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Exploring Macroeconomics 7th Edition Robert L. Sexton - Solutions
What is the benefits-received principle?
What is vertical equity?
What is the ability-to-pay principle?
What is a flat tax?
What are progressive and regressive taxes?
On what does the public sector spend its money?
How does government finance its spending?
In terms of moral hazard:a. Why does someone’s willingness to pay a large deductible on an insurance policy tell an insurer something valuable about the seriousness of the moral hazard problem they might expect from the policyholder?b. Why does car insurance that explicitly excludes insuring the
In terms of signaling behavior:a. Why is wearing a suit a weaker signal of ability than higher educational achievement?b. Why do some majors in college provide more powerful signals to future employers than others?c. Why could double-majoring provide a more powerful labor market signal than having
How would the adverse selection problem arise in the insurance market? How is it like the “lemon” used-car problem?
In order to get a license to practice in the United States, foreign-trained veterinarians must take an exam given by the American Veterinary Association. Only 48 people per year are allowed to take the exam, which is administered at only two universities. The fee for the exam, which must be booked
How does a TV broadcast have characteristics of a public good? What about cable services such as HBO?
What kind of problems does the government face when trying to perform a cost–benefit analysis of whether or how much of a public project to produce?
Why do you think buffaloes became almost completely extinct on the Great Plains but cattle did not? Why is it possible that you can buy a buffalo burger in a store or diner today?
Is a lighthouse a public good if it benefits many ship owners? What if it primarily benefits ships going to a port nearby?
For each of the following goods, indicate whether they are nonrival and/or nonexclusive. Indicate whether they are private or public goods.a. Hot dogsb. Cable TVc. Broadcast TVd. Automobilese. National defensef. Pollution control g. Parking in a parking structure h. A sunset i. Admission to a theme
Draw a standard supply-and-demand diagram for televisions, and indicate the equilibrium price and output.a. Assuming that the production of televisions generates external costs, illustrate the effect of the producers being forced to pay a tax equal to the external costs generated, and indicate the
Indicate which of the following activities create a positive externality, a negative externality, or no externality at all.a. During a live theater performance, an audience member’s cell phone rings loudly.b. You are given a flu shot.c. You purchase and drink a soda during a break from class.d. A
___________________ arises from the cost involved for the insurer to monitor the behaviors of the insured party.
Good warranties are an example of __________________ behavior that takes place because the ________________ may know the actual quality of durable goods better than the ___________________.
A college education can provide a(n) _________________ about a person’s intelligence and perseverance.
When one party enters into an exchange with another party that has more information, we call it ___________________ selection.
The existence of ___________________ may give rise to signaling behavior.
When the available information is initially distributed in favor of one party relative to another, ___________________ is said to exist.
The failure of private incentives to provide adequate maintenance of public resources is known to economists as the ___________________.
Fish in the vast ocean are a good example of a(n)___________________ resource.
A common resource is a(n) ___________________ good that is ___________________.
Goods that are owned by everyone and therefore not owned by anyone are called ___________________ resources.
The government may be able to overcome the freerider problem by ___________________ the public good and imposing taxes to pay for it.
When individuals derive the benefits of a good without paying for it, it is called a(n) ___________________.
If everyone can consume a good simultaneously, it is ___________________.
If once a good is produced it is prohibitively costly to exclude anyone from consuming the good, consumption of that good is called ___________________.
When large numbers of individuals are affected by an external cost, the transaction costs of using voluntary negotiation to internalize it is likely to be ___________________.
According to the Coase theorem, markets can internalize externalities as long as ___________________ are welldefined and ___________________ costs are low.
___________________, the costs of negotiating and executing exchanges, must be low for well-defined property rights to allow externalities to be internalized.
Problems of external costs are largely a question of how ___________________ should be assigned.
Under a system of transferable pollution rights, firms with high costs of abatement would likely be ___________________, and firms with low costs of abatement would be ___________________.
Transferable pollution rights ___________________ work when the EPA does not know the cheapest way for polluters to reduce their emissions because they make it in polluters’ interests to reduce pollution the cheapest way.
Firms buy and sell rights to pollute under a system of ___________________ rights.
The imposition of per-unit pollution taxes would likely be ___________________ costly than compliance standards for the same degree of pollution abatement.
Compared to compliance standards, pollution taxes lead to abatement by firms who can do so at the ___________________ cost.
The economically ideal tax to impose on a polluter would be ___________________ the marginal external costs imposed on others by its production.
Eliminating nearly all pollution would be economically __________________ because the marginal __________________ would exceed the marginal __________________.
Compliance standards should be stricter where the marginal benefit from pollution reduction is ___________________.
The optimal quantity of pollution is where the ___________________ of pollution abatement equals the ___________________ from pollution abatement.
The marginal cost of pollution abatement ___________________ with increasing levels of abatement.
Pollution reduction, like other forms of production, is subject to ___________________ returns.
Unlike the consumption of private goods, the consumption of public goods is both ___________________ and ___________________.
In the case of either external benefits or external costs, buyers and sellers are receiving the wrong signals: The apparent benefits or costs of some actions differ from the ___________________ benefits or costs.
Because producers are unable to collect payments from all who are benefiting from the good or service, the market has a tendency to ___________________ goods with external benefits.
If suppliers are unaware of or not responsible for the external costs created by their production, the result is a(n) ___________________ of scarce resources to the production of the good.
The benefits of a product or service that spill over to an outside party not involved in producing or consuming the good are called ___________________.
If the government taxed a manufacturer by the amount of those external costs it imposes on others, it would force the manufacturer to ___________________ the costs.
If a firm can avoid paying the external costs it imposes on others, it ___________________ its own costs of production but not the ___________________ cost to society.
Whenever an activity has physical impacts on individuals not directly involved in the activity, if the impact on the outside party is negative, it is called a ___________________; if the impact is positive, it is called a ___________________.
Sometimes the market system fails to produce efficient outcomes because of side effects economists call ___________________.
Why might withdrawals in several classes send a poor signal to potential employers?
If where you got your college degree acted as a signaling device to potential employers, why would you want the school from which you graduated to raise its academic standards after you leave?
How do substantial warranties offered by sellers of used cars act to help protect buyers from the problem of asymmetric information and adverse selection? Why might too extensive a warranty lead to a moral hazard problem?
In the market for insurance, the moral hazard problem leadsa. those most likely to collect on insurance to buy it.b. those who buy insurance to take fewer precautions to avoid the insured risk.c. those with more prior insurance claims to be charged a higher premium.d. to none of the above.
If, after you buy a car with air bags, you start to drive recklessly, it would be an illustration ofa. the moral hazard problem.b. the free-rider problem.c. the adverse selection problem.d. the “lemon” problem.
Adverse selection refers toa. the phenomenon that occurs when one party in an exchange takes advantage of knowing more than another party.b. the tendency for individuals to alter their behavior once they are insured against loss.c. the tendency for individuals to engage in insurance fraud.d. both
What is moral hazard?
What is adverse selection?
What is asymmetric information?
In what way can government provision of public goods solve the free-rider problem?
Why does the free-rider problem arise in the case of public goods?
How are public goods different from private goods?
A common resourcea. is rivalrous in consumption.b. is nonexcludable.c. can lead to the tragedy of the commons.d. All of the above are true.
Public goodsa. do not need to be produced by government.b. are subject to free-rider problems.c. tend to be underproduced in the marketplace.d. All of the above are true.
A public good is both _________ in consumption and ______________.a. nonrivalrous; exclusiveb. nonrivalrous; nonexclusivec. rivalrous; exclusived. rivalrous; nonexclusive
Public goods, like national defense, are usually funded through government becausea. no one cares about them because they are public.b. it is prohibitively difficult to withhold national defense from someone unwilling to pay for it.c. they cost too much for private firms to produce them.d. they
The market system fails to provide the efficient output of public goods becausea. people place no value on public goods.b. private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them.c. public enterprises can produce those goods at lower cost than
What is the tragedy of the commons?
What is a common resource good?
Why does the government provide public goods?
What is the free-rider problem?
What is a public good?
How do transaction costs limit the market’s ability to efficiently solve externality problems?
Why, according to the Coase theorem, will externalities tend to be internalized when property rights are clearly defined and information and transaction costs are low?
Why can externalities be considered a property rights problem?
Pollution reduction will be achieved for the least cost whena. large polluters are required to reduce pollution by a greater extent than small polluters.b. small polluters are required to reduce pollution by a greater extent than large polluters.c. all firms are required to reduce pollution by a
In the case of a private solution to the externality problem, the distribution of rightsa. restricts the ability of private parties to properly price the externalities.b. enhances the market incentive to reach an efficient solution.c. determines who bears the cost of the solution but does not
The Coase theorem suggests that private solutions to externality problemsa. can lead to an optimal allocation of resources if private parties can bargain at relatively low cost.b. result in the efficient outcome under all conditions.c. will result in the same distribution of wealth no matter how
According to the Coase theorem, one way to deal with an externality problem when transaction costs are low isa. for the government to impose pollution taxes.b. for the government to make certain that property rights are well defined.c. for the government to issue transferable pollution permits.d.
What is the Coase theorem?
What is the relationship between externalities and property rights?
What are the objectives of an ideal pollution control policy from the perspective of economists interested in resource allocation?
How could transferable pollution rights lead to pollution being reduced at the lowest possible opportunity cost?
How do command and control policies act to internalize external costs?
How is the optimal amount of pollution control determined, in principle?
How does pollution control lead to both rising marginal costs and falling marginal benefits?
Which of the following is not an advantage of transferable pollution rights?a. They create incentives for polluters to develop cheaper ways to reduce pollution.b. They allow the greatest value of output to be produced with a given amount of pollution.c. They require polluters to reduce emissions,
An advantage that emission taxes and tradable emissions permits have over compliance standards is that the formera. work well even if pollution output cannot be accurately measured.b. result in equal levels of pollution abatement across all firms.c. make it in the interests of firms to reduce
If compliance standards are too stringent,a. the marginal social benefit of pollution reduction may outweigh the marginal social cost of pollution reduction.b. the marginal social cost of pollution reduction may outweigh the marginal social benefit of pollution reduction.c. the marginal social cost
An ideal pollution taxa. does not affect the quantity of the good produced.b. forces a firm to internalize the externality.c. causes a polluting firm to increase production to the socially efficient level of output.d. leads to a reduction in price to the consumer of the polluting firm’s output.
Taxes on the emissions of polluting firms are primarily intended toa. encourage firms to reduce product prices.b. encourage firms to increase production of output.c. raise revenue for general spending needs.d. encourage firms to pollute less.
What are transferable pollution rights?
What if we placed a $0.50 tax on gasoline to reduce dependence on foreign oil and to raise the tax revenue?
Which of the following are true statements?a. Producer surplus is the difference between what a producer is paid for a good and the cost of producing that good.b. An increase in demand will lead to a higher market price and an increase in producer surplus; a decrease in demand will lead to a lower
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