7_Market Regulation

Question 1

LO: For industries in which a firm achieves economies of scale in the long-run, the government will regulate price rather than attempting to dismantle a monopoly or encourage new participants called a ___.
I.e., Electric or telephone companies

Answer 1

Natural monopoly

Question 2

___ are societies that primarily use centralized authorities to manage the creation and distribution of goods and service.

Answer 2

Collectivist economies

Question 3

___ are societies that rely primarily on markets to determine the creation of goods and services.
I.e., Predominant economy of the U.S.

Answer 3

Free market economies

Question 4

___ is a subfield of economics that focuses on evaluating the performance of markets based on efficiency and equity.

Answer 4

“Welfare economics”

Question 5

___ is the outcome of a set of exchanges between decision-making units in a market or network of markets if it would be impossible to modify how the exchanges occurred to make one party better off without making another party undecidedly worse off.
I.e., —

Answer 5

Pareto efficient

Question 6

___ is when markets operate inefficiently.

Answer 6

Market failure

Question 7

What are the four generic types of market failure?

1. ___
2. ___
3. ___
4. ___

Answer 7

1. Caused by seller or buyer concentration (PUBLIC UTILITIES)
2. When parties other than buyers and sellers are affected by the transaction, but do not participate in negotiating the transaction (EXTERNALITIES)
3. When an actual market will not emerge or cannot sustain operation due to the presence of FREE RIDERS
4. Poor buyer and seller decision, due to lack of sufficient information or understanding

Question 8

___ occurs when the purpose of the price drop is merely to chase out competition and is considered illegal.

Answer 8

Predatory pricing

Question 9

How does the government help out the “little guy” when there is a disadvantage fo being a small firm in a market?

Answer 9

Tax breaks

Subsidies

Question 10

___ occurs when private firms are allowed to be the sole sellers, but require approval for the prices to be charged; the seller enjoys the benefit of low average cost and being the only firm in the market.
I.e., a regulated monopoly

Answer 10

Public utilities

Question 11

___ are the effects of market activity on third parties because they fall outside the consideration of buyer and seller; two types.

Answer 11

Externalities

Two types: Positive and Negative

Question 12

___ are beneficial to third-parties and can create inefficiency.
I.e., Spillover in R and D, training of a worker now and creating a more valuable worker for a future employer, pest control, etc.

Answer 12

Positive externalities

Question 13

___ are harmful to third-parties and creates inefficiency.
I.e., Air or water pollution experienced by seller or buyer, injury or death, inconvenience and annoyances caused by loud noises, etc.

Answer 13

Negative externalities

Question 14

What are the two forms of externality regulation?

1. ___
2. ___

Answer 14

1. Legal (forbid or restrict activity)

2. Economic (taxation)

Question 15

An ___ is the value of the marginal externality damage created by consumption of an addition item from a market exchange; an optimal level for setting a tax.

Answer 15

Optimum tax

An optimum tax is negative for a positive externality

Question 16

___ is a legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution are selected, regardless of how property rights are divided.

Answer 16

Coase theorem

Question 17

___ is a type of good that may only be possessed or consumed by a single user.
I.e., Ice cream bar

Answer 17

Rival goods

Question 18

___ is a type of good that allows consumption or possession to multiple users.
I.e., National parks and roadways

Answer 18

Non-rival goods

Question 19

A ___ is a good or service which can benefit others without distracting from the party making the purchase.
I.e., Eradication of mosquitos around your house

Answer 19

Public good

Inefficiency: purchase by one person may not be worth the cost to the individual, but would be to a community; therefore, the community suffers due to the individual not purchasing.

Question 20

A ___ occurs when one party in an economic exchange deliberately exploits the ignorance of another party in the transaction to its own advantage and to the disadvantage of the unknowing party; brings about equity and efficiency concerns.
I.e., Presenting a biased view when seeking out investors in a new venture to attract capital; outside investors eventually lose their money due to knowable problems that were not presented.

Answer 20

Moral hazard

Question 21

___ require that those making loans clearly disclose key provision in the loan, the degree requiring the borrower to put initials beside written statements.
I.e., Sarbanes-Oxley law

Answer 21

Truth-in-lending laws

Question 22

The ___ postulates that government regulation is actually executed so as to improve the conditions for the parties being regulated and not necessarily to promote the public interest in reducing market failure and market inefficiency.

Answer 22

The Capture Theory of Regulation

Question 23

___ is the division of the burden of a tax between the buyer and seller.

Answer 23

Tax incidence

Question 24

___ is the deadweight loss from a tax.

Answer 24

Excess burden of tax

Question 25

___ is equal to the tax revenue and deadweight loss.

Answer 25

Burden of tax

Question 26

For firms, a tax doesn’t increase or decrease the quantity supplied at each price, instead it increases/decreases the cost of each unit – shifting the supply curve ___.

Answer 26

Up/Down

Not left or right

Question 27

Which of the following statements is (are) TRUE?

I. In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output.

II. If vaccinations generate an external marginal benefit, their marginal social benefit will always exceed their private marginal benefit.

III. In unregulated markets, the presence of negative externalities—but not positive externalities—causes deadweight losses.

a. III
b. I and III
c. I, II, and III
d. I and II

Answer 27

d. I and II

In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output.

If vaccinations generate an external marginal benefit, their marginal social benefit will always exceed their private marginal benefit.

Question 28

Which of the following statements is (are) TRUE?

I. Public goods tend to be underprovided.

II. One person’s consumption of a public good diminishes its use to another person.

III. The marginal cost of providing a public good to another consumer is infinite.

a. II and III
b. I and III
c. I, II, and III
d. I

Answer 28

d. I

Public goods tend to be underprovided.

Question 29

Mobile phone portability allows consumers to retain their phone number if they change to a different phone network, which will tend to:

a. encourage the formation of natural monopolies.
b. discourage product differentiation and increase switching costs
c. reduce market power in the phone industry.
d. increase barriers to entry in the phone industry.

Answer 29

c. reduce market power in the phone industry.

Question 30

Which of the following are sources of market power?

I. government-issued patents and copyrights

II. a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used

III. a Portland, Oregon, law that makes it a crime for limousine companies to charge less than $50 per ride

Select one:

a. I, II, and III
b. I
c. III
d. II

Answer 30

a. I, II, and III

ALL

Question 31

Antitrust laws:

a. encourage firms to work together on setting prices, market share, and output levels.
b. ensure that firms with market power are not penalized for colluding.
c. cannot be used to prevent the merger of two firms.
d. restrict firms from engaging in behaviors that make markets less competitive.

Answer 31

d. restrict firms from engaging in behaviors that make markets less competitive.

Question 32

Government encouragement of monopoly:

a. reduces the market power of regulated firms.
b. usually leads to lower prices and higher consumer surplus.
c. through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market.
d. results in the regulated firm producing beyond the competitive output level.

Answer 32

c. through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market.

Question 33

Which of the following is (are) examples of moral hazard?

I. An unemployed worker reduced his effort to find a job after he became eligible for unemployment insurance.

II. Banks make exceptionally risky investments because they expect government bailouts if their investments fail.

III. After a university made the morning-after pill available on campus, more students became sexually promiscuous.

a. I, II, and III
b. I and II
c. II
d. I

Answer 33

a. I, II, and III

ALL

Question 34

Which of the following practices mitigates moral hazard?

I. A health insurance company’s policy requires a $500 deductible and a 20% coinsurance rate.

II. Progressive Insurance offers drivers a discount for using a black box that records miles driven and the number of sudden stops.

III. Homeowner insurance does not cover claims arising from backyard trampolines.

a. III
b. I, II, and III
c. I
d. II and III

Answer 34

b. I, II, and III

ALL

Question 35

The antitrust laws regulate all of the following business decisions except ____.

a. mergers
b. monopolistic practices
c. collusion
d. wage levels

Answer 35

d. wage levels

Question 36

Which of the following best describes the free-rider problem?

a. People can sometimes enjoy common goods without contributing to them
b. A person who receives welfare from the government thereby loses the incentive to work
c. Everyone would be better off if everyone refrained from pursuing self-interest
d. Industrious people always attract others who try to capitalize on their success

Answer 36

a. People can sometimes enjoy common goods without contributing to them

Question 37

When the free-rider problem occurs in a market for a good, what is true of the quantity of the good supplied relative to the efficient quantity of the good?

a. When the free-rider problem occurs, the good can be provided completely free of charge.
b. The good is typically efficiently supplied in a market where the free-rider problem occurs.
c. The good is typically oversupplied in a market where the free-rider problem occurs
d. The good is typically under supplied in a market where the free-rider problem occurs

Answer 37

d. The good is typically under supplied in a market where the free-rider problem occurs

Question 38

Which of the following statements is true if a government decides that it must provide a public good, other things constant?

a. Governments should provide the most profitable public goods
b. Governments should supply the efficient quantity where the marginal cost is equal to the marginal social benefit.
c. Governments should minimize average total cost when providing a public good.
d. Governments should supply an unlimited amount of public goods free of charge.

Answer 38

b. Governments should supply the efficient quantity where the marginal cost is equal to the marginal social benefit.

Question 39

How could the expansion of property rights be used to address a problem with public goods or common resources?

a. Property rights could provide an incentive for individuals to better manage the public goods.
b. Property rights can never be used to address public good or common resource problems.
c. Property rights will make the good non-rival and non-excludable
d. Property rights will place the public good or common resource under the direct control of the government.

Answer 39

a. Property rights could provide an incentive for individuals to better manage the public goods.

Question 40

Mr. Leghorn lives next door to Mr. Fudd. During hunting season, Mr. Fudd likes to shoot rabbits in his backyard, which activity he values at $900. The noise from the shooting disturbs Mr. Leghorn and prevents him from taking afternoon naps, which he values at $500. If Mr. Leghorn has the legal right to stop Mr. Fudd from hunting, the socially optimal outcome is for:

a. Mr. Fudd to pay Mr. Leghorn less than $500 to continue hunting
b. Mr. Leghorn to pay $500 or less to get Mr. Fudd to stop hunting
c. Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting
d. Mr. Fudd to stop hunting

Answer 40

c. Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting

Question 41

Which of the following is a source of market failure?

a. an inequitable income distribution
b. a lack of government intervention in a market
c. unforeseen circumstances which leads to the bankruptcy of many firms
d. incomplete property rights or inability to enforce property rights

Answer 41

d. incomplete property rights or inability to enforce property rights

Question 42

Which of the following activities create a negative externality?

a. keeping a junked car parked on your front lawn
b. graduating from college
c. repainting the house you live in to improve its appearance
d. cleaning up the sidewalk on your block

Answer 42

a. keeping a junked car parked on your front lawn

Question 43

In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed. Many residents are pushing for a change in policy. Canine lover Sara Northridge observed, “There are 800 or more homes here. There are three parks within 10 minutes, and almost everyone has a dog, but we can’t take our dogs there.” Others fear that allowing dogs would detract from their enjoyment of the parks. Tim Cortis retorted, “We’re not preventing dog lovers from enjoying the park, just come without your dog.” Which of the following is a way of dealing with the problem by assigning property rights to a particular group?

a. impose a two-tier entry fee system - a lower fee for non dog owners and a higher fee for dog owners
b. dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park
c. allow dog owners to bring their dogs to the park but insist that they keep watch over their dogs
d. impose a fee only for dog-owners to use the public parks; non dog owners do not pay a fee

Answer 43

b. dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park

Question 44

Which of the following criteria should be used to evaluate if government intervention in a market for the purpose of environmental protection is justified?

a. Does the intervention program make the amount of economic surplus as large as possible?
b. Does the intervention program reduce pollution to zero using the least costly method?
c. Is the damage to the environment from government intervention as small as possible?
d. Is the intervention program economically efficient?

Answer 44

d. Is the intervention program economically efficient?

Question 45

In economics, the term “free rider” refers to

a. a supervisor who delegates menial time-consuming activities to others.
b. one who volunteers her services.
c. a person who evades taxes.
d. one who waits for others to produce a good and then enjoys its benefits without paying for it.

Answer 45

d. one who waits for others to produce a good and then enjoys its benefits without paying for it.

Question 46

Which of the following public policies has (have) the effect of restricting competition?

a. licensing
b. copyrights
c. patents
d. all of the above

Answer 46

d. all of the above

Question 47

The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in the world of torts and externalities both parties can claim that they have rights to impose on others. One case is that of a railroad that is noisy and scares the cattle and the rancher whose cattle sometimes wander in front of moving trains causing damage to them and the train. What does the Coase say would happen?

a. If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right
b. The rancher should have the property right to be safe from noisy trains, and the railroad should be liable for weight loss of cattle from train whistles and rumbling noise.
c. The train should have property right to be safe from wandering cattle, and the rancher should be liable for train damage of rampaging cattle.
d. The two party should fight with each other. The winner will be able to establish their right while the loser will can do nothing.

Answer 47

a. If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right