Chapter 5&31: Public Spending and Public Choice & Environmental Economics

Question 1

a price system allows all resources to move from lower-valued uses to higher-valued uses via

Answer 1

voluntary exchange

Question 2

Market Failures

Answer 2

when the market economy leads to few or too many resources going to a specific economic activity

Question 3

whats a result of Market Failures

Answer 3

dead weight loss

Question 4

What are some causes of market failures

Answer 4

positive or negative externalities, existence of public goods, imperfect competition, imperfection information

Question 5

Private Costs

Answer 5

borne solely by individuals who incur them “internal costs”

Question 6

External Costs

Answer 6

borne by third parties

Question 7

Social Costs

Answer 7

the full cost borne by society whenever a resource use occurs (private costs + external costs)

Question 8

Externalities

Answer 8

assume that people are rational, they should benefit from economic activities in which they are directly involved

Question 9

Voluntary transactions benefit

Answer 9

both the buyer and seller

Question 10

Economic activities can affect

Answer 10

people not directly involved (third parties)

Question 11

Externalities are the consequence of

Answer 11

an economic activity spill over of third parties

Question 12

Negative Externalities confer

Answer 12

external costs on third parties (pollution, littering, overfishing)

Question 13

Positive externalities confer

Answer 13

external benefits to third parties (research, vaccinations, lawn mowing)

Question 14

Social Cost (negative externalities & External costs)

Answer 14

internal cost + external cost

Question 15

Internal Cost (negative externalities & External costs)

Answer 15

cost on parties directly involved

Question 16

External Cost (negative externalities & External costs)

Answer 16

Cost on third parties

Question 17

Social Benefits (positive externalities and external benefits)

Answer 17

internal benefits (private benefits) + external benefits

Question 18

Internal Benefits (positive externalities and external benefits)

Answer 18

benefits on parties directly involved

Question 19

External Benefits (positive externalities and external benefits)

Answer 19

benefits on third parties

Question 20

External Costs are also know as

Answer 20

negative externalities

Question 21

External Benefits are also known as

Answer 21

positive externalities

Question 22

Common Property

Answer 22

owned by everyone (owned by nobody)

Question 23

Private Property rights

Answer 23

exclusive rights of ownership that allow the use, transfer and exchange of property

Question 24

Lack of clearly defined property rights can be

Answer 24

a precursor to externalities

Question 25

After defining property rights, bargaining between parties could

Answer 25

correct for externalities

Question 26

Government action

Answer 26

corrects negative externalities

Question 27

Special Taxes

Answer 27

adds the external cost to the supplier, which makes the supplier weigh the private benefits against social cost

Question 28

innovation

Answer 28

corrects negative externalities

Question 29

Mutual agreement/ Private bargaining

Answer 29

corrects negative externalities

Question 30

Positive externalities lead to

Answer 30

inefficient markets

Question 31

correct positive externalities

Answer 31

private sector, profit motive (google search)
government actions (gov. financing)
Altruism and reciprocity (charities)

Question 32

Optimal amount of pollution is where

Answer 32

Marginal Benefits= Marginal Cost

Question 33

Non-Rival (Public Good)

Answer 33

one persons use does not diminish anyone else’s enjoyment

Question 34

Non- Excludable (public goods)

Answer 34

hard to exclude free riders

Question 35

Production of public goods result in

Answer 35

positive externalities

Question 36

Private sector may lack enough incentive to provide enough amount of

Answer 36

public good

Question 37

Not a public good because

Answer 37

the government provides it

Question 38

Public Choice

Answer 38

study of politics using an economic way of thinking

Question 39

Public Choice uses economics

Answer 39

to examine collective decision making

Question 40

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

a) Smoking harms one’s own health.
b) The opening of a new football stadium increases the business of nearby restaurants.
c) Consumers pay a sales tax in addition to the price of a product.
d) There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.

Answer 40

There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.

Question 41

However, 10MPG increase 2% more miles driven
Are people elasticly or inelasticly responding to the change in MPG?

a) Elasticly
b) Inelasticity
c) Neither
d) Both

Answer 41

inelasticly

Question 42

Will we burn more or less gas after the increase in MPG?

a) more
b) less
c) same
d) can’t tell

Answer 42

less

Question 43

Why won’t the market provide the optimal resource allocation when externalities are present?

a) Not all costs & benefits are taken into account by decision makers
b) Activities that produce externalities are illegal
c) Markets work in the case of positive externalities, but not negative ones
d) Markets work in the case of negative externalities, but not positive ones

Answer 43

Not all costs & benefits are taken into account by decision makers