Econ 1000: Final Exam

Market Failure is:

a situation where a market outcome is economically inefficient due to productive or allocative inefficiency

Which of the following items does not represent a market failure:

market price and output in a competitive market.

In a monopoly

one firm controls the supply of a good and has a lot of market power.

When a firm is able to become a monopoly:

it will tend to charge a higher price and produce a lower quantity than would a competitive market.

Under the anti trust laws of the United States

it is illegal for a private firm to have a monopoly without government permission.

Public goods are characterized by:

being both non-rival in consumption and non-excludable

Common property is characterized by:

rival in consumption and non-excludable

Fish raised on a catfish farm are:

private goods since the catfish are rival in consumption and private property rights give the farmer who owns the pond the right to restrict access

A lighthouse is an example of:

a public good because if one boat sees the light it does not reduce the ability of other boats to see the light, and there is no way for a lighthouse owner to turn off the light for a non-payer but still leave it on for those who do pay

We have two different goods. When one of the goods is characterized as a public good and the other as a common good:

private firms will under-produce the former and over-utilize the latter.

An externality in Economics is a situation where:

a third party is being affected by the market activity of others, and either does not pay for benefits received nor is compensated for harms suffered.

An example of a negative externality is a situation where:

a nightclub opens near a residential neighborhood. The neighborhood suffers from noise at late hours, but is not compensated by the club owner.

An example of a positive externality is a situation where:

a factory hires an engineering firm to help it reduce its fuel consumption in order to save money. In the process the neighbors get cleaner air.

Whenever a negative externality exists in the production of a good:

we expect that the firms will produce too much of the good at too low a price compared to the economically efficient amounts.

When the production of a good generates a negative externality:

the government could increase economic efficiency by taxing the good producing of the negative externality.

A kleptocracy is a government:

with widespread corruption in which government officials mostly seek their own enrichment at the expense of the public.

The two main areas of government failure can be called:

productive inefficiency and allocative inefficiency.

The Condorcet Paradox:

arises when voters are confronted with a series of pair wise votes on three or more issues, and the overall winner of the vote can cycle based on who was placed in the runoff election first.

all of the above

The government suffers from the public failure known as Informational Problems because:
a) the values of government goods and services are not clear
b) planners to not have market information
c) the tastes and preferences of the public are difficult to know and aggregate

Rational Ignorance is:

the act of remaining uninformed because the cost of being informed is high relative to the personal benefit one derives from being informed

Regulatory Capture is usually caused:

a natural byproduct of the fact that the expertise needed by personnel in government regulatory agencies often comes from the industries that they regulate, and vice versa.

When economists refer to allocative efficiency in the government they are referring to:

the need of the government to choose the right things to produce..

Logrolling is a process whereby:

elected representatives vote for others economically inefficient projects even though it hurts their own constituents. They do this to get a reciprocal vote on a project that helps their own constituents.

both a and b

When thinking about the free market or government intervention in the market, one must recognize that:
a) markets fail and government intervention can sometimes make society better off
b) government failure means that sometimes the market outcome is the best society can achieve
c) the free market and no government intervention is always better for society than government programs of services

Rent Seeking is illegal because:

The premise of the question is false. Rent Seeking is perfectly legal since it works through the normal process of petitioning our elected leaders to do things which are themselves legal.

In Economics, Government Failure

means that government produces inefficiently or does things that it should not do.

A government agency can be said to suffer from Regulatory Capture:

when private businesses influence the decisions of that agency to such a degree that the agency protects the interests of the firms that it is supposed to be regulating instead of the interests of the public.

An example of Rent Seeking would be:

orange growers in Florida and California getting a tax placed on the import of oranges so that they can raise their own prices.

The public failure known as informational problems:

is generally larger in government than in markets since markets get correct valuations from consumers and producers in market prices while government often gets incorrect valuations from voters and special interest groups.

From your readings (including previous chapters) what do you think the "Dead Weight Loss" of Taxation refers to:

the fact that taxes change the market price for goods or services such that, in the new equilibrium, the total social surplus is smaller than it would have been without the tax.