Chapter 5 Econ: Public Spending and Public Choice

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The 5 economic functions of our capitalistic system are:
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1. providing a legal system 2. promoting competition 3. correcting externalities 4. providing public goods 5. ensuring economy-wide stability
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If there are disputes in an economic arena, the ________ often acts as a \”referee\” to help settle the dispute.
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government
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Anti-trust legislation, in theory, is supposed to ________ competition in the private sector.
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promote
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If externalities are an important result of an economic activity, then the price system is ________.
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inefficient
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If Ms. Johnson buys an automobile from Toyota, those people not directly involved in the transaction are considered ________.
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third parties
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Pollution is an example of a ________ externality.
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negative
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When there are spillover costs, a price system will ________ resources to the production of the good in question.
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overallocate
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If third parties benefit from a transaction, then ________ exist and the price system will allocate resources ________.
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positive externalities inefficiently.
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Positive and negative externalities are examples of market ________.
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failures
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A government can correct negative externalities by imposing taxes and ________ the industry or firms in questions.
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regulating
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A government can correct positive externalities by ________ and ________.
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subsidizing production financing production
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If a positive externality exists for good B, a price system will produce too ________ of good B.
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little
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Public goods have 4 distinguishing characteristics. They are usually ________. Public goods can be used by more people at ________ additional cost. Additional users ________ deprive others of the services of a public good. It is very ________ to charge individual based on how much they used the public good.
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indivisible zero cost do not difficult
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A free rider has an incentive ________ for a public good.
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not to pay
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Government-inhibited goods are goods for which society wants to ________ production.
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decrease
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Because the Medicare program pays a per-unit subsidy for health-care expenses of people covered by the program, the price that they pay for health-care services is ________ the market price, and the quantity of health-care services that they desire to consume is ________ the equilibrium quantity.
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less than greater than
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Because the Medicare program pays a per-unit subsidy for health-care expenses of people covered by the program, the price that providers receive for health-care services ________ the market price, and the quantity of health-care services they are willing to supply is ________ the equilibrium quantity.
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greater than less than
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An increase in the number of people covered by Medicare will tend to cause the demand for covered health-care services to ________, thereby causing a(n) ________ in both the equilibrium and actual quantities of the service demanded and supplied.
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increase increase
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When governments provide subsidies to providers of educational services, the result is that the cost of the last unit of services provided is ________ than the marginal value of the services to parents and students.
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higher
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Reducing government subsidies paid to public schools causes ________ in the quantity of educational services provided by these schools and ________ in the quantity of educational services desired by students and their parents.
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a decrease a decrease
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Many government, or political, goods are provided to consumers at a ________ price. The opportunity cost to society of providing government goods is ________.
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zero positive
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In contrast to goods sold in private markets, government goods are not _______.
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explicitly priced
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In the government sector, decisions concerning what goods to produce are determined by ________ rule.
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majority
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In the U.S. economy the government plays only a minor role in resource allocation, because the country is capitalistic.
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F Even in capitalist countries, the government plays a major role.
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Governments provide a legal system, but this important function is not considered an economic function.
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F It is an economic function because by enforcing contracts, government can promote trade and commerce.
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One aim of antitrust legislation is the promotion of competition.
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T
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If externalities, or spillovers, exist, then a price system misallocates resources, so that inefficiency exists.
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T
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If a negative externality exists, buyers and sellers are not faced with the true opportunity costs of their actions.
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T
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If a positive externality exists when good A is produced, a price system will underallocate resources into the production of good A.
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T
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One way to help correct for a negative externality is to tax the good in question, because that will cause the price of the good to fall.
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F A tax will cause the price of a good to RISE, which is a movement in the correct direction.
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A price system will tend to overallocate resources to the production of free goods, due to the free-rider problem.
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F The free-rider problem deals with goods that are SCARCE, but for which the exclusion principal does not work well.
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Scarcity exists in the market sector, but not in the public sector.
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F Scarcity exists in the public sector too. After all, the government uses and allocates scarce goods.
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If third parties are hurt by the production of good B and they are not compensated, then too many resources have been allocated to industry B.
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T
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Deciding what is a government-sponsored good and what is a government-inhibited good is easily done and does not require value judgments.
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F Whether or not a good is a government-sponsored good requires value judgements.
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The price that Medicare patients pay for covered care that they receive is lower than the market price of that care.
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T
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Not including any administration costs, the direct expense that taxpayers incur in paying the government’s share of the total costs of a particular type of care equals the per-unit subsidy that the government pays times the quantity of care demanded under the subsidy.
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T
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The price that the supplier of a service covered by Medicare receives is higher than the market price of providing that service.
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T
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If market demand and supply curves have their normal shapes, then the difference between the market price of a health-care service covered by Medicare and the price that Medicare recipients actually pay is equal to the per-unit Medicare subsidy.
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F The Medicare subsidy equals the difference between the price that suppliers receive and the price the recipients pay.
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In recent years, decreases in educational subsidies have generally widened the difference between the cost of the last unit of services provided and the marginal value of the services to parents and students.
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F A decrease in per-unit educational subsidy actually narrows this difference.
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Government goods are produced solely in the public sector.
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F Governments can also buy privately produced goods for distribution at no charge.
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The best way for the government to prevent the underallocation of resources to production of vaccines against diseases is to require producers to set the price of vaccines below the equilibrium price.
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F Requiring vaccine producers to set the price of vaccines lower than the equilibrium price results in a shortage of vaccines. Preventing underallocation of resources to production of a good that creates external benefits, such as vaccines, requires inducing an increase in demand for the good. Hence the government provision of subsidies in the form of vouchers or rebate coupons would more likely generate an increase in demand for vaccines and a resulting increase in the equilibrium quantity of vaccines produced and consumed.
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Which one of the following is not an economic function of government? a. income redistribution b. providing a legal system c. ensuring economy-wide stability d. promoting competition
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a. income redistribution
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A price system will misallocate resources if a. much income inequality exists. b. government-inhibited goods are produced. c. externalities exist. d. All of the above.
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c. externalities exist.
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The exclusion principle a. does not work for public goods. b. does not work for private goods. c. causes positive externalities. d. makes it easy to assess user fees on true public goods.
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a. does not work for public goods.
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Which one of the following statements concerning externalities is true? a. If a positive externality exists for good A, A will be overproduced by a price system. b. If externalities exist, then resources will be allocated efficiently. c. Efficiency may be improved if the government taxes goods for which a positive externality exists. d. The output of goods for which a positive externality exists is too low, from society’s point of view.
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d. The output of goods for which a positive externality exists is too low, from society’s point of view.
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Which one of the following is not a characteristic of public goods? a. indivisibility b. high extra cost to additional users c. exclusion principle does not work easily d. difficult to determine how each individual benefits from public goods
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b. high extra cost to additional users
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Market failure exists if a. Mr. Smith cannot purchase watermelons in his town. b. buyers and sellers must pay the true opportunity costs of their actions. c. third parties are injured and are not compensated. d. the government must provide government-sponsored goods.
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c. third parties are injured and are not compensated.
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Which one of the following will properly correct a negative externality that results from producing good B? a. subsidizing the production of good B b. letting the price system determine the price and output of good B c. forcing buyers and sellers of good B to pay the true opportunity costs of their actions d. banning the production of good B
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c. forcing buyers and sellers of good B to pay the true opportunity costs of their actions
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Government-sponsored and government-inhibited goods a. are examples of public goods. b. are examples of externalities. c. indicate market failure. d. are not easily classified.
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d. are not easily classified.
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If Ms. Ayres loves good A, she can convey the intensity of her wants if good A is a. a private good. b. a public good. c. not subject to the exclusion principle. d. expensive.
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a. a private good.
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The free-rider problem exists a. for private goods. b. for goods that must be consumed collectively. c. only if people can be excluded from consumption. d. All of the above.
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b. for goods that must be consumed collectively.
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Suppose that the government has been paying a fixed per-unit subsidy for a health-care service covered by Medicare. Then officials who administer the program tell patients and doctors and other health-care providers that they plan to cut the per-unit subsidy. Other things being equal, the result will be a. a rise in the market price and a decline in the equilibrium quantity in the market for the service. b. a rise in the price paid by each Medicare recipient, and a reduction in the quantity of the service demanded and supplied. c. a rise in the price received by each health-care supplier, and an increase in the quantity of the service demanded and supplied. d. a fall in the price received by each health-care supplier, and an increase in the quantity of the service demanded and supplied.
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b. a rise in the price paid by each Medicare recipient, and a reduction in the quantity of the service demanded and supplied.
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Suppose that, until this year, a health-care service was not covered by Medicare. Recently, however, the government has extended Medicare coverage to this service and has started paying a fixed per-unit subsidy to providers of the service. Other things being equal, the result will be a. a fall in the market price and an increase in the equilibrium quantity in the market for the service. b. a rise in the price paid by each Medicare recipient, and a reduction in the quantity of the service demanded and supplied. c. a rise in the price received by each health-care supplier, and an increase in the quantity of the service demanded and supplied. d. a fall in the price received by each health-care supplier, and an increase in the quantity of the service demanded and supplied.
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c. a rise in the price received by each health-care supplier, and an increase in the quantity of the service demanded and supplied.
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In future years, the number of people covered by Medicare will increase, so the demand for each covered health-care service will rise. Suppose that the per-unit subsidy that the government pays for each covered service remains unchanged. Other things being equal, which one of the following will not occur as a result? a. The market price of the service will increase, and the equilibrium quantity in the market for the service will rise. b. There will be a rise in the price paid by each Medicare recipient, and there will be an increase in the quantity of the service demanded. c. There will be a rise in the price received by each health-care supplier, and there will be an increase in the quantity of the service supplied. d. Because the per-unit subsidy paid by the government remains unchanged, the total expense incurred by taxpayers will remain unaffected.
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d. Because the per-unit subsidy paid by the government remains unchanged, the total expense incurred by taxpayers will remain unaffected.
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Which one of the following is true of both market and collective decision making? Within both contexts, a. resources are scarce. b. people face identical incentive structures. c. production and allocation decisions arise from majority rule. d. production and allocation decisions arise from proportional rule.
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a. resources are scarce.
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Which one of the following is true of government goods? a. They are always produced within the public sector. b. They are always produced within the private sector. c. They are provided free of charge. d. They have no opportunity cost.
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c. They are provided free of charge.
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A situation in which the free market leads to too many resources going to producing a good is a. a market failure. b. rival consumption. c. a market equilibrium. d. positive externality.
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a market failure.
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Which one of the following is the primary difference between a public good and a private good? a. Private goods are subject to the principle of rival consumption while public goods are not. b. The government oversees the production of private goods but does not oversee the production of public goods. c. A private good is subject to the free-rider problem while a public good is not. d. Private goods are manufactured because of the workings of the price system while public goods come about through antitrust legislation.
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Private goods are subject to the principle of rival consumption while public goods are not.
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Which of the following is not a political function of the government? a. Determining government-inhibited goods. b. Providing In-kind transfers. c. Income redistribution. d. Providing public goods.
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Providing public goods.
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The government can correct a positive externality from producing a good by a. charging an effluent fee for producing that good. b. providing subsidies to firms producing that good. c. restrict the consumption of that good. d. imposing a tax on production of that good.
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providing subsidies to firms producing that good.
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How do market failures justify the economic functions of the government? a. The economic functions of the government include the promotion of all goods subject to market failure. b. When a market failure exists, there will be too few or too many resources being directed to a specific form of economic activity. c. Without the economic functions of the government, there would be no externality. d. The price system will promote competition, provide public goods and promote economic stability.
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When a market failure exists, there will be too few or too many resources being directed to a specific form of economic activity.
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The study of collective decision making is known as the a. proportionate rule. b. incentive structure. c. majority rule. d. theory of public choice.
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theory of public choice.
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Which of the following is an example of a public good? a. Satellite TV b. Flood control c. Electrical power service d. Cable television
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Flood control
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Assume there is a negative externality in the production of steel. If we force the steel producers to consider the social costs of their actions, then this would a. decrease the supply of steel and increase its market price. b. increase the supply of steel and decrease its market price. c. decrease both the supply of steel and its market price. d. increase both the supply of steel and its market price.
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decrease the supply of steel and increase its market price.
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Goods that are determined to be socially desirable through the political process are known as a. transfers-in-kind. b. incentive goods. c. government-inhibited goods. d. government-sponsored goods.
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government-sponsored goods.
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Social security and Medicare are clear examples of a. negative externality. b. government intervention in the market. c. free market systems. d. the free-rider problem.
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government intervention in the market.
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Public goods are goods that a. can be jointly consumed by many people at the same time. b. people can be excluded from consuming. c. people pay for according to how much they use them. d. impose a cost or benefit on a third party.
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can be jointly consumed by many people at the same time.
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Economic functions of government include a. making decisions on the types of government-inhibited goods. b. income redistribution and the provision of government-sponsored goods. c. allocating public goods and promoting competition. d. deciding which states may or may not impose income taxes, charge fees and enforce contracts.
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allocating public goods and promoting competition.
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Which of the following is a main difference between collective and private decision making? a. Private individuals compete and act in their own interest while government bureaucrats do not. b. Individuals working in the government sector face a different incentive structure than those in the private sector. c. The government sector does not face scarcity issues while the private sector does. d. The government’s actions do not have an opportunity cost while private actions do.
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Individuals working in the government sector face a different incentive structure than those in the private sector.
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Beekeepers provide external benefits to owners of orchards. If these benefits are ignored, then the beekeepers will a. have too few hives. b. charge too high a price for honey. c. enjoy a free-ride on the orchard owners. d. supply too much honey.
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have too few hives

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