Question 1

Which of the following best describes a negative externality, and what is its likely effect on market allocation?

Accepted Answer

A cost imposed on third parties, causing the market to overallocate resources to the activity.

Question 2

Suppose a steel mill emits pollution that causes health problems for nearby residents. Which government policy would most directly address this negative externality?

Accepted Answer

Imposing an effluent fee (pollution tax) on the steel mill for each unit of pollution emitted.

Question 3

Which of the following is a defining characteristic of a public good?

Accepted Answer

It can be consumed by many people simultaneously without reducing its availability to others.

Question 4

The free-rider problem is most likely to occur with which type of good?

Accepted Answer

Public goods, because it is difficult or costly to exclude nonpayers.

Question 5

If the government increases subsidies for public education, which of the following is a likely economic consequence according to the study materials?

Accepted Answer

The last unit of educational services provided may cost more than its value to students and parents.

Question 6

Which of the following best illustrates a positive externality?

Accepted Answer

A person receiving a flu shot, reducing the likelihood of spreading illness to others.

Question 7

Which equation best represents the effect of a government subsidy on the price paid by consumers and the price received by producers in the medical care market?

Accepted Answer

If $$P_c is $$the price paid by consumers, $$P_p is $$the price received by providers, and $$S is $$the subsidy per unit, then $$P_p = P_c + S.$$

Question 8

Which of the following is NOT a function of government as described in the study materials?

Accepted Answer

Maximizing profits for private firms.

Question 9

A government-inhibited good is best described as:

Accepted Answer

A good deemed socially undesirable through the political process.

Question 10

Which of the following statements about transfer payments is correct?

Accepted Answer

Transfer payments include Social Security and unemployment insurance benefits.

Question 11

According to the theory of public choice, how do individuals behave within the political process?

Accepted Answer

They act to maximize their own individual well-being.

Question 12

Which of the following best explains why the exclusion principle does not apply to public goods?

Accepted Answer

The cost of excluding nonpayers is prohibitive.

Question 13

Suppose the government enacts a regulation requiring all citizens to purchase health insurance. What is the likely effect on the market for health insurance?

Accepted Answer

The demand curve for health insurance shifts to the right, increasing equilibrium price.

Question 14

Which of the following is an example of a transfer in kind?

Accepted Answer

Food stamps provided to low-income households.

Question 15

Which of the following best describes the difference between majority rule and proportional rule in collective decision making?

Accepted Answer

Majority rule bases decisions on more than 50% of votes, while proportional rule bases actions on the proportion of votes cast.

Question 16

Which of the following is a likely unintended consequence of government subsidies for medical care, as described in the study materials?

Accepted Answer

Consumers may use more medical services, including those valued less than their cost.

Question 17

Which of the following is an example of a government-sponsored good?

Accepted Answer

Museums.

Question 18

Which of the following best describes the incentive structure in the public sector compared to the private sector?

Accepted Answer

The public sector often provides goods at zero price and uses majority rule, while the private sector uses prices and proportional rule.

Question 19

Which of the following is a plausible reason why big data is generally not considered a public good, according to the study materials?

Accepted Answer

Most large datasets are collected under private contracts and are subject to rival consumption.

Public Spending and Public Choice: Government Functions in the Economy

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