Unit 5

Question 0

Positive Externality

Answer 0

Underproduction of output and therefore under-allocation of resources

Question 1

Negative Externality

Answer 1

Overproduction of output and therefore overallocation of resources

Question 2

Ways to correct negative externality

Answer 2

1) Private bargaining
2) Liability rules and lawsuits
3) Tax on producers
4) Direct controls
5) Market for externality rights

Question 3

Ways to correct positive externality

Answer 3

1) Private bargaining
2) Subsidy to consumers
3) Subsidy to producers
4) Government provision

Question 4

Moral Hazard Problem

Answer 4

the tendency of one party to a contract or agreement to alter his or her behavior

Question 5

Adverse selection

Answer 5

One person knows something that the other does not

Question 6

Assymetric information

Answer 6

Buyers and sellers do not have the same information

Question 7

The study of market failures helps us

Answer 7

understand how regulating markets may help with the allocation of resources

Question 8

study of government failure may help us to

Answer 8

understand how changes in the way the government functions may help to operate more efficiently

Question 9

Demand-side market failures

Answer 9

demand curves do not reflect consumers full willingness to pay

Question 10

Supply-side market failures

Answer 10

Supply curves do not reflect full cost of production

Question 11

Allocation efficiency

Answer 11

mb=mc
Total surplus is at a maximum
Maximum willingness to pay=minimum acceptable price

Question 12

Private goods

Answer 12

Cars, clothes, computers, etc.

• Rivalry-when one person buys and consumes a product it is no longer available for another person
• Excludability- sellers can keep people who do not pay for a service from obtaining the benefits

Question 13

Public goods

Answer 13

Nonrivalry and nonexcludability

-leeds to a free rider problem- once a producer has provided a public good, everyone obtains the benefit

Question 14

The more free riding the

Answer 14

less the demand

Question 15

Cost benefit analysis

Answer 15

Comparison of mb and mc to figure out whether or not to provide or how much to provide of a service

Question 16

Quasi-public good

Answer 16

exclusion is possible ie. education, streets, libraries etc.
(provided by the government through taxes)

Question 17

Demand or MB for a public good is found by

Answer 17

vertically adding prices that all members of society are willing to pay for the last unit of output

Question 18

Direct control

Answer 18

limit activity—raise MC of production

Question 19

Coase Theorem

Answer 19

Individuals can negotiate their own mutually agreeable solutions to externality problems through private bargaining
(the fable of bees)

Question 20

Subsidies

Answer 20

taxes in reverse

Question 21

Provision

Answer 21

give free to all ie. flue shots

Question 22

Optimal reduction of an externality

Answer 22

mb=mc

Question 23

Public choice theory

Answer 23

economic analysis of government decision making, politics, and elections

Question 24

Taxes should be

Answer 24

Simple, efficient, certain and fair

Question 25

Benefits received principle

Answer 25

those who pay get the benefits

ie. if you have kids you pay for public schools

Question 26

Ability to pay principle

Answer 26

more money=more taxes

Question 27

Progressive taxes

Answer 27

Follows the ability to pay
higher income=higher tax rate
-federal income taxes are progressive

Question 28

Proportional taxes

Answer 28

Flat tax, everyone pays the same RATE

-corporate taxes tend to be proportional

Question 29

Regressive taxes

Answer 29

Tax rates increase as your income decreases

“everyone pays $100”

Question 30

When a supplier is taxed, who pays?

Answer 30

Producers and consumers each pay half

Question 31

The market system fails to produce public goods because

Answer 31

private firms cannot restrict the benefits of such goods only to consumers who are willing to pay for them

Question 32

What are the economic functions of government

Answer 32

enforcing laws and contracts, providing public goods, correcting market failures

Question 33

In a market economy, the distribution of income is

Answer 33

primarily determined by the prices of scarce resources people own

Question 34

if the production of a good creates positive externalities, the private market will produce

Answer 34

too little of the good at too low a price

Question 35

If the production of a good creates negative externalities, the private market will produce

Answer 35

too much of the good at too low a price

Question 36

public choice theory is based on the idea that

Answer 36

self interest motivates participants in both the public and private sectors of the economy

You cannot expect the gvnmt to fix anything

Question 37

Federal income tax is based on

Answer 37

ability to pay

Question 38

Excise tax on gasoline is based on

Answer 38

benefits received

Question 39

Sales tax is

Answer 39

regressive

Question 40

An excise tax will generate the most revenue for government if

Answer 40

demand is inelastic

Question 41

Moral hazard problem

Answer 41

after getting insurance, people act more recklessly

Question 42

Adverse selection

Answer 42

people who actually need insurance will get it