Review

INSTRUCTION: Select the BEST answer for each question by marking the circle next to your selection, then click on the [Grade the Test] button at the bottom.

1.

In a competitive market: A. spillover benefits will always exceed spillover costs. B. resources will be misallocated if demand and supply are not properly adjusted by government for large spillover costs and benefits. C. resources will be allocated efficiently only if spillover benefits equal spillover costs. D. an efficient allocation of resources is always realized.

2.	A pure market economy overallocates resources to the production of goods which: A. involve spillover costs (external costs). B. involve spillover benefits (external benefits). C. are public goods. D. are inexpensive to produce.

3.

When spillovers cause substantial positive benefits to accrue to third parties, a competitive market: A. underallocates resources to the production of the good. B. overallocates resources to the production of the good. C. is allocatively efficient. D. compensates people for the value of the benefits which accrue to these third parties.

4.	If a market is competitive, the resulting equilibrium output: A. will also be the most efficient output. B. will always be less than the most efficient output. C. will always be greater than the most efficient output. D. may be either larger or smaller than the most efficient output.

5.	A productive activity which creates substantial spillover costs should be: A. encouraged by subsidization. B. discouraged by special taxes or legislation. C. exempt from governmental intervention. D. prohibited.

6.

The market system fails to produce public goods because: A. there is no need or demand for such goods. B. private firms cannot restrict the benefits of such goods to consumers who are willing to pay for them. C. public enterprises can produce such goods at lower cost than can private enterprises. D. their production seriously distorts the distribution of income.

7.	Which of the following is an example of a public good: A. a fireworks display B. a hotdog. C. a personal computer. D. a barbeque grill.

8.	The exclusion principle: A. applies to private, but not to public goods. B. applies only where spillover benefits exceed spillover costs. C. suggests there are certain economic functions from which government must be excluded. D. is a fundamental characteristic of public goods.

9.

R-1 F30020 Refer to the above diagram in which S is the market supply curve and S t is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. Without government interference, this market will result in: A. an optimal allocation of society's resources. B. an underallocation of resources to this product. C. an overallocation of resources to this product. D. a higher price than is consistent with an optimal allocation of resources.

10.

R-1 F30020 Refer to the above diagram in which S is the market supply curve and S t is a supply curve comprising all costs of production, including external costs. Assume that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should: A. not intervene because the market outcome is optimal. B. subsidize consumers so that the market demand curve shifts leftward. C. subsidize producers so that the market supply curve shifts leftward (upward). D. tax producers so that the market supply curve shifts leftward (upward).

11.	In a market for pollution rights an increase in demand would: A. raise the price of pollution rights, but leave the quantity unchanged. B. stimulate the economic incentive to pollute. C. increase the actual amount of pollution. D. induce an increase in the supply of pollution rights.

This is the end of the test. When you have completed all the questions and reviewed your answers, press the button below to grade the test.