Chapter 5: Difficult Cases for the Market, and the Role of Government

Question 1

Economic efficiency

Answer 1

A situation that occurs when (1) all activities generating more benefit than cost are undertaken, and (2) no activities are undertaken for which the cost exceeds the benefit.

Question 2

Externalities

Answer 2

Spillover effects of an activity that influence the well-being of nonconsenting third parties.

Question 3

External cost

Answer 3

Spillover effects that reduce the well-being of nonconsenting third parties

Question 4

External benefit

Answer 4

Spillover effects that generate benefits for nonconsenting third parties.

Question 5

Public goods

Answer 5

Goods for which rivalry among consumers is absent and exclusion of nonpaying customers is difficult.

Question 6

Free riders

Answer 6

A person who receives the benefit of a good without paying for it. Because it is often virtually impossible to restrict the consumption of public goods to those who pay, these goods are subject to free-rider problems.

Question 7

Repeat-purchase items

Answer 7

An item purchased often by the same buyer.

Question 8

Franchise

Answer 8

A right or license granted to an individual to market a company’s goods or services or use its brand name. The individual firms are independently owned but must meet certain conditions to continue to use the name.

Question 9

Market failure

Answer 9

A situation in which the structure of incentives is such that markets will encourage individuals to undertake activities that are inconsistent with economic efficiency.

Question 10

Government failure

Answer 10

A situation in which the structure of incentives is such that the political process, including democratic political decision-making, will encourage individuals to undertake actions that conflict with economy efficiency.