Difficult cases for the market, and the role of government.

A market is a powerful tool for allocating resources efficiently, but there are certain situations where the market may not work well. These are known as difficult cases for the market, and they include:

Externalities: Externalities occur when the actions of one person or firm affect the well-being of others and are not reflected in the market price. For example, pollution from a factory harms the health of nearby residents, but the cost of that pollution is not reflected in the price of the goods produced by the factory. This can lead to the overproduction of goods that generate negative externalities.
Public goods: Public goods are goods or services that are non-excludable and non-rivalrous. This means that once they are produced, everyone can enjoy them, and one person’s use does not reduce the amount available for others. Examples include national defense and public parks. Because it is difficult to exclude people from using public goods, it can be challenging to charge a market price for them. This can lead to the underproduction of public goods.
Market power: Market power refers to the ability of firms to influence the price of goods or services. When a few firms control a large portion of the market, they can use their market power to charge higher prices, leading to inefficiency and reduced economic welfare.

In these cases, government intervention may be necessary to correct market failures and ensure that resources are allocated efficiently. The government can use a variety of tools to address these issues, such as:

Regulating externalities: The government can impose regulations on firms to control negative externalities, such as pollution.
Providing public goods: The government can fund the production of public goods through taxes or other means, to ensure that they are provided to the public.
Regulating market power: The government can use antitrust laws and regulations to limit the market power of firms, to prevent them from charging higher prices and harming consumers.

In conclusion, a market is a powerful tool for allocating resources efficiently, but there are certain cases where the market may not work well. These include externalities, public goods, and market power. In these cases, government intervention may be necessary to correct market failures and ensure that resources are allocated efficiently. The government can use a variety of tools such as regulation, provision of public goods, and regulation of market power to address these issues.

1.Which of the following accurately describes the protective function of government?

Protecting domestic industries from foreign competition through tariffs on international trade

Providing equitable distribution of wealth through taxation and redistribution of income

Protecting individuals and their property against invasion by others

Achieving zero inflation rates

2.Public goods are difficult for markets to produce efficiently because:

the nonexcludable nature of the goods creates free rider problems

markets tend to overproduce public goods

there is a conflict between the interests of the protective and the productive functions of a government

they create no benefit for consumers

3.When the production of a good generates external benefits, the:

market equilibrium level of output generally meets the conditions for ideal economic efficiency

demand curve showing total benefits lies below the market demand curve

demand curve showing total benefits lies above the market demand curve

output produced will generally be more than the economically efficient level

4.Which of the following is true of a market with external costs?

The market demand curve will not reflect the total benefit of the good

The output produced by firms may be less than the economically efficient level

The market supply curve understates the total costs of production and consumption of the good

The market can be counted on to always reach economic efficiency at the market equilibrium level

5.Achieving zero levels of pollution is generally an undesirable goal from the standpoint of economic efficiency because:

economic efficiency requires the production of any and all goods that can be produced with productive resources

pollution has no harmful effects and thus imposes no social costs

beyond some level, the additional cost of pollution abatement will exceed the additional benefit

allowing all pollution is the only outcome consistent with efficiency

6.If this good generates external benefits, the market supply curve will understate the total costs of the good. As a result the equilibrium output will be greater than the ideally efficient amount

A new animated movie at a local movie theater

Health care, such as a surgical operation

The guiding beam of light produced by a functioning lighthouse at sea

Residential electricity service

7.People who receive the benefit of a good without paying for it are known as

Free riders

Nonrivalrs

Nonexcluders

Public gooders

8.Economists use the standard of economic efficiency to assess the desirability of economic outcomes. An outcome is efficient if:

it ensures an equitable distribution of wealth

producer surplus equals consumer surplus

it generates more benefits than costs

producer surplus exceeds consumer surplus

9.Identify the correct statement about the information problems faced by consumers.

The market provides consumers with a strong incentive to acquire information

The information problem tends to be most serious for repeat-purchase items

The sellers of low-quality goods have a strong incentive to supply consumers with accurate information about them

Buyers are always fully informed while making purchasing decisions

10.Which of the following explains why the taxi industry fights so hard to get government to ban ridesharing services such as Uber or Lyft?

When more ridesharing services are on the roads, there is more drunk driving accidents and fatalities

By restricting competition they can charge higher prices and earn greater profits

Because Uber and Lyft try to charge consumers higher prices than traditional taxis and thus harm consumers by entering the industry

Because the cars used by Uber and Lyft are generally unreliable and leave passengers stranded more often than in traditional taxicabs

11.For centuries, philosophers, economists, and other scholars have debated the proper role of government. While the debate continues, there is substantial agreement that at least which two functions of government are legitimate?

Providing retirement income for individuals and subsidies to failing businesses

The common ownership of the productive assets in an economy and long-term planning of resource utilization

Protecting individuals and their property against invasions by others and providing goods that cannot easily be provided through private markets

Redistributing wealth away from those with little political influence to give it to those with more political influence and imposing price controls on necessary products

12.Which of the following is an example of a market transaction creating external benefits?

Local fisherman overfishing the local waters to the point where there are not enough fish remaining to successfully reproduce

A chemical company discharging toxic waste into a nearby public lake

A consumer purchasing a cup of coffee and drinking it

The building of a new amusement park leading to property values of surrounding properties increasing

13.Which of the following is true of franchisers?

They do not care about maintaining their reputation for quality, because a consumer may purchase a particular commodity sold by a franchise only once

They have a strong incentive to maintain their reputation for quality, because if it declines, the government will prohibit them from operating in a market

They do not give consumers reliable information, because the profits of the franchises are independent of the quality of the commodities sold

They have a strong incentive to maintain their reputation for quality, because if it declines, their ability to sell new franchises will be adversely affected

14.Which of the following is true of public goods?

If a good is provided by the government, then it is a public good

Markets tend to undersupply public goods

Markets tend to overproduce public goods

If markets fail to supply a good, then it is a public good

15.Which of the following describes the first and most important role of government in ensuring competitive markets?

Carefully examine the firms in a market, and select only one to manage the entire market output

Certify each producer who enters a market by subjecting them to a rigorous government review process

Do no harm; that is, eliminate any government barriers that make it difficult for new competitors to enter industries and compete with existing firms

Take campaign contributions from firms and pass laws that favor the firm who provides the most political support

16.Which of the following is an example of a good that is nonrival in consumption?

A local FM radio station broadcast

An automobile

A pair of jeans

A bottle of soda

17.Which of the following is most likely to happen when more and more resources are dedicated to an activity?

The opportunity cost of the resources will eventually become zero

The marginal benefits or improvements will become smaller and smaller, while the marginal costs will rise

The marginal costs will become smaller and smaller, while the marginal benefits or improvements will rise

The total value of the activity will decrease to zero

18.Which of the following is an example of an external benefit obtained from an activity?

Benjamin Chemicals polluting southern Montesia by channeling all its debris into a nearby waterbody

Jason enjoying the tenth slice of pizza as much as the ninth slice

Fiona sitting in her front yard and enjoying the view of her neighbor’s rose garden

The loud music from a neighbor’s party making it hard for Frieda to sleep

19.Which of the following is true of a market with external costs?

The democratic political process always creates the proper incentives and information for policy makers to quickly step in and intervene to bring about economic efficiency

Some goods are produced even though their total costs exceed the total benefits they generate

Some goods are not produced even though the total benefits of doing so would exceed the total cost

The market supply curve overstates the total costs of production and consumption

20.Identify the correct statement about a market with restricted competition.

Compared to a competitive market, prices will be higher but output will be lower

Compared to a competitive market, prices as well as output will be lower

Compared to a competitive market, prices as well as output will be higher

Compared to a competitive market, prices will be lower but output will be higher

21.An item regularly purchased often by the same buyer, such as toothpaste, most food products, lawn service, and gasoline provide examples of:

Goods whose production and consumption create significant external costs and benefits so markets are generally unable to produce the economically efficient quantity

Public goods for which it is difficult to exclude nonpaying customers and consumption of the goods are nonrival

Repeat-purchase items for which the consumer can use past experience to acquire accurate information and make wise decisions

Goods that must be produced by government because of the significant information problems consumers have regarding product quality if they are privately produced

22.A market with artificially restricted competition is characterized by:

restricted output levels and higher prices

lower profits for firms

excess supply of goods in the market

a lower price of goods

23.Which of the following is not way entrepreneurs have responded to the need of consumers for more and better information?

External costs

Brand names

Franchising

Consumer-ratings magazines and websites

24.In a market with artificially restricted competition among sellers,

government should take additional steps to increase the costs and barriers to new firms who wish to enter

consumers will benefit from not having to choose among too many goods

lower prices and a larger quantity supplied will result

higher prices and an inefficiently lower supply will result

25.Which of the following is an example of a public good?

Trash collection

Education

National defense

Medical services

26.Production of an inefficiently large quantity of a good is undesirable because:

the total value of the good will be driven to zero

some of the units produced create more costs than benefits

the benefit from the good will exceed the cost, at the margin

the marginal cost of the good will become so low it prevents additional production

27.Which of the following is often caused by property rights not being well defined or poorly enforced?

Hyper-efficiency, that is cases where markets quickly and reliably meet the conditions for ideal economic efficiency

Externalities, that is cases where the costs or benefits of individual actions spill over onto others

Comparative advantage, that is cases where individuals specialize in the areas where they have the lowest opportunity cost

Rational exuberance, that is cases where market bubbles occur due to individuals overestimating future economic conditions

28.Which of the following is most likely to reduce the intensity of competition in a market?

An increase in the number of buyers and sellers in the market

Low barrier to entry that make it easy for new firms to enter markets to compete with existing firms

A political system in which politicians can gain contributions and support by favoring concentrated interest groups who lobby for legal restrictions

Low transaction costs and strongly enforced contract laws.

29.Providing a stable monetary and financial environment and producing goods that cannot easily be provided through private markets (such as public goods) are part of which function of government?

Protective function of government

Equity function of government

Productive function of government

Fiscal function of government

30.Which of the following is true of situations involving external benefits, such as the development of a golf course or amusement park increasing surrounding property values?

Without the granting of subsidies for such activities, the market would fail to produce any of these type of activities at all

Markets generally provide little incentive to solve these problems and government intervention always leads to an improved outcome

Without government intervention the market will tend to overproduce such activities, leading to a higher than efficient level

Entrepreneurs have an incentive to figure out a way to more fully capture these external benefits, such as by extending the scope of the project

31.Identify the correct statement about a market with external benefits.

The market supply curve overstates the total costs of production

Market forces may supply less than the amount consistent with economic efficiency

Market forces may supply more than the amount consistent with economic efficiency

The market supply curve understates the total costs of production

32.When the production of a good generates external benefits, the market:

demand curve overstates the total benefits derived from the production and consumption of the good

supply curve overstates the total costs of production and consumption of the good

supply curve understates the total costs of production and consumption of the good

demand curve understates the total benefits derived from the production and consumption of the good

33.Which of the following is necessary for the efficient functioning of a market system?

Widespread wealth redistribution to ensure everyone can purchase necessity goods

Predictable tax policy and a stable value of a nation’s currency

Unpredictable inflation so the value of the currency fluctuates abruptly

Wide swings in tax policy so people can not plan to evade taxes

34.Which of the following is true of information problems in markets?

Information problems are the most extensive for repeat-purchase items

Franchising and brand names help consumers overcome information problems

Information problems are eliminated in cases where consumers are unable to distinguish between high-quality and low-quality goods

Entrepreneurs have no incentive to help consumers overcome information problems

35.The enforcement of contracts and property rights, and the provision of national defense

are part of the productive function of government and result in higher productivity and a smooth operation of markets

eliminate scarcity of goods and resources and are part of the planning function of government

are present in socialist planned economies but not market-based economies

ensure an equitable distribution of income and wealth through government redistribution of income

36.Which of the following is an example of an activity generating external benefits?

A neighbor playing their radio so loud it makes it difficult for other residents to study

The increasing number of cars in a locality making traffic more congested

A manufacturing plant dumping toxic waste into a nearby major river

Vaccinations (immunization) against communicable diseases

37.Which of the following is true of a market with external benefits?

The market demand curve overstates the true total benefits of production and consumption

Some goods are produced and consumed even though their total costs exceed the total benefits they generate

Some goods are not produced and consumed even though the total benefits of doing so would exceed the total cost

The market supply curve understates the true total costs of production and consumption

38.Which of the following is true of a public good?

It is overproduced by private markets (relative to the economically efficient level)

It is nonrival in consumption, and it is nonexcludable

It is excludable in nature, and the benefits are rival in consumption

It is the name given to any good produced by the public sector, regardless of its characteristics

39.Economic efficiency requires a comparison of

the social cost involved in an activity with the private cost

the marginal social benefit obtained from an activity with the marginal social cost

the total benefit obtained from an activity with the marginal benefit

the social benefit obtained from an activity with the private benefit

40.Identify the correct statement about a public good.

It is overproduced by markets (relative to the economically efficient level)

Its consumption by one consumer reduces its availability to others, and it is easy to exclude nonpaying customers from receiving the good

It is very costly or impossible to exclude nonpaying customers from receiving the good, and consumption by one does not lower the availability to others

All goods produced by government are public goods

41.Which of the following occurs when political choices lead to outcomes that conflict with the efficient allocation of resources?

The free-rider problem

Government failure

Externality

Imperfect information

42.Which of the following conditions is met when all activities generating more benefit than cost are undertaken, and no activities for which the cost exceeds the benefit are undertaken?

output maximization

welfare minimization

economic efficiency

equitable surplus division

43.Undertaking an action, such as the production of an additional unit of a good, that generates more costs than benefits would be considered:

an external benefit

inefficient

a public good

an efficiency exception

44.Which of the following is true of information problems in markets?

Information problems in markets tend to be the most problematic for goods where it is difficult to evaluate quality on inspection and those that are seldom repeatedly purchased from the same producer

Government action that relies upon the democratic political process can generally be counted on to always have the information and incentives to intervene to efficiently overcome market information problems

Consumers are usually unwilling to pay for information that will help them make better decisions

Entrepreneurs developed franchising and brand names to deliberately confuse potential customers and these tend to make information problems more severe

45.Which of the following is the term used to refer to a situation in which a right or license is granted to independently owned firms to market a company’s goods or services or use its brand name as long as they meet certain conditions?

A franchise

A tariff

An import quota

A patent

46.Which of the following is not a potential source of market failure?

Externalities

Public goods

Lack of competition

Creative destruction

47.Identify the correct statement about a products’ brand name.

Brand names are generally only used for products that are produced within a franchise business model

Brand names generally give little information about a product to consumers

The value of a brand name is a hostage to quality control and maintaining the value of a brand name is important for a firm

Producers generally have little incentive to advertise their brand name and the products associated with it

48.The supply curve of a good in a market with artificially restricted competition (such as might be caused by government regulations or barriers to entry) is most likely to:

be downward sloping

lie to the left of the supply curve of a good in a competitive market

lie to the right of the supply curve of a good in a competitive market

be horizontal

Difficult cases for the market, and the role of government.

Difficult cases for the market, and the role of government.

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