imposes a burden on them who are not directly involved in it
C)  An economic activity imposes a cost on them who are directly involved in it
D)  The government produces such goods and services which are consumed by only a particular class of people
E)  Goods of mass consumption are not produced as they do not yield profit for the producers

Question 14

Benefits granted to powerful special interest groups in return for political support are known as rents.

Accepted Answer

A) True 
 B)False  True

Question 15

Private costs exceed social cost when external benefits are created.

Accepted Answer

A) True 
 B)False

Question 16

A tradable government permit for the atmospheric release of a ton of sulfur dioxide can help reduce acid rain.

Accepted Answer

A) True 
 B)False

Question 17

In the case of automobile and medical insurance, adverse selection might mean that, as the cost of insurance rises, the good drivers and healthy people reduce their coverage while the poor drivers and unhealthy people maintain their coverage.

Accepted Answer

A) True 
 B)False

Question 18

The major problem with common ownership is that, too much of the commonly owned is consumed, and not enough is produced.

Accepted Answer

A) True 
 B)False

Question 19

The figure given below shows the demand and supply curves of steel.Sp is the private supply curve, and Ss is the social supply curve that includes both private costs and external costs. Figure 13.2 p is the private supply curve, and Ss is the social supply curve that includes both private costs and external costs. Figure 13.2   In Figure 13.2, external costs are equal to _____. A) Ps - Pp B) da C) Qp - Qs D) ab E) bc" class="answers-bank-image d-inline" rel="preload" > In Figure 13.2, external costs are equal to _____.

Accepted Answer

A)  Ps - Pp
B)  da
C)  Qp - Qs
D)  ab
E)  bc B

Question 20

Which of the following is true of externality?

Accepted Answer

A)  An externality enhances the efficiency of the market system.
B)  An externality is not an economic problem because it is external to the market.
C)  An externality is a cost borne by the people who are directly or indirectly involved in the production of a good or service.
D)  An externality accrues to someone who had nothing to do with the production or consumption of a good or service.
E)  An externality refers to some unexpected change in the equilibrium price or quantity of a product.

Exam 21: Market Failures, Government Failures, and Rent Seeking

When the government tries to control pollution through cap and trade, it _____.

Correct AnswerverifiedShow Answer

The good for which neither the principle of mutual excludability nor the principle of rivalry applies is referred to as a:

Correct AnswerverifiedShow Answer

When consumers have perfect information about the quality of the products they purchase, the problem of adverse selection is likely to arise.

Correct AnswerverifiedShow Answer

Which of following would help minimize moral hazard in the financial market?

Correct AnswerverifiedShow Answer

Higher the economic freedom in a country:

Correct AnswerverifiedB

When negotiation is costly, it makes a difference where liability is placed in terms of reaching an efficient solution to a negative externality problem.

Correct AnswerverifiedShow Answer

A good that is both excludable and rivalrous is a(n) :

Correct AnswerverifiedShow Answer

The European Union Emission Trading Scheme is an example of:

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

The existence of externalities in a market implies that:

Correct AnswerverifiedShow Answer

When economic activity imposes costs on others not directly involved in the transaction:

Correct AnswerverifiedShow Answer

Why are cows and chickens less prone to become extinct?

Correct AnswerverifiedShow Answer

Why do externalities arise?

Correct AnswerverifiedShow Answer

Benefits granted to powerful special interest groups in return for political support are known as rents.

Correct AnswerverifiedTrue

Private costs exceed social cost when external benefits are created.

Correct AnswerverifiedShow Answer

A tradable government permit for the atmospheric release of a ton of sulfur dioxide can help reduce acid rain.

Correct AnswerverifiedShow Answer

In the case of automobile and medical insurance, adverse selection might mean that, as the cost of insurance rises, the good drivers and healthy people reduce their coverage while the poor drivers and unhealthy people maintain their coverage.

Correct AnswerverifiedShow Answer

The major problem with common ownership is that, too much of the commonly owned is consumed, and not enough is produced.

Correct AnswerverifiedShow Answer

The figure given below shows the demand and supply curves of steel.Sp is the private supply curve, and Ss is the social supply curve that includes both private costs and external costs. Figure 13.2 In Figure 13.2, external costs are equal to _____.

Correct AnswerverifiedB

Which of the following is true of externality?

Correct AnswerverifiedShow Answer

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B

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True

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The figure given below shows the demand and supply curves of steel.S_p is the private supply curve, and S_s is the social supply curve that includes both private costs and external costs. Figure 13.2 In Figure 13.2, external costs are equal to _____.

Correct Answer
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B

Correct Answer
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