Externalities, Market Failure, and Public Choice
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1. An externality is
a. a good whose benefits is not diminished even when additional people consume it.
b. a good whose benefits cannot be withheld from anyone.
c. the unintended cost or benefit that affects other people and results from economic activity.
d. a cost which does not change with the level of production.
2. If my child is inoculated against the measles, the risk of all other children catching the measles is diminished. This is an example of a
a. negative externality.
b. positive externality.
c. good with increasing marginal utility.
3. If a family decides that the risk of its children getting the measles is low and the cost of an inoculation is high,
a. it will decide to do what is socially optimal.
b. it will spend more on inoculations than is socially optimal.
c. it will spend less on inoculations than is socially optimal.
4. Pork, Inc. decides to build a giant pig farm in Henry, IL, but having so many pigs in one place creates a terrible smell. This is an example of
a. a negative externality.
b. a positive externality.
c. a public good.
d. a good with increasing marginal utility.
5. If Pork, Inc. were forced to install a methane collection system to filter out the offensive aromas, it would
a. not change its production decisions.
b. raise fewer pigs.
c. raise more pigs.
d. We do not know enough to predict the impact on the supply of pigs.
6. If Pork Inc. is forced to install the methane scrubbers, the price of pork chops in the supermarket will probably
a. increase.
b. decrease.
c. stay the same.
d. We do not know enough to say.
7. The government could deal with the "air pollution" created by Pork, Inc. by
a. subsidizing the raising of pigs.
b. taxing the pig production to finance public aroma control devices.
c. creating a law that limits the number of pigs that can be raised on one farm.
d. a and c.
e. b and c.
8. Market failures create problems because
a. people are really not capable of behaving rationally.
b. markets will not reach the most efficient level of production.
c. people tend to overestimate social costs.
d. they are so rare that we do not know how to deal with them.
9. Last year, everyone in my neighborhood was worried about crime, so we agreed as a group to raise money for extra street lights. The street lights are public goods because
a. they have to be financed by a public organization.
b. they exist in public.
c. no one can be excluded from enjoying the benefit they create.
d. we will have to get a public permit to buy them.
10. When the money for the lights was collected, my neighbor Bob didn't contributed anything, but we made up the difference and bought the lights anyway. Bob is a
a. cheapskate.
b. free rider.
c. person who does not make rational economic decisions.
11. This year, someone in the neighborhood suggested that we raise money to plant flowers along the side of the road. Everyone agreed that flowers would be great, but no one has contributed any funds. This illustrates that
a. private actions can always reach the socially optimal level of public goods.
b. public goods will not be provided unless free riders are present.
c. private actions may not reach the optimal outcome because economically rational people will always become free riders.
d. public goods have a social benefit but no private benefit.
12. Which of the following is a near public good?
a. national defense
b. clean air
c. a lighthouse
d. the national highway system
13. Because of externalities created by public goods, the government decides what and how much to provide. If people vote on how much to provide,
a. they will never reach the socially efficient decision.
b. they will always reach the socially efficient decision.
c. sometimes they will reach the socially efficient decision but sometimes they will not.
14. The fact that the government may not reach the socially efficient choice is the problem of
a. market failure.
b. antitrust policy.
c. government failure.
d. property rights.
15. Government failure may result from
a. the fact that only people who cannot get jobs elsewhere work for the government.
b. the existence of special interest lobbies.
c. the fact that government employees only take the public interest and never their personal interest into account.
d. the fact that the government has no mechanisms for financing public goods efficiently.
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