Economics 251
Review Questions Chapter 4 – The Public Sector
Consider Figure 1 in answering Questions (1) and (2).
Figure 1
(1) In Figure 1 suppose that point C represents the optimal mix of output for society. If market forces cause society to produce at point B, then:
(a) there is government failure.
(b) the forces of supply and demand will return society to point C.
(c) points A and D are unattainable with given resources and technology.
(d) there is market failure.
(2) In Figure 1, if point C is the optimal mix of output, and market forces lead to point B, then education:
(a) is likely to involve damages to third parties, or society as a whole.
(b) is overproduced by market forces, and government should intervene to reduce education spending.
(c) is underproduced by market forces, and government should intervene to increase education spending.
(d) is a good without third party effects.
(3) The optimal mix of goods and services:
(a) always provides a greater quantity of goods and services than the market mix.
(b) could be inside the production possibilities curve.
(c) may be the same as the market mix.
(d) is never the same as the market mix.
(4) Which of the following is an example of a public good?
(a) Education.
(b) Social Security payments.
(c) A lighthouse.
(d) All of the above are public goods.
(5) A public good is:
(a) any good produced by a unit of government.
(b) priced in the market like a private good.
(c) characterized by joint consumption.
(d) characterized by exclusive consumption.
(6) The free rider problem:
(a) arises because an individual can reap benefits from someone else's purchases.
(b) arises when crime takes place, as the theft of goods from legitimate owners to criminals.
(c) arises because costs of a market activity are borne by a third party.
(d) means that the market mechanism allocates the optimal level of resources to public goods.
(7) Governments usually build highways because it is difficult to exclude individuals who do not pay for the highways from using them. What type of failure is involved?
(a) Inequity.
(b) Public goods.
(c) Government failure.
(d) Market power.
(8) The federal government's role in reducing pollution is justified by consideration of:
(a) inequity.
(b) externalities.
(c) market power.
(d) government failure.
(9) Which of the following would produce external benefits?
(a) My consumption of a donut.
(b) The inoculation of college students against the flu.
(c) Air pollution from an electric power plant.
(d) The use of my automobile on a crowded street during rush hour.
(10) The federal government's role in antitrust enforcement is justified by consideration of:
(a) inequity.
(b) public goods.
(c) externalities.
(d) market power.
(11) The federal government's role in providing aid to the poor and the aged is justified by considerations of :
(a) market power.
(b) equity.
(c) externalities.
(d) public goods.
(12) When the economy experiences an increase in unemployment:
(a) there is government failure.
(b) there is a macroeconomic failure.
(c) there is excessive market power displayed by various industrial sectors.
(d) there is a microeconomic failure.
Consider Figure 2 in answering Questions (13) and (14).
Figure 2
Q(2) Quantity(Q)
(13) Suppose Figure 2 illustrates the market for automobiles. Assume that there are negative externalities in the use of automobiles in terms of congestion and pollution experienced by third parties. Which statement is correct?
(a) The social demand for automobiles is represented by D(2).
(b) The socially optimal level of automobiles is represented by Q(1).
(c) The market demand for automobiles is represented by D(1).
(d) The socially optimal level of automobiles is represented by Q(2).
(14) Suppose Figure 2 illustrates the market for education. Assume that there are positive externalities for spending in education in terms of improved productivity for society in general. Which statement is correct?
(a) The social demand for education is represented by D(2).
(b) The social demand for education is represented by D(1).
(c) The market demand for education is represented by D(2).
(d) The socially optimal level of education spending is represented by Q(1).
(15) Which of the following is an example of a progressive tax?
(a) The federal tax on gasoline.
(b) Local property taxes.
(c) State sales taxes.
(d) The federal income tax.
(16) Suppose that if your income is $10,000, your tax is $1,000, but if your income is $50,000, your tax is $4,000. Such a tax is:
(a) regressive.
(b) progressive.
(c) proportional.
(d) a flat tax.
(17) According to cost-benefit analysis, a government project should be undertaken when:
(a) its opportunity costs are positive.
(b) its benefits exceed its opportunity costs.
(c) benefits equal costs.
(d) a majority votes for the project.
(18) The theory of public choice examines:
(a) how to apply cost-benefit analysis.
(b) the optimal government intervention to correct market failures.
(c) how a policy of laissez-faire works to allocate resources.
(d) the role of self-interest in public decisions.