Economics Today The Macro View Ch.5 Public Spending and Public Choice

22 October 2022
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Market failure
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prevent the price system from attaining economic efficiency and individual freedom.
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Externality (external cost)
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A consequence of an economic activity that spills over to affect third parties. Pollution is an _____?
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Market Failure
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A situation in which the market economy leads to too few or too many resources going to a specific economic activity.
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Externalities can also be _____.
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positive
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Effluent fee
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A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax.
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Subsidies
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another term for negative tax
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Free riders
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anticipate that others will pay
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Antitrust legislation
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Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.
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Third parties
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Parties who are not directly involved in a given activity or transaction.
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Antitrust legislation Monopoly power
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Market failure may occur if markets are not competitive
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Externalities
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are examples of market failures.
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Incentive structure
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The system of rewards and punishments individuals face with respect to their actions
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Government inhibited goods
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A good that has been deemed socially undesirable through the political process. ‚ÄĘ Certain psychoactive drugs i.e. heroin
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Externality
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A consequence of an economic activity that spills over to affect third parties. Pollution is externality.
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Monopoly
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A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.
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Private goods
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Good that can be consumed by only one individual at a time. Private goods are subject to the principle of rival consumption.
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Public
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goods are not subject to rival consumption
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Property rights
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The rights of an owner to use and to exchange property.
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Negative externalities, at least two avenues are open to the government. Name 2 examples special taxes and legislative regulation or prohibition
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special taxes and legislative regulation or prohibition
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In its most ideal form, a _____ _____ allows resources to move from lower-valued to higher-valued uses through voluntary exchange.
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price system
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An increase in input prices shifts the supply curve? up and to the left
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up and to the left
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A ______ ______ is a cost that is suffered by a third party as a result of an economic transaction.
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negative externality
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_____ ______ is a benefit that is enjoyed by a third-party as a result of an economic transaction.
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Positive externality
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____ _____ arises when all mutually advantageous trades have taken place.
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Economic efficiency
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Government sponsored goods
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Goods deemed socially desirable through the political process: (hint: museums)
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Transfer payments transfers in kind
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Income redistribution includes progressive income tax system and transfers: (name 2)
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It is difficult to charge for a public good based on consumption; this is called the _____ _____ .
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exclusion principle
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How the Government can correct positive externalities? Give 3 examples
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government financing and production subsidies regulations
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All of the following are goals established by the‚Äč Full-Employment Act of 1946 except A. price stability. B. a balanced budget. C. economic growth. D. full employment.
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B. a balanced budget.
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_____ _____ can be used by more and more people at no additional opportunity cost.
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Public goods
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______ _____ problem arises when some individuals take advantage of the fact that others will take on the burden of paying for public goods. free rider
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Free rider
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Money payments (terms) made by governments to individuals for which no services or goods are rendered in return.
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Transfer payment Examples: Social Security old age and disability benefits and unemployment insurance benefits
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Payments that are in the form of goods and services.
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Transfer in kind Examples: food stamps, subsidized public housing, and medical care
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_____ ______ all federal, state, and local spending. give examples:
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Government outlays ‚ÄĘ Defense, income security, and Social Security‚ÄĒat the federal level ‚ÄĘ Education, health and hospitals, and public welfare‚ÄĒat the state level
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The steel mill doesn't have to pay the cost of dirtying the air. Rather, it is the people in the community who incur that cost in the form of dirtier clothes, dirtier cars and houses, and more respiratory illnesses is an example of
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Externality ( external cost)
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_____ ______ ______ how voters, politicians, and other interested parties act and how these actions influence nonmarket decisions.
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collective decision making
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______ __ ________ ________ the study of collective decision making. Assumes that individuals will act within the political process to maximize their individual (not collective) well-being.
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Theory of public choice
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When there are external costs, the market will tend to _________resources to the production of the good or service in question
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overallocate
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Differences between market and collective decision making (give 3 examples)
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Government goods at zero price Use of force Voting versus spending
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Voting versus spending
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Differences between market and collective decision making: ___ Vs ____
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Political system is run by ______ rule Market system is run by ______ rule
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majority proportional
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Political system
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run my majority rule
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Market system
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run by proportional rule
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Majority rule
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Collective decision making, with decisions based on more than 50 percent
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government political goods
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Goods (and services) provided by the public sector (2)
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Proportional rule
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With 10 percent of "dollar votes" cast for blue cars, 10 percent of the output is blue
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Spending of dollars can indicate intensity of want. Votes cannot indicate intensity of want; each vote counts with the same intensity.
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Difference between market and collective decision making VOTING VS SPENDING
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Goods are subject to rival consumption.
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private
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Goods are deemed socially undesirable.
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demerit
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Goods are deemed socially desirable.
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merit
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Redistributing income give 2 examples
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Transfer payments In-kind transfers
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know and must bear the true opportunity cost of their actions.
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In a pure market system, competition generates economic efficiency only when individuals
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_______ lead to a higher quantity of the medical services consumed.
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Subsidies
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__________encourages people to consume medical services that are low in per-unit value relative to the cost.
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Medicare
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______ ______ for public schools do not necessarily translate into improved student performance.
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Bigger subsidies
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The last unit of educational services provided is likely to ____ _____ _____ __ ______ by parents and students.
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cost more than its valuation by parents and students
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the services provided _____ _____ _____ _____ to promoting student learning. exceed those best suited to promoting student learning
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exceed those best suited
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___________ _________ Rewards and punishments affect provision of government goods.
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Incentive structures
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Similarities and differences with market system structures. 1. ____ and _____ are ______. 2. ____ ______ and _______ are _______ .
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scarcity; competition; similarities. Legal coercion; majority rule; differences.
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Market failure occurs when A. the market system fails to allocate an equal share of resources to all individuals. B. the unrestrained market economy leads to too few or too many resources going to a specific economic activity. C. the market system fails to allocate resources to each individual according to their abilities. D. the market system fails to allocate resources to each individual according to their needs.
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B. the unrestrained market economy leads to too few or too many resources going to a specific economic activity.
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Which of the following government policies might be effective in achieving the amount of orange production that fully reflects all social‚Äč costs? A. A tax on growers commensurate with the cost to third parties. B. Government financing or production of oranges. C. Regulations that limit the use of pesticides. D. Both A and C are viable policies. E. Both A and B are viable policies.
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D. Both A and C are viable policies.
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Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct for the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. These actions by the government lead to all the following‚Äč outcomes, except A. a leftward shift of the supply curve of tobacco. B. an increase in the negative externality caused by cigarette smoking. C. a reduction in the negative externality caused by cigarette smoking. D. a leftward shift of the supply curve of cigarettes.
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B. an increase in the negative externality caused by cigarette smoking.
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After a government implements a voucher‚Äč program, granting funds that families can spend at schools of their‚Äč choice, numerous students in public schools switch to private schools.‚Äč Parents' and‚Äč students' valuations of the services provided at both private and public schools adjust to equality with the true market price of educational services. As a result of this voucher‚Äč program, A. the public schools and the private schools will gain equally. B. the public schools will gain. C. the public schools will lose. D. the parents of these school children will lose.
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C. the public schools will lose.
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In a small‚Äč town, a paper mill produces water pollution. If the government does not‚Äč intervene, the equilibrium price of paper will be‚Äč __________, and the equilibrium quantity of paper will be‚Äč __________. A. greater than the socially optimal‚Äč price, greater than the socially optimal quantity B. equal to the socially optimal‚Äč price, equal to the socially optimal quantity C. greater than the socially optimal‚Äč price, less than the socially optimal quantity D. less than the socially optimal‚Äč price, less than the socially optimal quantity E. less than the socially optimal‚Äč price, greater than the socially optimal quantity The government could best correct this externality by_____.
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E. less than the socially optimal‚Äč price, greater than the socially optimal quantity taxing the production of paper.
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The French government recently allocated the equivalent of more than‚Äč $120 million in public funds to Quaero ‚Äč(Latin for‚Äč "I ‚Äč search"), an Internet search engine analogous to Google or Yahoo. Is a publicly funded Internet search engine a public good or a government sponsored‚Äč good? A. It is a public‚Äč good, unlikley to be provided in the private market. B. It is a public‚Äč good, deemed socially desirable through the political process. C. It is a government sponsored‚Äč good, deemed socially desirable through the political process. D. It is a government sponsored‚Äč good, deemed politically desirable through the political process.
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B. It is a public‚Äč good, deemed socially desirable through the political process.
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Does an Internet search engine satisfy the key characteristics of a public‚Äč good? A. Yes, because it can be used by many people simultaneously at some additional opportunity cost, and it would be impossible to exclude users. B. No, it has the characteristic of non minus rivalrous consumption, but advertisers can excluded and be made to pay nothing. C. No, because the principle of rival consumption applies but users could be excluded. D. Yes, because the principle of rival consumption does not apply and it would be too costly to exclude users.
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B. No, it has the characteristic of non minus rivalrous consumption, but advertisers can excluded and be made to pay nothing.
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In many‚Äč countries, education is either wholly provided by the government or is heavily subsidized. How would an economist explain‚Äč this? A. Since education has a spillover‚Äč benefit, private markets will under provide for it. B. Education is a pure public good and those who do not pay cannot be excluded from it. C. Individuals will not purchase education because they do not benefit from it. D. Since education has a spillover‚Äč cost, private markets will over provide for it. E. The only way to provide education is through a‚Äč government-sponsored system.
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A. Since education has a spillover‚Äč benefit, private markets will under provide for it.
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The government of country B is more heavily involved in the economy through economic functions rather than political functions because it devotes a higher fraction of its budget toward A. efforts to affect the way exchange is carried out. B. the discouragement of goods that are deemed socially undesirable. C. the encouragement of goods that are deemed socially desirable. D. activities that are subjective rather than objective.
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A. efforts to affect the way exchange is carried out.
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Which of the following is an example of a transfer in kind‚Äč? A. Social Security. B. Food stamps C. Disability benefits D. Unemployment insurance benefits
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B. Food stamps
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In the absence of a‚Äč government-subsidized health‚Äč plan, the equilibrium price of MRI tests is ‚Äč$500 and the amount of‚Äč society's total spending on MRI tests is ‚Äč$___million. Suppose that the government establishes a health plan guaranteeing that all qualified participants can purchase MRI tests at an effective price‚Äč (that is,‚Äč out-of-pocket cost) to the individual of‚Äč $100 per test. In this case people will consume ___MRI tests. The‚Äč per-unit price that induces producers to provide the amount of MRI tests demanded at the government guaranteed price of‚Äč $100 is ‚Äč$___and‚Äč society's total spending on MRI tests becomes ‚Äč$___million. Under the‚Äč government's coverage of MRI‚Äč tests, the‚Äč per-unit subsidy it provides is ‚Äč$__ and the total subsidy that the government pays to support MRI testing at its guaranteed price is ‚Äč$___million.
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$500 $40 100,000 $700 $70 $600 (the difference between the supply price & gov't prince). $60
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Since the‚Äč 1960s, public spending on education has‚Äč _________, while student performance has‚Äč ______________. A. ‚Äčdecreased, remained constant or increased B. ‚Äčdecreased, remained constant or increased C. ‚Äčdecreased, decreased D. ‚Äčincreased, increased E. ‚Äčincreased, remained constant or declined
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E. ‚Äčincreased, remained constant or declined
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A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort‚Äč and, if‚Äč successful, receive larger budget allocation in future years. Another rationale for expanding the‚Äč agency's activities is that this will make the jobs of its workers more‚Äč interesting, which may help the agency attract‚Äč better-qualified employees.‚Äč Nevertheless, to broaden its legal‚Äč mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In‚Äč addition, to expand its‚Äč activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. The behavior of the government agency is similar to a‚Äč profit-seeking private enterprise in all of the following‚Äč aspects, except A. the government agency depends on majority rule to enact the changes that it is seeking. B. the government agency is promoting competition. C. the government agency attempts to increase its budgetary allocations. D. the government agency attempts to make its‚Äč workers' jobs more interesting.
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A. the government agency depends on majority rule to enact the changes that it is seeking.
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According to the theory of public‚Äč choice, the employees of Kodak and employees of the State of Washington should act differently because A. public employees act to maximize collective welfare rather than individual welfare. B. private employees are motivated only by money. C. public employees cannot be fired while private employees can. D. the incentives facing them are different.
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D. the incentives facing them are different.
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Which of the following is not a difference between market and collective decision‚Äč making? A. Money payments can signal intensity of desire for a‚Äč product, but voting cannot. B. Government goods are often provided free of‚Äč charge, while market goods have a price. C. The government can use expropriation to extract‚Äč payments, but private firms cannot. D. Government goods are costless to‚Äč produce, while private goods have production costs.
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D. Government goods are costless to‚Äč produce, while private goods have production costs.
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Which one of the following is a primary difference between a public good and a private‚Äč good? A. Private goods are manufactured because of the workings of the price system while public goods come about through antitrust legislation. B. Private goods are subject to the principle of rival consumption while public goods are not. C. A private good is subject to the‚Äč free-rider problem while a public good is not. D. Private goods are purchased by money transfers while public goods are purchased by‚Äč in-kind transfers.
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B. Private goods are subject to the principle of rival consumption while public goods are not.
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A true public good must be provided by the government. Which of the following goods provided by the government is a true public‚Äč good? A. Postal service. B. Highways where tolls are collected. C. Flood control. D. Tax collection.
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C. Flood control.
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Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that A. Canadians perceive national defense as generating external costs rather than as a public good. B. Canada is able to‚Äč free-ride on the defense spending of the United States. C. ‚ÄčCanada's tax system is less efficient than other industrial nations. D. national defense is not a public good in Canada.
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B. Canada is able to‚Äč free-ride on the defense spending of the United States.
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Other than correcting‚Äč externalities, other economic functions of government include A. Deciding what to‚Äč produce, how to produce it and for whom to produce for all sectors of the economy. B. providing a legal‚Äč system, allocating public‚Äč goods, promoting‚Äč competition, and stabilizing the economy. C. deciding which states may or may not impose income‚Äč taxes, charge fees and enforce contracts. D. income redistribution and the regulation and provision of merit and demerit goods.
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B. providing a legal‚Äč system, allocating public‚Äč goods, promoting‚Äč competition, and stabilizing the economy.
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Much of our legal system is involved with defining and protecting property rights. A. True B. False
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A. True
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The goal of antitrust legislation is to reduce the power of firms that can determine the market price of the goods they sell. A. True B. False
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A. True
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The most common provider of public goods is the private sector. A. True B. False
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B. False
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Most private goods‚Äč ________ rival in‚Äč consumption, and most public goods‚Äč ________ rival in consumption. A. are‚Äč not; are B. ‚Äčare; are C. are‚Äč not; are not D. ‚Äčare; are not
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D. ‚Äčare; are not
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All of the following are goals established by the‚Äč Full-Employment Act of 1946 except A. price stability. B. a balanced budget. C. economic growth. D. full employment.
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B. a balanced budget.
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The economic activities of government include‚Äč (1) correcting for _____, ‚Äč(2) providing a _____, ‚Äč(3) promoting _____, ‚Äč(4) producing _____ ‚Äčgoods, and‚Äč (5) ensuring _____. The principle of _____ does not apply to public goods as it does to private goods.
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externalities, legal system, competition, public, economywide stability rival consumption
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Public goods have two‚Äč characteristics: (1) Once they are‚Äč produced, there is no additional _____ when additional consumers use‚Äč them, because your use of a public good does not deprive others of its simultaneous‚Äč use; and‚Äč (2) consumers cannot conveniently be _____ on the basis of use.
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opportunity cost charged
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A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort‚Äč and, if‚Äč successful, receive larger budget allocation in future years. Another rationale for expanding the‚Äč agency's activities is that this will make the jobs of its workers more‚Äč interesting, which may help the agency attract‚Äč better-qualified employees.‚Äč Nevertheless, to broaden its legal‚Äč mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In‚Äč addition, to expand its‚Äč activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. The behavior of the government agency is similar to a‚Äč profit-seeking private enterprise in all of the following‚Äč aspects, except A. the government agency depends on majority rule to enact the changes that it is seeking. B. the government agency is promoting competition. C. the government agency attempts to increase its budgetary allocations. D. the government agency attempts to make its‚Äč workers' jobs more interesting.
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A. the government agency depends on majority rule to enact the changes that it is seeking.
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Pollution produced by a factory is being dumped into a local river. The community uses local funds to clean the river. This is an example of A. an external cost as the‚Äč community, not the‚Äč factory, is paying for the clean up. B. an external benefit since it creates jobs in environmental science. C. a public good. D. an effluent fee because it is as if the factory is taxing the community.
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A. an external cost as the‚Äč community, not the‚Äč factory, is paying for the clean up.
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The study of collective decision‚Äč making, or the process through which‚Äč voters, politicians and other interested parties influence nonmarket choices is known as A. a private choice theory. B. public choice theory. C. antitrust legislation. D. the exclusion principle.
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B. public choice theory.
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Market failure occurs because A. the market system does not make individuals responsible for the social‚Äč costs/benefits of their actions. B. the market system does not make individuals responsible for the private‚Äč costs/benefits of their actions. C. the market system forces individuals to consider the social and private consequences of their actions. D. the market system forces individuals to consider the social consequences of their actions.
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A. the market system does not make individuals responsible for the social‚Äč costs/benefits of their actions.
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A cost or benefit of an economic activity that has an impact on an‚Äč individual's well-being, even though the individual was not directly involved in the‚Äč activity, is known as‚Äč a(n) A. externality. B. ‚Äčfree-rider. C. capital loss. D. public good.
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A. externality.
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Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A. transfer payments. B. demerit payments. C. merit payments. D. black market payments.
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A. transfer payments.
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A good that has been deemed socially desirable through the political process is known as A. a‚Äč free-rider. B. a merit good. C. a positive externality. D. a demerit good
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B. a merit good. (aka) Government-sponsored good
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Subsidizing medical services through Medicare A. makes medical services available to a large percentage of the‚Äč population, who otherwise could not afford them. B. drives a wedge between the price received by providers and the price perceived by consumers. C. is a relatively low percentage of U.S. GDP compared to other nations. D. All of the above are true. E. Only A and B are true.
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E. Only A and B are true.