Chapter 16

Economics - Canadian Edition, 16e (Ragan)
Chapter 16 Market Failures and Government Intervention
16.1 Basic Functions of Government
1) Which of the following roles of the government is most fundamental to a society's ability to
function safely and carry on normal economic and social life?
A) provider of health care
B) provider of education
C) provider of a justice system
D) holder of a monopoly of violence
E) regulator of free markets
Answer: D
Diff: 1 Type: MC
Topic: 16.1. basic functions of government
Skill: Recall
Learning Obj.: 16-1 Discuss the importance of the government's "monopoly of violence."
Category: Qualitative
2) The concept of "institution building" is becoming more prominent. Which of the following
best describes the aim of institution building?
A) In Canada, for example, the strengthening of existing financial institutions is key to the
country's economic well-being.
B) Canada's aid to developing countries is being focused on creating the economic institutions,
such as a central bank, that are key to a country's economic growth.
C) The rich, developed countries focus their assistance to developing countries on creating stable
political infrastructures.
D) The rich, developed countries focus on the success of institutions that are global in nature,
such as the United Nations, The World Bank and the International Monetary Fund.
Answer: C
Diff: 2 Type: MC
Skill: Recall
1
Copyright © 2020 Pearson Canada Inc.
3) Which of the following statements about free-market economies is FALSE?
A) An efficiently functioning market economy will correct temporary shortages and surpluses.
B) Markets tend to be impersonal and to decentralize economic power.
C) The government has a role to play in correcting market failures.
D) In a free-market economy there is no role for government intervention.
E) The existence of profits and losses provides signals to other economic agents.
Answer: D
Diff: 1 Type: MC
Skill: Recall
16.2 The Case for Free Markets
1) What is the essential coordinating mechanism of a free-market economy?

A) allocative efficiency
B) productive efficiency
C) profit maximization
D) the price system
E) opportunity cost
Answer: D
Diff: 1 Type: MC
Topic: 16.2. the case for free markets
Skill: Recall
Learning Obj.: 16-2 Describe the "informal" defence of free markets.
2) The "formal defence" of free markets includes the argument that competitive markets
A) lead to allocative efficiency.
B) provide automatic coordination of the actions of decentralized decision makers.
C) provide a stimulus to innovation and economic growth because of the pursuit of profits.
D) permit a decentralization of economic power.
E) lead to political freedom.
Answer: A
Diff: 2 Type: MC
Skill: Recall
2
3) The "informal defence" of free markets includes the argument that markets
A) provide automatic coordination of the actions of decentralized decision makers.
B) achieve the maximum feasible rate of economic growth.
C) lead to allocative efficiency.
D) permit a centralization of economic power.
E) lead to productive efficiency.
Answer: A
Diff: 2 Type: MC
Skill: Recall
4) The "informal defence" of free markets includes the argument that competitive markets
1) result in a more equitable distribution of income;
2) provide automatic coordination of the actions of decentralized decision makers;
3) provide a stimulus to innovation and economic growth because of the pursuit of profits.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 2 and 3
Answer: E
Diff: 2 Type: MC
Skill: Recall
5) Which of the following statements about market economies is true?

A) Most present-day economists advocate extensive government intervention in most parts of
market economies.
B) Externalities make free-market outcomes socially efficient.
C) An important characteristic of the market system is its ability to set in motion forces that tend
to correct disequilibrium.
D) Market failure means that a market economy is incapable of satisfying human wants.
E) Pure market economies provide the best social outcome.
Answer: C
Diff: 1 Type: MC
Skill: Recall
3
6) In a competitive market economy with no externalities, allocative efficiency would exist if
A) prices equal total cost in all markets.
B) prices equal marginal revenue in all markets.
C) prices equal marginal costs in all markets.
D) prices equal average variable cost in all markets.
E) stringent government intervention exists.
Answer: C
Diff: 1 Type: MC
Skill: Recall
7) Economic losses in an industry are a signal that

A) too few resources are allocated to the industry.
B) all of the firms should leave the industry.
C) a government subsidy is necessary.
D) will lead resources to leave the industry (until the losses disappear).
E) the economy is in a recession.
Answer: D
Diff: 2 Type: MC
Skill: Applied
8) If typical firms in a competitive industry are earning economic profits, the industry
A) is in a long-run equilibrium.
B) has too many resources allocated to it.
C) must be experiencing an increase in monopoly power.
D) can be expected to experience the entry of new firms.
E) is allocatively efficient.
Answer: D
Diff: 1 Type: MC
Skill: Recall
4
9) Which of the following statements about the price system is most accurate? The price system
A) is automatic and functions perfectly in reallocating economic resources.
B) is automatic, although it does not function perfectly.
C) depends on planned coordination between firms and governments.
D) operates only in a laissez-faire economy.
E) is the only feasible method of allocating resources.
Answer: B
Diff: 2 Type: MC
Skill: Applied
10) Economists describe prices as "signals" in a market economy because

A) prices are the only mechanism through which supply and demand will balance.
B) changes in these signals bring about changes in economic behaviour.
C) changes in these signals bring about changes in market structure.
D) they tell consumers how to act to keep the market system functioning well.
E) they tell government agents how to act to keep the market system functioning well.
Answer: B
Diff: 1 Type: MC
Skill: Applied
11) One part of the "informal defence" of the market system is the argument, made forcefully by
the late Milton Friedman, that free markets provide for the
A) greatest equality in income distribution.
B) decentralization of economic power.
C) greatest security for members of society.
D) government with the highest tax revenues.
E) greatest scope for international trade.
Answer: B
Diff: 1 Type: MC
Skill: Recall
5
12) Profit-motivated product and process innovation is primarily a characteristic of ________
systems.
A) market
B) centrally planned
C) oligopolistic
D) socialist
E) monopolistic
Answer: A
Diff: 1 Type: MC
Skill: Recall
13) Which of the following is characteristic of a free-market economy?

A) Temporary shortages and surpluses become permanent.
B) Economic power is centralized.
C) Market failures are automatically corrected.
D) Government intervention is essential.
E) Profits and losses provide signals to other economic agents.
Answer: E
Diff: 1 Type: MC
Skill: Recall
14) In a free-market economy that is continually adjusting toward equilibrium, a primary force
driving this adjustment is
A) opportunity costs.
B) diminishing returns.
C) the pursuit of allocative efficiency.
D) the scarcity of resources.
E) the pursuit of profits.
Answer: E
Diff: 1 Type: MC
Skill: Recall
6
15) In a free-market system, a disequilibrium in one market
A) provides evidence that the market system does not work.
B) shows that government intervention is always necessary to restore the market to equilibrium.
C) suggests that no seller or buyer has an incentive to alter his or her behaviour.
D) produces forces that eventually bring that market back to equilibrium.
E) means that the economy will fall into chaos.
Answer: D
Diff: 1 Type: MC
Skill: Recall
16.3 Market Failures
1) Economists use the term "market failure" to refer to those free-market situations where
A) income is not distributed equitably.
B) allocatively efficient outcomes are not achieved.
C) externalities do not exist in the economy.
D) the economy is not in equilibrium.
E) government has intervened in the economy.
Answer: B
Diff: 1 Type: MC
Topic: 16.3a. market failure
Skill: Recall
Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency.
2) A free-market economy with perfect allocative efficiency does not exist in reality. Why?
A) Government intervention in the economy prevents the economic forces that would eventually
bring the market to an allocatively efficient outcome.
B) The assumption of profit-maximization is not a realistic assumption about the behaviour of
firms.
C) The assumption of utility maximization is not a realistic assumption about the behaviour of
consumers.
D) Firms in many industries have some degree of market power and face negatively sloped
demand curves, and produce a level of output where P > MC.
E) The decentralization of economic power in a free-market economy does not allow for
allocative efficiency.
Answer: D
Diff: 2 Type: MC
Skill: Applied
7
3) What is meant by the term "market failure"?
A) that a small group in society is affected
B) that allocative efficiency has not been achieved
C) that the market economy is a failure
D) that one or more markets are not in equilibrium
E) that the free market has failed to achieve desirable social goals
Answer: B
Diff: 1 Type: MC
Skill: Recall
4) The existence of imperfectly competitive firms implies a market failure because

A) they do not produce a productively efficient level of output.
B) their market power allows them to deceive consumers.
C) they lead to a socially undesirable distribution of income.
D) there is no way to prevent these firms from abusing their market power.
E) those firms will maximize profits by setting price above marginal cost.
Answer: E
Diff: 2 Type: MC
Skill: Recall
5) Government intervention in an effort to promote allocative efficiency in all industries would

likely impose a cost in terms of economic growth. One explanation for this is that
A) some policies to promote allocative efficiency will lead to increased income inequality.
B) some policies to promote allocative efficiency will lead to decreased income inequality.
C) correcting externalities inevitably reduces the economy's growth rate.
D) firms in perfectly competitive industries that are already allocatively efficient would also be
affected by the intervention and become inefficient.
E) much of the innovation and productivity growth that leads to economic growth comes from
oligopolistic firms.
Answer: E
Diff: 3 Type: MC
Skill: Applied
8
6) Which of the following phenomena is NOT an example of market failure?
A) moral hazard
B) a positive externality
C) asymmetric information
D) diminishing marginal returns
E) public goods
Answer: D
Diff: 1 Type: MC
Skill: Recall
7) Government intervention in a particular industry is unnecessary if each of the industry's firms

is operating where
A) there are no positive externalities.
B) there are no negative externalities.
C) price is equal to private marginal cost.
D) marginal social benefit is equal to marginal social cost.
E) the demand curve is perfectly elastic.
Answer: D
Diff: 2 Type: MC
Topic: 16.3b. externalities
Skill: Applied
8) The problem with externalities is essentially one of

A) a discrepancy between private and social costs.
B) asymmetric information.
C) the inability of a firm in an industry characterized by increasing returns to scale to make
positive profits if it sets price equal to marginal cost.
D) a failure of the market to generate socially valued outcomes.
E) the failure of the market to solve social problems.
Answer: A
Diff: 1 Type: MC
Skill: Recall
9
9) A plausible example of market failure due to an externality is
A) the cost of building new highways outside of major cities.
B) the despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers.
C) the high salaries enjoyed by professional athletes.
D) the line-ups at the theatre when a good movie is playing.
E) a farmer with an apple orchard who also keeps bees.
Answer: B
Diff: 2 Type: MC
Skill: Applied
10) A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon. An
externality associated with this decision is
A) the increased work for the homeowner in yard cleanup.
B) the cost of purchasing the dogs.
C) the neighbours' lost sleep.
D) the homeowner's lost sleep.
E) the veterinary costs of keeping the dogs healthy.
Answer: C
Diff: 1 Type: MC
Skill: Applied
11) Consider an industry producing good X. The quantity of good X produced in a competitive
free market will be greater than the socially optimal level if
A) the production of good X generates a positive externality.
B) the consumption of good X generates a positive externality.
C) the production of good X generates a negative externality.
D) the government has imposed a tax on the production of good X.
E) good X is a public good.
Answer: C
Diff: 2 Type: MC
Skill: Recall
10
12) Consider an industry producing good X. The quantity of good X produced in a competitive
free market will be less than the socially optimal level if
A) the consumption of good X generates a negative externality.
B) the consumption of good X generates a positive externality.
C) the production of good X generates a negative externality.
D) the government is subsidizing the production of good X.
E) good X has negative third party effects associated with its consumption.
Answer: B
Diff: 2 Type: MC
Skill: Recall
11
13)
FIGURE 16-1
Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention
achieves equilibrium at point A. If the social marginal costs and social marginal benefits are
represented by MC1 and MB0, respectively, then there exists
A) an external benefit, but no external cost.
B) an external cost, but no external benefit.
C) an external cost and an external benefit.
D) no externalities at all.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
12
14)
FIGURE 16-1
A) a negative external benefit.
B) a negative external cost.
C) a positive external benefit.
D) a positive external cost.
E) no externality whatsoever.
Answer: E
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
13
15)
FIGURE 16-1
A) an external benefit.
B) an external cost.
C) an external benefit and an external cost.
D) a social cost that exceeds the private cost.
E) no external benefits or costs.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
14
16)
FIGURE 16-1
represented by MC0 and MB0, respectively, then
A) the competitive price is too high.
B) the competitive price is too low.
C) the competitive quantity is too high.
D) the competitive quantity is too low.
E) the competitive price and quantity are consistent with allocative efficiency.
Answer: E
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
15
17)
FIGURE 16-1
represented by MC2 and MB0, respectively, then the competitive equilibrium quantity is
A) too low for allocative efficiency.
B) too high for allocative efficiency.
C) consistent with allocative efficiency.
D) not enough information to determine allocative efficiency.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
16
18)
FIGURE 16-1
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
17
19)
FIGURE 16-1
Answer: B
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
18
20) Suppose a production process confers benefits to third parties not involved in the transaction.
In this case,
A) a per unit tax could be imposed on the producer to achieve the socially optimal level of
production.
B) marginal social benefit is less than marginal private benefit.
C) marginal social cost is more than marginal private cost.
D) without government intervention the market will produce too much of this good.
E) a subsidy to producers could increase production to the socially optimal level.
Answer: E
Diff: 3 Type: MC
Skill: Applied
21) If a firm produces a good and the consumption of that good generates external benefits, then
at the competitive market equilibrium,
A) the government could subsidize the production of this good to improve efficiency.
B) the marginal private benefit is greater than the marginal cost of producing the last unit.
C) the output would be more than the socially optimal amount.
D) the firm will not produce an additional amount if it can internalize the external benefits.
E) the marginal social benefit is less than the marginal cost of producing the last unit.
Answer: A
Diff: 3 Type: MC
Skill: Applied
19
22) The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16-2
Refer to Figure 16-2. Suppose the marginal benefit curve (MB) includes all social benefits and
there are no externalities in production. In this case, ________ for allocative efficiency.
A) P1 and Q1 are appropriate
B) the price P1 is appropriate but the quantity Q1 is too low
C) the price P1 is appropriate but the quantity Q1 is too high
D) the price P1 is too low but the quantity Q1 is appropriate
E) the price P1 is too high but the quantity Q1 is appropriate
Answer: A
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
20
23) The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16-2
Refer to Figure 16-2. Suppose the marginal benefit curve (MB) includes all social benefits and
there is a negative externality in production. In this case, ________ for allocative efficiency.
A) P1 and Q1 are appropriate
B) the price P1 is appropriate but the quantity Q1 is too low
C) the price P1 is appropriate but the quantity Q1 is too high
D) the price P1 is too low and the quantity Q1 is too high
E) the price P1 is too high and the quantity Q1 is too low
Answer: D
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
21
24) Consider a product (say, tulip bulbs) that generates positive externalities when it is consumed
(other people enjoy looking at the tulips). In this case,
A) the government could tax the production of this good to improve efficiency.
B) at market equilibrium, the marginal social benefit is less than the marginal cost of producing
the last unit.
C) at the market equilibrium, the output would be greater than the socially optimal amount.
D) too few tulips will be produced and consumed unless external benefits are internalized.
E) at the market equilibrium, the price is too high to be allocatively efficient.
Answer: D
Diff: 3 Type: MC
Skill: Recall
25) If a homeowner uses wood to heat his house,

A) he may generate an external cost if the smoke bothers his neighbours.
B) the price of the wood represents an external cost to the homeowner.
C) the price of the wood represents an external cost to the homeowner, unless he harvests the
wood himself.
D) he may generate an external benefit if the smoke bothers his neighbours.
E) he may generate an external benefit if the price of heating oil goes down in his region.
Answer: A
Diff: 2 Type: MC
Skill: Applied
26) A flu vaccine has an associated ________ externality. In the absence of government
intervention, the quantity of flu vaccines purchased will be ________ the socially optimal
quantity.
A) positive; the same as
B) negative; the same as
C) negative; less than
D) positive; less than
E) positive; more than
Answer: D
Diff: 2 Type: MC
Skill: Applied
22
27) The diagram below shows the supply and demand diagrams for the competitive market for
honey in one region. MC0 represents private marginal cost and MB0 represents private
marginal benefit.
FIGURE 16-3
Refer to Figure 16-3. Assume there are two types of firms in this region—beekeepers that
produce honey and orchard keepers that produce peaches. The bees provide a benefit to the
orchard keepers by pollinating their peach trees. In the absence of any government intervention,
the equilibrium price and quantity in the honey market are
A) $5 and 60 kg.
B) $5 and 100 kg.
C) $7 and 80 kg.
D) $9 and 60 kg.
E) $11 and 80 kg.
Answer: C
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
Category: Quantitative
23
marginal benefit.
FIGURE 16-3
orchard keepers by pollinating their peach trees. We can say that there is a ________ externality
in the production of honey. The curve ________ represents the ________ marginal benefit of
honey.
A) positive; MB1; social
B) negative; MB1; private
C) negative; MB2; social
D) positive; MB2; social
E) positive; MB2; private
Answer: D
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
24
marginal benefit.
FIGURE 16-3
orchard keepers by pollinating their peach trees. If the government subsidizes the beekeepers so
as to fully internalize the externality, the equilibrium price of honey would be ________ and the
allocatively efficient output would be ________.
A) 3; 80
B) 5; 100
C) 7; 100
D) 9; 60
E) 11; 80
Answer: B
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
25
marginal benefit.
FIGURE 16-3
orchard keepers by pollinating their peach trees. If MB2 represents the social marginal benefit of
honey, the external benefit associated with producing one unit of honey is
A) $1.
B) $2.
C) $3.
D) $4.
E) $5.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
26
marginal benefit.
FIGURE 16-3
orchard keepers by pollinating their peach trees. If the external marginal benefit is $4 per unit of
honey, then what is the allocatively efficient output?
A) 40 kg
B) 60 kg
C) 80 kg
D) 100 kg
E) 120 kg
Answer: D
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
27
32) Which of the following is an example of a common-property resource?
A) a congested toll highway
B) a national park with an entrance fee
C) privately owned ranch land
D) an unregulated sport-fishing river in BC
E) privately owned cattle grazing land in Alberta
Answer: D
Diff: 1 Type: MC
Topic: 16.3c. rivalry and excludability of goods
Skill: Applied
Learning Obj.: 16-4 Explain why public goods are underprovided by private markets.
33) Which of the following best describes the reason for overfishing in Canadian offshore
fisheries?
A) Fishing has depleted fish stocks leading to smaller catches.
B) The private marginal cost incurred by current fishermen is less than the social marginal cost.
C) The private marginal cost incurred by future generations of fishermen is greater than the
private marginal cost incurred by current fishermen.
D) The Canadian government encourages foreign fishing within the Canadian offshore boundary.
E) None of the above can explain overfishing.
Answer: B
Diff: 2 Type: MC
Skill: Applied
34) Which of the following is an example of a rivalrous good?

A) toxic emissions from a factory smokestack
B) an empty toll highway
C) an uncrowded beach
D) a visit to the dentist
E) the weather forecast
Answer: D
Diff: 1 Type: MC
Skill: Applied
28
35) Consider an ordinary rivalrous good, provided in a competitive market. At the socially
optimal level of provision of this good, the marginal
A) cost of production of this good is zero.
B) cost of production of the last unit of the good is equal to the consumers' marginal willingness
to pay.
C) sacrifice society needs to make to supply the last unit of the good is more than each
consumer's marginal willingness to pay.
D) cost of production of the last unit of the good is more than all consumers' combined marginal
willingness to pay.
E) cost of production of the last unit of the good is equal to all consumers' combined marginal
willingness to pay.
Answer: B
Diff: 2 Type: MC
Skill: Recall
36) Consider a non-rivalrous good, like national defence, provided by the government. At the
socially optimal level of provision of this good, the marginal
A) cost of production of this good is zero.
B) cost of production of the last unit of the good is less than the consumers' marginal willingness
to pay.
C) sacrifice society needs to make to supply the last unit of the good is equal to each consumer's
marginal willingness to pay.
D) cost of production of the last unit of the good is more than all consumers' combined marginal
willingness to pay.
E) marginal cost of production of the last unit of the good is equal to all consumers' combined
marginal willingness to pay.
Answer: E
Diff: 3 Type: MC
Skill: Recall
29
37) The price charged for access to an uncongested, excludable, non-rivalrous good should be
________ because ________.
A) positive; consumers receive a positive marginal benefit from consuming the good
B) positive; marginal cost and marginal benefit for this good are both positive
C) positive; more than one person can consume this good at the same time
D) zero; it is inefficient to exclude people from consuming this good once it has been supplied
E) zero; the marginal benefit of the last unit consumed is zero
Answer: D
Diff: 2 Type: MC
Skill: Recall
38) Which of the following best explains why it is sometimes efficient to charge a positive price
for the use of some products such as museums, beaches, and roads?
A) Since these products are non-excludable, it is sometimes efficient to charge a positive price.
B) Once these products become congested they become rivalrous, marginal cost is positive, and a
positive price is then efficient.
C) Each person consuming the product has a positive marginal benefit and should therefore pay a
positive price.
D) Since these products are excludable, marginal cost is always positive, and a positive price is
appropriate.
E) Since these products are excludable and non-rivalrous, it is always efficient to charge a
positive price.
Answer: B
Diff: 2 Type: MC
Skill: Applied
30
39) Why might it be economically efficient to offer access to an uncongested art gallery or
museum at a price of zero?
A) because they are non-rivalrous and non-excludable and therefore should be provided at a
price of zero
B) because the marginal benefit received by the visitor is zero, and marginal benefits and
marginal cost should be equal
C) because the marginal cost of providing access to one more visitor is zero, while the visitor has
a positive marginal benefit
D) because it is good for society if more people visit art galleries and museums
E) because they are public goods, which would not be provided by the free market
Answer: C
Diff: 2 Type: MC
Skill: Applied
40) Economists consider a product such as a university education to be ________, whereas a

product such as your local art gallery is generally considered to be ________.
A) non-rivalrous and non-excludable; rivalrous and non-excludable
B) rivalrous and non-excludable; rivalrous and excludable
C) rivalrous and excludable; non-rivalrous and excludable
D) rivalrous and excludable; rivalrous and non-excludable
E) non-rivalrous and excludable; non-rivalrous and excludable
Answer: C
Diff: 2 Type: MC
Skill: Applied
41) Common-property fishing grounds are

A) often underexploited because non-excludability means there is little investment in the
resource.
B) always efficiently exploited because fishermen now understand the dangers of overfishing.
C) often overexploited because individual fishermen have no incentive to leave fish for the
"next" fisherman.
D) often overexploited because fishing grounds are rivalrous and excludable.
E) often overexploited because fishermen are concerned with preserving fish stocks for future
fishermen.
Answer: C
Diff: 2 Type: MC
Skill: Applied
31
42) Consider a remote village with a limited, freely available water supply and no government
intervention in the allocation of water. In this case, each individual has an incentive to use water
until their
A) private marginal benefit is zero.
B) private marginal cost is zero.
C) social marginal benefit is maximized.
D) social marginal cost is minimized.
E) private and social marginal costs are equal.
Answer: A
Diff: 2 Type: MC
Skill: Applied
intervention in the allocation of water. Economic theory predicts that the water will be
A) allocated efficiently because users will tend to use the water until marginal cost and marginal
benefit are both equal to zero.
B) overexploited because users will tend to use the water until the marginal cost of providing the
water is zero.
C) allocated efficiently because users will tend to use the water until the supply and demand are
in equilibrium.
D) overexploited because users will tend to use the water until their marginal benefit is zero.
E) allocated efficiently because users will tend to use the water as though it were a public good.
Answer: D
Diff: 3 Type: MC
Skill: Applied
intervention in the allocation of water. In economics, the resulting outcome of a situation such as
this is often referred to as
A) the Coase theorem.
B) the tragedy of the commons.
C) moral hazard.
D) adverse selection.
E) asymmetric information.
Answer: B
Diff: 2 Type: MC
Skill: Applied
32
45) Which of the following are characteristics of a common-property resource?
A) rivalrous and excludable
B) non-rivalrous and non-excludable
C) non-rivalrous and excludable
D) rivalrous and non-excludable
Answer: D
Diff: 1 Type: MC
Skill: Recall
46) If you consume some good, and by doing so you diminish other people's possible use of that
good, we say that the good is
A) rivalrous.
B) excludable.
C) a common resource.
D) not productively efficient.
E) a public good.
Answer: A
Diff: 2 Type: MC
Skill: Recall
47) In economics, the term "public good" refers to a product

A) that only private producers will provide.
B) which consumers cannot be excluded from using.
C) that is produced by a publicly owned corporation.
D) that is widely advertised.
E) that has a very low marginal cost of production.
Answer: B
Diff: 1 Type: MC
Topic: 16.3d. public goods
Skill: Recall
33
48) A public good is ________.
A) one that is produced by the government
B) excludable but non-rivalrous
C) non-excludable and non-rivalrous
D) rivalrous but non-excludable
E) excludable and rivalrous
Answer: C
Diff: 1 Type: MC
Skill: Recall
49) A good example of a product that is both non-excludable and non-rivalrous is

A) grazing land.
B) public information.
C) electricity.
D) food.
E) natural gas.
Answer: B
Diff: 1 Type: MC
Skill: Applied
50) How might a government intervene in a market to prevent the overuse of a common-property
resource, such as an ocean fishery?
A) subsidies to the consumers of fish
B) reducing the marginal social cost such that marginal social cost equals marginal social
benefit, thereby establishing allocative efficiency
C) subsidies to the firms catching the fish
D) a system of licences and quotas for fishers
E) encouraging the use of larger, more efficient trawlers to reduce the marginal private cost to
fishers
Answer: D
Diff: 2 Type: MC
Skill: Applied
34
51) Under what circumstances would it be efficient to charge a positive price for drivers to cross
the Champlain Bridge in Montreal or the Lion's Gate Bridge in Vancouver?
A) when it is possible to exclude drivers from the bridge
B) when it is not possible to exclude drivers from the bridge
C) when the sum of marginal benefits to all drivers is positive
D) when the marginal private benefit to the last driver is greater than the marginal private cost to
that driver
E) when congestion on the bridge means that the marginal cost of providing access to one more
driver is positive
Answer: E
Diff: 2 Type: MC
Skill: Applied
52) Why are goods that are non-rivalrous and excludable (such as an uncrowded library or art
gallery) often provided by the government?
A) Because when these goods are used beyond capacity, they would not be provided by private
firms.
B) The marginal cost to society of providing access to one more user is zero, so it is allocatively
efficient to provide this good at a price of zero.
C) Because the government can provide these goods with fewer resources, it is productively
efficient.
D) The marginal private benefit to the last user is greater than the marginal private cost.
E) The marginal benefit to society of providing access to one more user is zero, so it is
allocatively efficient to provide this good at a price of zero.
Answer: B
Diff: 2 Type: MC
Skill: Applied
53) Which of the following statements about public goods is true?

A) They cannot be publicly provided.
B) They are unlikely to be provided by private, profit-seeking firms.
C) They are essentially negative externalities.
D) They respond to market signals.
E) The firms producing them must be listed on a public stock exchange.
Answer: B
Diff: 1 Type: MC
Skill: Applied
35
54) Which of the following is the best example of a public good?
A) a municipal swimming pool
B) a seat on an airplane flight
C) light from a lighthouse
D) a school bus
E) a publicly owned subway system
Answer: C
Diff: 1 Type: MC
Skill: Applied
55) Which of the following is the best example of a public good?

A) apples on a tree in a public park
B) insurance
C) street lighting
D) air travel
E) municipal transit service
Answer: C
Diff: 1 Type: MC
Skill: Applied
56) One reason that national defence is a classic example of a public good is that
A) all citizens want national defence.
B) society deems it to be too important to be provided by the private sector.
C) the benefits of national defence cannot be kept from those who do not pay.
D) military technology is too expensive for private firms to provide.
E) it would be immoral for private firms to provide this essential commodity.
Answer: C
Diff: 1 Type: MC
Skill: Applied
36
57) One reason that national defence is a classic example of a public good is that
A) all citizens want national defence.
B) society deems it to be too important to be provided by the private sector.
C) the benefits that accrue to one person do not diminish the benefits available to others.
D) military technology is too expensive for private firms to provide.
E) it would be immoral for private firms to provide this essential commodity.
Answer: C
Diff: 1 Type: MC
Skill: Recall
58) An efficient amount of a public good is unlikely to be produced in a free market because
A) there is no way to prevent a person who is not willing to pay for the good from receiving
benefits from the good.
B) of the high cost of producing the public good.
C) social benefits exceed social costs.
D) of the existence of moral hazard.
E) of the existence of adverse selection.
Answer: A
Diff: 1 Type: MC
Skill: Recall
59) Private markets will always provide too few public goods. Why?
A) Because the private marginal cost of such goods is less than the social marginal cost.
B) Because it is unlawful for private firms to provide public goods.
C) Because of the negative externalities associated with these goods.
D) Because private markets will never provide goods at a price of zero, which is the efficient
price.
E) Because private markets will never provide goods that they know the government could
provide.
Answer: D
Diff: 2 Type: MC
Skill: Recall
37
60) An efficient level of provision of a public good is achieved when
A) the cost of providing an extra unit of the good is equal to the valuation of each consumer of
the extra unit.
B) the cost of providing an extra unit of the good is equal to the sum of the valuations of all
consumers for that unit.
C) the cost of providing an extra unit of the good is equal to the price of the good.
D) the valuation of each consumer for the last unit of the good produced is zero.
E) voters are satisfied that an adequate amount of the good is being produced.
Answer: B
Diff: 2 Type: MC
Skill: Recall
61) The fact that it is difficult to prevent people from using public goods once they are produced,
even if they have not paid, is known as
A) the easy-rider problem.
B) the over-consumption problem.
C) moral hazard.
D) the free-rider problem.
E) adverse selection.
Answer: D
Diff: 1 Type: MC
Skill: Recall
62) Consider a childhood vaccination program that is fully effective if all children are
vaccinated. Now suppose that all children except one are vaccinated — and as a result that one
child will not contract the disease. In economics, we can compare this situation to
A) moral hazard.
B) adverse selection.
C) the free-rider problem.
D) asymmetric information.
E) common property problem.
Answer: C
Diff: 3 Type: MC
Skill: Applied
38
63) Which of the following is the best description of a "free rider"? Someone who
A) pays for a good but does not receive any benefit from the good.
B) receives the benefit of a good without having to pay for it.
C) does not produce any goods but is able to consume them.
D) consumes a good until the marginal benefit received from the last unit is zero.
E) consumes a good until the marginal benefit received from the last unit is equal to the marginal
cost of producing the good.
Answer: B
Diff: 2 Type: MC
Skill: Recall
64) Which of the following will occur as a result of the free-rider problem?
A) The private market will generally produce the efficient amount of a public good.
B) Too many people will over-consume a public good.
C) Government will not be able to produce an efficient amount of a public good.
D) Private markets will tend not to produce a public good.
E) Consumers will need to pay a government user fee to pay for the good's production.
Answer: D
Diff: 1 Type: MC
Skill: Recall
65) Why is it inefficient for the government to charge a price for consuming public health
information?
A) Too much of the information will be produced.
B) The price cannot be set to cover all research costs.
C) No one will be willing to pay to use this information.
D) The cost of providing this information to an additional person is essentially zero.
E) The marginal costs of producing the information exceed the marginal benefits of using it.
Answer: D
Diff: 1 Type: MC
Skill: Recall
39
66) The efficient price to charge consumers for their use of a public good is
A) equal to the average per-person cost of providing this good.
B) equal to the cost of providing the good to one additional consumer.
C) equal to the highest individual marginal benefit from consuming a unit of the good.
D) that price that prevents free riding by some consumers.
E) equal to the price that the free market would achieve.
Answer: B
Diff: 3 Type: MC
Skill: Recall
40
67) The diagram below shows the marginal benefit of consuming, and marginal cost of
providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the
MB for each individual and a summation of their marginal benefits.
FIGURE 16-4
Refer to Figure 16-4. What is the optimal quantity of this public good to provide?
A) Q
B) Q1
C) Q2
D) Q3
E) Q4
Answer: E
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
41
FIGURE 16-4
Refer to Figure 16-4. The curve MBABC is derived by

A) a vertical summation of the marginal benefits of all individuals at each level of output.
B) observation of the consumption of public goods at a price of zero.
C) observation of the consumption of public goods at the optimal price.
D) a horizontal summation of the marginal benefits of all individuals at each given price level.
E) determining the private marginal cost of the public good.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
42
FIGURE 16-4
Refer to Figure 16-4. Suppose the optimal amount of this good is provided, but that Individual B
was only consuming Q2 units of the good. What would be the marginal cost of Individual B
consuming an extra unit of this good?
A) P2
B) P4
C) P4-P2
D) MB
E) zero
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
43
FIGURE 16-4
Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the
government was able to require consumers to pay a price of P4, then
A) the market would clear, although not enough would be produced.
B) the inefficient quantity would be being produced.
C) the appropriate price would be achieved, although not enough would be consumed.
D) consumers would not use the public good at all, and this would be socially optimal.
E) consumers would use too little of the public good, and this would be inefficient for society.
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
44
FIGURE 16-4
Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the
government was able to require consumers to pay a price of P1, then
B) an inefficient quantity would be being produced.
C) consumers would use too little of the public good, and the outcome would be inefficient for
society.
D) consumers would not use the public good at all, and this would be socially optimal.
E) the appropriate price would be achieved, although not enough would be consumed.
Answer: C
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
45
FIGURE 16-4
Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If
consumers were then required to pay a price of zero for the good,
B) the inefficient quantity would be being produced.
C) consumers would use too little of the public good, and the outcome would be inefficient for
society.
D) consumers would use the public good until their marginal benefit was zero, and this would be
socially optimal.
E) the appropriate price would be achieved, although not enough would be consumed.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
46
FIGURE 16-4
Refer to Figure 16-4. Once some quantity of this public good is provided, the efficient price to
charge for its use is
A) approximately zero.
B) P1.
C) P2.
D) P3.
E) P4.
Answer: A
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
47
74) Moral hazard is said to exist when one party to a transaction
A) is not able to take advantage of the other party.
B) has the incentive to, and is able to, shift costs to another party in the transaction.
C) is subject to a hostile corporate takeover.
D) purchases insurance because they know they are involved in risky activities.
E) has no morals.
Answer: B
Diff: 2 Type: MC
Topic: 16.3e. adverse selection and moral hazard
Skill: Recall
Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures.
75) Why does moral hazard often arise in the case of insurance? Because
A) people generally underestimate the amount of insurance coverage needed.
B) insured people will not take sufficient care to reduce risks because the private benefit of
reducing risks exceeds the private cost of reducing risks.
C) insured people will not take sufficient care to reduce risks because the private cost of reducing
risks exceeds the private benefit of reducing risks.
D) insurance companies have no incentive to investigate fraudulent claims.
E) people who are in the most need of insurance have the most trouble obtaining insurance
coverage.
Answer: C
Diff: 3 Type: MC
Skill: Recall
76) The concept of moral hazard was publicly discussed in the context of the 2007-2008
financial crisis because
A) it was claimed that moral hazard was necessary to prevent large U.S. financial institutions
from going bankrupt.
B) it was argued that the U.S. government should invoke moral hazard to sustain the financial
sector.
C) it was feared that government bailouts of financial institutions would encourage the
institutions to continue their risky behaviour.
D) it was feared that government bailouts of financial institutions would reduce competition in
financial markets.
E) it was feared that the U.S. government was taking advantage of its special knowledge in the
financial markets.
Answer: C
Diff: 3 Type: MC
Skill: Applied
48
77) Which of the following describes a situation where adverse selection exists? When an
individual
A) is not able to take advantage of another individual.
B) has the incentive to, and is able to, shift costs to another individual.
C) selects a product which has adverse externalities.
D) purchases a lot of insurance because he/she knows that he/she is at high risk.
E) is averse to certain products.
Answer: D
Diff: 2 Type: MC
Skill: Recall
78) Which of the following is the best example of adverse selection?

A) asking a private pilot about the safety of his plane
B) asking a doctor if you are sick
C) purchasing more dental insurance when you know your teeth are especially bad
D) asking your lawyer if you should sue your doctor for malpractice
E) purchasing the required homeowner's insurance when you buy a condo
Answer: C
Diff: 1 Type: MC
Skill: Applied
79) Suppose an advertising firm purchases additional insurance against theft, and as a result, the
partners are not very careful about locking their office doors when they leave. This is an example
of
A) the free-rider problem.
C) a public good.
D) a common property resource.
E) moral hazard.
Answer: E
Diff: 2 Type: MC
Skill: Applied
49
80) Export Development Canada (EDC) provides insurance to Canadian exporters for their
accounts receivable from foreign buyers. If EDC charges an insurance premium that reflects the
average level of risk of the exporting firms, it is only the most risky firms that will tend to
purchase insurance. This is an example of
A) the free-rider problem.
C) a public good.
D) a common property resource.
E) moral hazard.
Answer: B
Diff: 2 Type: MC
Skill: Applied
81) Which of the following proposals could be an example of an effort to correct for an adverse
selection problem?
A) The government imposes a tax on factory-emissions of a toxic substance.
B) The government subsidizes the consumption of fitness activities.
C) An employer requires all employees to submit to drug testing.
D) The government subsidizes the development of eco-friendly production methods.
E) An employer that requires all employees to purchase the employer-sponsored dental insurance
program.
Answer: E
Diff: 2 Type: MC
Skill: Applied
16.4 Broader Social Goals
1) Services such as those within the justice system are usually provided by the government. What
broader social goal is being met in this case?
A) income distribution
B) preference for public provision
C) protecting individuals from others or themselves
D) social responsibility
E) regulation of an imperfectly competitive economic activity
Answer: B
Diff: 1 Type: MC
Topic: 16.4. social goals of government
Skill: Applied
Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals.
50
2) Governments usually provide a system of unemployment insurance. What broader social goal
is being met in this case?
Answer: A
Diff: 1 Type: MC
Skill: Applied
3) The Canadian government operates a progressive personal income-tax system. What broader
social goal is being met in this case?
Answer: A
Diff: 1 Type: MC
Skill: Applied
4) All Canadian provincial governments have legislated minimum wages. What broader social
goal is being met in this case?
Answer: A
Diff: 1 Type: MC
Skill: Applied
51
5) The government has seatbelt and airbag requirements in cars, and laws requiring individual
drivers to use them. What broader social goal is being met in this case?
Answer: C
Diff: 1 Type: MC
Skill: Applied
6) In the context of government intervention in the economy, an example of paternalism is

A) taxation law.
B) regulation to reduce pollution.
C) economic regulation of monopolies.
D) the provision of public goods.
E) laws requiring the use of bicycle helmets.
Answer: E
Diff: 1 Type: MC
Skill: Applied
7) The government prohibits individuals from paying someone else to replace them when they
are selected to perform jury duty. What broader social goal is being met in this case?
Answer: D
Diff: 1 Type: MC
Skill: Applied
52
16.5 Government Intervention
1) The construction of the TransCanada highway is an example of government intervention

through
A) public provision.
B) redistribution.
C) regulation.
D) restructuring of economic incentives.
E) subsidization.
Answer: A
Diff: 1 Type: MC
Topic: 16.5. government intervention
Skill: Applied
Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some
of the important causes of government failure.
2) Providing subsidies to for-profit firms that offer day-care services represents government
intervention through
A) public provision.
B) the influencing of economic incentives.
C) regulation.
D) merit-goods allowances.
E) progressive taxation.
Answer: B
Diff: 1 Type: MC
Skill: Applied
3) Provincial laws that mandate a minimum drinking age for alcohol are an example of
government intervention through
A) public provision and price control.
B) redistribution and reorganization.
C) regulation.
D) communism.
E) merit-goods control.
Answer: C
Diff: 1 Type: MC
Skill: Applied
53
4) Which of the following statements concerning cost-benefit analysis is true?
A) Large potential benefits, regardless of their time horizon, always justify government
intervention.
B) Large potential costs, regardless of their time horizon, always preclude government
intervention.
C) Though benefits from a government policy can be accurately measured, costs are usually
impossible to quantify.
D) Cost-benefit analysis can be used effectively by private firms but should not be used in the
public sector.
E) Though it is often difficult to estimate costs and benefits with precision, cost-benefit analysis
can be useful in determining whether to implement a given government policy.
Answer: E
Diff: 2 Type: MC
Skill: Recall
5) Which of the following is considered a direct resource cost of government intervention?

A) the increased costs of production arising from compliance with regulations
B) the loss of productivity in the private sector due to government intervention
C) opportunity costs of forgone investment
D) the salaries of government regulators
E) rent seeking
Answer: D
Diff: 1 Type: MC
Skill: Recall
54
6) The total costs of government intervention in the market economy include
1. compliance costs;
2. the costs of rent seeking;
3. extra costs from regulation.
A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 3 only
E) 1, 2, and 3
Answer: E
Diff: 1 Type: MC
Skill: Recall
7) Which of the following is the best example of a direct cost of government intervention?
A) the production cost of meeting new emission standards on new cars
B) the regulatory affairs departments of many Canadian corporations
C) the time spent by Canadians completing their income-tax forms
D) the government's administrative costs of conducting the Census
E) costs of complying with provincial sales taxes
Answer: D
Diff: 2 Type: MC
Skill: Recall
8) Where does the issue of "rent-seeking" present a problem?

A) in pure free-market economies
B) in centrally planned economies
C) in all economies, given the existence of government
D) in private organizations in which ownership is not identical to management
E) in the rental market between landlords and tenants
Answer: C
Diff: 1 Type: MC
Skill: Recall
55
9) Attempts by professional lobbyists in Ottawa to influence the government's subsidy to the
shipbuilding industry, for example, even when such a subsidy is not in the national interest,
represents
A) an inefficient public choice.
B) the government acting like a monopolist.
C) rent seeking.
D) an externality.
E) asymmetric information.
Answer: C
Diff: 2 Type: MC
Skill: Applied
10) Which of the following is the best example of "rent seeking"?

A) The government imposes a pollution tax on firms to eliminate a negative externality.
B) A municipal government chooses the lowest bid for construction of a new water system.
C) Owners of aerospace firms receive government subsidies to make the firms more competitive
in world markets.
D) Costly renovations are made to the roof of the Parliament Buildings in Ottawa.
E) Taxpayer funds are used for snow removal on public streets.
Answer: C
Diff: 2 Type: MC
Skill: Applied
11) Most economists who study "public choice theory" now agree that an important possible
source of "government failure" is
A) that it is not possible for civil servants to determine the allocatively efficient provision of
government services.
B) that most civil servants are incompetent.
C) that politicians and civil servants have their own objectives that may conflict with the national
interest.
D) governments govern undemocratically.
E) politicians are incompetent or corrupt.
Answer: C
Diff: 1 Type: MC
Skill: Recall
56
12) Economists generally agree that government intervention in the economy is appropriate
A) whenever there is a market failure.
B) whenever the costs of market failure are greater than the benefits of the existence of markets.
C) whenever the benefits of the correction of the market failure through intervention are greater
than the costs of the intervention itself.
D) only when the market fails to provide a socially useful good.
E) whenever the costs of the intervention are greater than the value of the correction of the
market failure.
Answer: C
Diff: 2 Type: MC
Skill: Applied
13) Governments continue to provide public support to some farmers, even in the absence of
market failures. Choose the best explanation for this practice according to public choice theory.
A) The marginal social cost of providing support is equal to the marginal social benefit.
B) Government support goes to consumers in the form of price controls, which balances the
support given to farmers.
C) All consumers are willing to pay higher prices in order to provide financial support to some
farmers.
D) Vote-maximizing governments are not rational in their response to powerful lobbying.
E) The benefits of the support are concentrated among a small and vocal group of farmers and
the costs are widely dispersed among millions of consumers.
Answer: E
Diff: 2 Type: MC
Skill: Applied
57
14) The main point about public choice theory is that
A) most politicians are corrupt.
B) most civil servants act solely in the public interest.
C) there is adverse selection in the selection of elected officials.
D) elected officials never compromise the public interest in order to gain votes.
E) the choices of public officials may be influenced more by their own self-interest than the
public interest.
Answer: E
Diff: 1 Type: MC
Skill: Recall
58

Chapter 16

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 16

Uploaded by

Copyright:

Available Formats

Economics - Canadian Edition, 16e (Ragan)

Chapter 16 Market Failures and Government Intervention

16.1 Basic Functions of Government

16.2 The Case for Free Markets

1) What is the essential coordinating mechanism of a free-market economy?

5) Which of the following statements about market economies is true?

7) Economic losses in an industry are a signal that

10) Economists describe prices as "signals" in a market economy because

13) Which of the following is characteristic of a free-market economy?

16.3 Market Failures

4) The existence of imperfectly competitive firms implies a market failure because

5) Government intervention in an effort to promote allocative efficiency in all industries would

7) Government intervention in a particular industry is unnecessary if each of the industry's firms

8) The problem with externalities is essentially one of

25) If a homeowner uses wood to heat his house,

34) Which of the following is an example of a rivalrous good?

40) Economists consider a product such as a university education to be ________, whereas a

41) Common-property fishing grounds are

47) In economics, the term "public good" refers to a product

49) A good example of a product that is both non-excludable and non-rivalrous is

53) Which of the following statements about public goods is true?

55) Which of the following is the best example of a public good?

Refer to Figure 16-4. The curve MBABC is derived by

78) Which of the following is the best example of adverse selection?

16.4 Broader Social Goals

6) In the context of government intervention in the economy, an example of paternalism is

1) The construction of the TransCanada highway is an example of government intervention

5) Which of the following is considered a direct resource cost of government intervention?

8) Where does the issue of "rent-seeking" present a problem?

10) Which of the following is the best example of "rent seeking"?

You might also like