ECON 121 chapter 8 – Flashcards

State three reasons for a potentially beneficial role of government intervention. A. Creating barriers to entry to promote market efficiency. B. Providing public goods. C. Restraining trade so prices rise. D. Correcting informational problems. E. Generating a government failure to affect market pricing. F. Offsetting the incentive effect provided by wages. G. Correcting for negative or positive externalities.

The marginal social benefit of a good that exhibits positive externalities is _________ the private social benefit of that good. Why? A. When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade. B. When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit plus the costs incurred by third parties not involved in the trade. C. When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit minus the costs incurred by third parties not involved in the trade. D. When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit minus the benefits received by third parties not involved in the trade.

How would an economist likely respond to the statement "There is no such thing as an acceptable level of pollution"? A. An economist would agree with this statement because the word "acceptable" reflects individual preferences, which are not easily accounted for in a market with externalities such as pollution. B. An economist would disagree with this statement because the market is able to allocate sufficient resources to reducing pollution to an acceptable level. Externalities are taken into account by those making market choices. C. An economist would disagree with this statement because although reducing pollution has benefits, doing so also has costs. The optimal level of pollution is where the marginal benefit of reducing pollution just equals the marginal cost. D. An economist would agree with this statement because western countries have sufficient monetary resources to invest in pollution-reducing equipment. Further, people can change their consumer choices to eliminate pollution.

Would a high tax on oil significantly reduce the amount of pollution coming from the use of oil? Why? A. This type of tax will provide an incentive for the users with the lowest cost of reduction to decrease their consumption of oil. If those with the lowest costs are significant users, then there will be a significant reduction. B. This is an example of a voluntary program, which rarely works due to free riders. C. This is a type of direct regulation that is almost always successful in reducing consumption, which in turn will lead to less pollution. D. This is an example of a tax incentive program. Although tax incentive programs sometimes work better than direct regulation, they are much less efficient than simply allowing the market to correct itself via the invisible hand.

Which is more efficient: a market incentive program or a direct regulatory program? Why? A. A market incentive program is more efficient because it makes use of the powerful force of the invisible hand, and unlike the direct regulation approach, it gets people to equate the marginal costs with the marginal benefit. B. A market incentive program is more efficient because the government does not have to be involved in the program. C. A direct regulatory program is more efficient because direct regulation will provide the optimal framework for people to be able to equate the marginal costs and marginal benefits of their decisions. D. A direct regulatory program is more efficient because direct regulation is the only way for people to take into account the effects of their decisions on people not involved in the trade.

There's a gas shortage in Gasland. You're presented with two proposals that will achieve the same level of reduction in the use of gas. Proposal A would force everybody to reduce their gas consumption by 5 percent (regulatory policy). Proposal B would impose a 50-cent tax on the consumption of a gallon of gas, which would also achieve a 5 percent reduction. Consumers of gas can be divided into two groups—one group whose demand is elastic and another group whose demand is inelastic. a. How will the proposals affect each group? A. With both proposals, the quantity of oil demanded will decline for each group, causing a movement down along each demand curve. B. With both proposals, each group will demand less oil. Their demand curves will shift down. C. Proposal A would result in a lower quantity of oil demanded (movement along the demand curve). Proposal B would result in less oil demanded (demand curve shifts). D. Proposal A would result in less oil demanded (demand curve shifts). Proposal B would result in a lower quantity of oil demanded (movement along the demand curve). b. Which group would support a regulatory policy? A. The group with inelastic demand. B. The group with elastic demand. c. Which would support a tax policy? A. The group with elastic demand. B. The group with inelastic demand.

List the public-good aspects (if any) of the following goods: a. Safety. A. When one person acts in a safe manner, it affects others not included in the decision to act safely. It reduces risks to others. B. It involves choices the public makes, such as safe driving, that enhances their own safety. C. Safety has no public-good aspects, since it is both rival and excludable. D. If safety provides a safe environment, it is provided for all people, and one person enjoying safety does not preclude others from benefiting from that safety. b. Street names. A. Naming streets allows people to orient themselves in towns and facilitates communication. Once a street is named, it benefits all people. No one can be excluded from referring to that name. In addition, one person using that street name does not preclude others from referring to that street. B. Naming streets allows people to orient themselves in towns and facilitates communication. Since the government is in charge of naming streets, they are a public good. C. Naming streets is not a public good because it is up to each person to navigate maps and streets. Naming streets allows people to orient themselves in towns and facilitates communication. Although everyone benefits from street names, no one wants to pay the costs if some people are free riders. The government eliminates the free rider problem by using tax dollars to name streets, thus creating a public good. D. Naming streets has no public-good aspects, since street names are rival (unique to towns) and excludable (once used in a town, it cannot be used again). c. A steak dinner. A. A steak dinner has no public-good aspects, since it is both rival (if one person eats it, no one else can) and excludable (if you don't pay for it, you don't get it). B. A steak dinner is a public good because the government subsidizes meat farms. In other words, the price of a steak is partly paid for by taxes, making the steak itself a public good. C. A steak dinner is a public good because cows graze on public land. In this way, farmers are often free riders and the meat they produce is actually a public good. D. A steak dinner is a public good because an entire cow has to be butchered to produce the steak. Other people receive the remaining meat, making the steak a public good.

Why are both nonexcludability and nonrivalry important elements of public goods? A. These characteristics are important because they counteract negative externalities. With negative externalities, extra social costs are incurred. With public goods, extra social benefits are gained. B. These characteristics increase the ability of free riders to enjoy the benefit of the public good without sharing in the cost of that good. C. Goods with these characteristics can be efficiently supplied privately or publicly. D. These characteristics increase the value of a public good because no single person can make the decision to provide the good. They must be provided in collaboration with the public.

Why are voluntary contributions to provide for public goods such as city parks unlikely to lead to an efficient quantity of parks in a city? A. City parks are examples of public goods that lead to a positive externality. Asking for voluntary contributions to sustain city parks will result in too few parks because of the voluntary restraint problem. B. City parks are examples of public goods that lead to government failure. Asking for voluntary contributions to sustain city parks will result in too few parks because of the adverse selection problem. C. City parks are examples of public goods that are nonrival and nonexcludable. Asking for voluntary contributions to sustain city parks will result in too few parks because of the free rider problem. D. City parks are examples of public goods that need to be managed by market incentive plans. Because of this, public funds are directed away from city parks toward administrating the plan, and fewer parks are built than is efficient.