Chapter 5

Question 1

Market Failure

Answer 1

when the quantity of goods or services supplied is not equal to the quantity of goods or services demanded

Question 2

What are the two externalities?

Answer 2

Positive & Negative

Question 3

Positive Externality

Answer 3

A beneficial side effect or spillover of an economic activity that positively impacts individuals or entities not directly involved in that activity.

Question 4

Negative Externality

Answer 4

A harmful side effect or spillover consequence of an economic activity that negatively impacts individuals or entities not directly involved in that activity.

Question 5

Ex. of negative externality

Answer 5

pollution

Question 6

Ex. of positive externality

Answer 6

getting a flu shot

Question 7

What are the different approaches the gov can do to reduce negative externalities?

Answer 7

Set regulations, effluent fee (pollution tax)

Question 8

What are the different approaches the gov can do to correct positive externalities?

Answer 8

Regulations, gov financing and production, subsidies

Question 9

Third parties

Answer 9

Parties who are not directly involved in a given activity or transaction

Question 10

5 economic functions of the government

Answer 10

providing a legal system, promoting competition, providing public goods, ensuring economic stability, & income redistribution

Question 11

Providing a Legal System

Answer 11

-enforcing contracts
-defining and protecting property rights
-establishing legal rules of behavior

Question 12

Promoting competition

Answer 12

-antitrust legislation
-monopoly power

Question 13

Antitrust legislation

Answer 13

Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices

Question 14

Monopoly

Answer 14

A firm that can determine the market price; in the extreme case, the only seller of a good or service

Question 15

Providing public goods

Answer 15

These are goods that may be consumed jointly by many individuals at the same time.

Question 16

Free Rider Problem

Answer 16

The free-rider problem arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods.

Question 17

Ensuring economic stability

Answer 17

-Smooth ups and downs in overall business activity.
-Full-Employment Act, 1946

Question 18

2 political functions of the government

Answer 18

government-sponsored goods & government inhibited goods

Question 19

Government-sponsored goods

Answer 19

Goods deemed socially desirable through the political process. Ex. Museums

Question 20

Government inhibited goods

Answer 20

Goods deemed socially undesirable.
Ex. Certain psychoactive drugs

Question 21

Transfer Payments

Answer 21

a payment made by a government or another organization to an individual, household, or entity for which no goods or services are exchanged.

Question 22

What are the 3 stabilization goals?

Answer 22

price stability, economic growth, & full employment