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Chapter 08
Market Failure versus Government Failure
True / False Questions
1. Externalities can be either positive or negative.
True False
2. Economists generally prefer direct regulation to incentive-based programs because explicit

regulation tends to be more efficient.
True False
3. Direct regulation means that government sets specific limits on the use of scarce resources.
True False
4. Economists are likely to oppose direct regulation because they do not believe there is any
need for government to take action when negative externalities exist.
True False
5. Economists tend to believe that market incentive plans are generally more efficient than
direct regulation.
True False
8-1
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
6. An optimal policy is one in which the marginal cost of undertaking a policy is less than the
marginal benefit of that policy.
True False
7. If a program requires people to pay a price that reflects the cost of an externality associated
with their actions that they previously did not pay, it will be in their best interest to change
their behavior.
True False
8. Government provides secondary education because of its private good aspects.
True False
9. Economists believe that free riders often can undermine the social commitment of many in
the society, causing voluntary policies to fail.
True False
10. Adverse selection problems can occur when buyers and sellers have different amounts of
information about a good for sale.
True False
11. Moral hazard problems can occur when insured individuals change their behavior to the
detriment of the insurer.
True False
8-2
12. Government attempts to offset market failures can prevent the market from dealing with a
problem more effectively.
True False
13. If government action is likely to do some good, it is always best for government to intervene
in the marketplace.
True False
Multiple Choice Questions
14. What do economists mean when they say there is "market failure"?
A. Business has introduced a product that consumers did not want.
B. Free markets have led to excessive profits.
C. Markets have surpluses or shortages so that government rationing is necessary.
D. Free markets yield results that economists do not consider socially optimal.
15. Some economists believe that the market will not solve all problems. They are referring to:
A. market failure.
B. market incentive plans.
C. optional policy.
D. the need to balance the good of the individual with the good of society as a whole.
8-3
16. All of the following are considered sources of market failure except:
A. public goods.
B. imperfect information.
C. profit-maximizing behavior.
D. externalities.
17. The criterion that no person can be made better off without another being made worse off is
known as the:
A. normative criterion.
B. Pareto criterion.
C. nirvana criticism.
D. second-best criticism.
18. John has 10 apples and six bananas. Jane has two bananas and two apples. If this situation is
Pareto optimal, what mutually beneficial exchange could be made?
A. None; there is no exchange that can help one without hurting the other.
B. Fruit should be taken from John and given to Jane to equalize their holdings.
C. Jane should give up apples to get bananas.
D. Jane should give up bananas to get apples.
19. The perfectly competitive output level is Pareto optimal because at this output level:
A. the total cost to society equals the total benefit.
B. the marginal cost to society equals the marginal benefit.
C. the marginal cost to society is minimized.
D. the marginal benefit to society is maximized.
8-4
20. The economist who mathematically proved that a complete set of competitive markets could
yield a socially (or Pareto) optimal result was:
A. Adam Smith.
B. Kenneth Arrow.
C. Milton Friedman.
D. Ronald Coase.
21. If there is a complete set of markets that are perfectly competitive:
A. the marginal cost of producing goods will exceed their marginal benefit.
B. the marginal cost of producing goods will be less than their marginal benefit.
C. every person's utility function is at a maximum.
D. the invisible hand guides the economy to a Pareto optimal position.
22. If a system has multiple defects but those defects in effect offset each other, curing one
defect may make the system perform more poorly. This possibility is known as:
A. the Hume dictum.
B. the normative criticism of Pareto optimality.
C. the second best criticism of Pareto optimality.
D. the nirvana criticism of Pareto optimality.
8-5
23. Can outcomes that are not Pareto optimal be considered better than outcomes that are
Pareto optimal?
A. No; Pareto optimal is defined as the best possible outcome.
B. Yes, if the non-Pareto optimal outcome is more efficient than the Pareto optimal outcome.
C. Yes, if the distribution of wealth in the Pareto optimal outcome is considered undesirable.
D. Yes, if there are too many market failures in the Pareto optimal outcome.
24. If a market has no externalities, marginal private costs:
A. exceed marginal social costs.
B. equal marginal social costs.
C. are below marginal social costs.
D. intersect marginal social costs.
25. Economists generally call the effect of an agreement on others that is not taken into account
by the parties making the agreement:
A. excess burden.
B. welfare loss.
C. Pareto optimality.
D. an externality.
26. The best example of a positive externality is:
A. roller coaster rides.
B. pollution.
C. alcoholic beverages.
D. education.
8-6
27. Alex is playing his music at full volume in his dorm room. The other people living on his floor
find this to be nuisance, but Alex does not care. Alex's music playing is an example of a:
A. negative externality.
B. positive externality.
C. normative externality.
D. Pareto externality.
28. Alex is playing his music at full volume in his dorm room. The other people living on his floor
are enjoying his music, but Alex does not know or care. Alex's music playing is an example of
a:
29. James enjoys gardening in the nude because he says it puts him in touch with nature. His
neighbors find his gardening routine very offensive, but James replies that they should mind
their own business and not watch him. To an economist this situation illustrates the concept
of:
A. the tragedy of the commons.
B. a negative externality.
C. a positive externality.
D. adverse selection.
8-7
30. Carbon dioxide emissions are thought to contribute to global warming, and there is concern
that changes in climate will be costly. Emitting carbon dioxide is an example of:
A. a public good.
C. an adverse selection problem.
D. an effluent fee.
31. In the Flint Hills area of Kansas, proposals to build wind turbines to generate electricity have
pitted environmentalist against environmentalist. Members of the Kansas Sierra Club support
the turbines as a way to reduce use of fossil fuel, but local chapters of the Nature
Conservancy say they will befoul the landscape. The Sierra Club argues that wind turbines:
A. are a source of negative externalities.
B. reduce negative externalities elsewhere in the economy.
C. create a free rider problem.
D. are a way of solving a free rider problem.
32. Proposals in Flint Hills, Kansas, to build wind turbines to generate electricity have pitted
environmentalist against environmentalist. Members of the Kansas Sierra Club support the
turbines as being a way to reduce use of fossil fuel, but local chapters of the Nature
Conservancy say they will befoul the landscape. The chapters of the Nature Conservancy
argue that wind turbines:
8-8
33. College education provides higher income for the individual but also a more productive and
more educated person who will contribute to society in many ways. Higher education is an
example of:
A. a positive externality.
C. a non-excludable service.
34. Richard Vedder argues that the states that have spent the most on higher education in the
last 25 years have experienced the least economic growth. One might conclude that higher
education:
A. does not have important positive externalities.
B. does not have important negative externalities.
C. is a non-excludable service.
D. has problems of adverse selection.
35. Under the Texas law known as "rule of capture," land owners "get to pump as much of the
water under it as they want. . . . 'This means whoever sucks it out first, it's their water'—even
if that means there isn't enough left for others." Under this law, pumping large amounts of
water:
A. imposes a negative externality on others.
B. imposes a positive externality on others.
C. imposes the free rider effect on others.
D. is a private decision with no effects on others.
8-9
36. Which of the following is not an example of an externality?
A. Carbon dioxide from energy generation that adds to the worldwide long-term greenhouse
effect
B. Heat from a factory that makes the neighboring tomato patches more productive
C. A defective part that causes an automobile to break down three months after purchase
D. Acidic by-products of fossil fuel combustion that produce acid rain
37. An externality is present in a free market whenever:
A. a monopolist spends funds to keep potential competitors out of the market.
B. an activity generates costs or benefits that are not reflected in market prices.
C. firms hire employees from outside the firm to fill positions normally filled by promotion
from within the firm.
D. a tax is imposed on the supplier of a good.
38. When negative externalities are present, market failure often occurs because:
A. the cost borne by a third party not involved in the trade is not reflected in the market price.
B. the borne by a third party not involved in the trade is reflected in the market price.
C. the existence of imports from foreign countries takes jobs (and income) away from U.S.
citizens.
D. consumers will consume the good at a level at which their individual marginal benefits
exceed the marginal costs borne by the firm producing the good.
8-10
39. The existence of negative externalities:
A. prevents the market from working efficiently.
B. prevents government from intervening in the marketplace.
C. causes the market to work more effectively.
D. necessarily means that government must intervene in the marketplace.
40. An example of a negative externality is the:
A. decrease in your real income that results when photographic equipment you purchase
increases in price because of increased demand by others for these items.
B. cost you bear when your neighbor has a noisy party and does not compensate you for your
discomfort.
C. benefit you receive without paying when your neighbor installs a smoke detector.
D. decrease in income to farmers that results from a drought.
41. If a negative externality is associated with burning firewood:
A. the marginal social cost of burning firewood falls short of its price.
B. the marginal social cost of burning firewood is exactly equal to its price.
C. less than the efficient amount of firewood for burning will be used each year.
D. the marginal social cost of burning firewood exceeds the price of burning firewood.
8-11
42. When negative externalities exist in the production of a good, the marginal social cost of
producing the good:
A. is equal to the marginal benefit received by consumers if competitive markets exist and
there is no government intervention.
B. equals the marginal cost borne by the firm minus marginal cost borne by a third party that
results from the production and consumption of the good.
C. is less than the marginal cost borne by the firm.
D. equals the marginal cost borne by the firm plus the marginal cost borne by third parties
from the production and consumption of the good.
43. The cost of running an electrical utility includes costs for fuel, labor, and capital. In addition,
there are sometimes costs associated with pollution from the utility, such an increased
health-care costs for people living near the utility. To an economist, the costs associated with
the pollution resulting from additional electricity are:
A. marginal private costs.
B. marginal social costs.
C. the difference between marginal social costs and marginal private costs.
D. the sum of marginal social costs and marginal private costs.
44. If a positive externality is associated with the purchase of smoke detectors:
A. the marginal social benefit of smoke detectors exceeds their price.
B. the marginal social benefit of smoke detectors is zero.
C. the marginal social benefit of smoke detectors equals their price.
D. more than the efficient quantity of smoke detectors will be sold.
8-12
45. When positive externalities exist in the consumption of a good, the marginal social benefit:
A. equals the marginal benefit received by consumers of the good minus the marginal benefit
to third parties.
B. equals the marginal cost of producing the good plus the marginal cost to third parties.
C. equals the marginal benefit received by consumers of the good plus the marginal benefit to
third parties.
D. could be either greater than or less than the marginal benefit received by consumers of the
good depending on the equilibrium price determined in competitive markets.
46. If a negative externality exists in the production of paper and paper is sold in a perfectly
competitive market, at the equilibrium output:
A. additional net gains to society are possible by reducing the output of paper.
B. additional net gains to society are possible by increasing the output of paper.
C. the marginal social benefit of paper equals its marginal social cost.
D. additional net gains to society are not possible from either increasing or decreasing the
output of paper.
47. If a positive externality exists in the provision of education when education is provided in a
perfectly competitive market without government intervention, at the market equilibrium level
of education:
A. additional net gains to society are possible by reducing the level of education.
B. additional net gains to society are possible by raising the level of education.
C. the marginal social benefit of education equals the marginal social cost.
D. additional net gains to society are not possible by either increasing or decreasing the level
of education.
8-13
48. If a negative externality exists in the market for dirt bikes and that market is perfectly
competitive:
A. less than the efficient output of dirt bikes will be produced.
B. the price of dirt bikes exceeds the marginal social cost.
C. the price of dirt bikes equals the marginal social cost.
D. the price of dirt bikes is less than the marginal social cost.
49.
Refer to the graph shown. There is a $.010 per-gallon marginal cost external to the trade
associated with the use of gasoline. Assuming that gasoline is sold in perfectly competitive
markets, the market equilibrium price will be:
A. $0.95
B. $1.00
C. $1.05.
D. $1.10.
8-14
50.
Refer to the graph shown. If the marginal cost external to the trade associated with the use
of gasoline is $0.10 per gallon, the point on the graph corresponding to the efficient quantity
and price is:
A. G.
B. H.
C. K.
D. L.
8-15
51.
Refer to the graph shown. Assuming a $0.10-per-gallon marginal cost external to the trade
that is associated with gasoline, the market price of gasoline necessary to induce consumers
to purchase the efficient quantity each year is:
A. $1.10.
B. $1.00.
C. $1.05.
D. $0.95.
8-16
52. Refer to the following graph.
Assuming a marginal cost external to the trade equals the tax shown in the graph, the market
price necessary to induce consumers to purchase the efficient quantity each year is:
A. P1.
B. P2.
C. P3.
D. P4.
53. Once vaccinated, a person cannot catch a cold or give a cold to someone else. As a result, the
marginal social benefit resulting from consumption of the vaccine:
A. exceeds the marginal benefit received by consumers of the vaccine.
B. equals the marginal social cost of producing the vaccine in a competitive equilibrium.
C. equals the marginal benefit received by consumers of the vaccine in a competitive

equilibrium.
D. is less than the marginal benefit received by consumers of the vaccine.
8-17
54.
Refer to the graph shown, which shows the demand and supply for a new vaccine against the
common cold. Once vaccinated, a person cannot catch a cold or give a cold to someone else.
As a result, the marginal social benefit curve will:
A. coincide with the market demand curve.
B. lie strictly below the market supply curve.
C. lie below the market demand curve.
D. lie above the market demand curve.
8-18
55.
At the competitively determined output level, the marginal social benefit will be:
A. equal to P0.
B. less than P0.
C. greater than or less than P0 depending on the income elasticity of demand and the
effectiveness of the vaccine.
D. greater than P0.
8-19
56.
The socially efficient level of output is:
A. less than Q0.
B. greater than or less than Q0 depending on the income elasticity of demand and the
C. greater than Q0.
D. equal to Q0.
8-20
57.
If government does not subsidize the production of this vaccine:
A. the number of workers hired to produce the vaccine will be less than the socially efficient
level.
B. the firm producing the vaccine will use too much capital in producing the vaccine.
C. the vaccine will be overproduced because consumers will not take into account the fact
that many of their neighbors and co-workers will consume the vaccine.
D. no positive externality can be created.
8-21
The point on the graph corresponding to the socially optimal output per year and the price
sellers must receive to make that amount available is shown by point:
A. G.
B. H.
C. I.
D. K.
59. If a negative externality is to be internalized to the decision maker, the:
A. producers' marginal costs should be increased by an amount equal to the marginal cost to
those outside the trade that results from production of the good.
B. producers' marginal costs should be reduced by an amount equal to the marginal cost to
those outside the trade that results from production of the good.
C. consumer of the good should receive a subsidy equal to the marginal cost to those outside
the trade that results from production of the good.
D. consumer of the good should pay a tax equal to the marginal benefit to those outside the
trade that results from consuming the good.
8-22
60. If a positive externality is to be taken full advantage of, the:
A. consumer of the good should receive a subsidy equal to the marginal cost imposed on third
parties that results from production (or consumption) of the good.
B. producers' marginal costs should be increased by an amount equal to the marginal benefit
to third parties that results from production of the good.
C. consumer of the good should pay a tax equal to the marginal benefit to third parties that
results from production (or consumption) of the good.
D. producers' marginal costs should be decreased by an amount equal to the marginal cost
imposed on third parties that results from production of the good.
61. If a corrective tax on gasoline results in the efficient output of gasoline by internalizing
negative externalities associated with pollution:
A. pollution from gasoline will increase because people are also harmed by the tax.
B. there will be no effect on pollution from gasoline because the tax is paid by the supplier.
C. pollution from gasoline will be zero because environmental cleanliness is priceless.
D. the tax will generate enough revenue to compensate society for the damages resulting
from the pollution that still occurs.
8-23
62.
Refer to the graph shown. Say that there is a negative externality associated with the
production of the good depicted. The marginal social benefit from consuming this good at the
competitive equilibrium output level is:
A. greater than P0.
B. equal to P0.
C. either greater than or less than P0, depending on the elasticities of supply and demand.
D. less than P0.
8-24
63.
production of the good depicted. The marginal social cost from consuming this good at the
A. either greater than or less than P0, depending on the elasticities of supply and demand.
B. greater than P0.
C. less than P0.
D. equal to P0.
8-25
64.
Refer to the graph shown. There is a negative externality associated with the production of
the good depicted. The socially efficient level of output is:
A. either greater than or less than Q0, depending on the elasticities of supply and demand.
B. less than Q0.
C. equal to Q0.
D. greater than Q0.
65. The rule for making optimal decisions is that an activity should be increased until:
A. average costs are minimized.
B. total costs are minimized.
C. total benefits are maximized.
D. marginal benefits equal marginal costs.
8-26
66. A strategy that achieves a goal at the lowest cost in total resources without consideration of
who pays those costs is:
A. efficient.
B. inefficient.
C. impossible.
D. always the most profitable to the firm.
67. Direct regulation is inefficient because:
A. affected firms ignore regulations, for example, by dumping toxic waste illegally.
B. it does not take into account that the costs of reducing consumption are the same for all
individuals.
C. it does not take into account the fact that the costs of reducing consumption may differ
among individuals.
D. it does not take negative externalities into account.
68. Suppose that government wants a policy that will encourage people to use less oil. For this
policy to be efficient, it must:
A. induce those with the highest cost of conserving to reduce their oil consumption the most.
B. induce those with the lowest cost of conserving to reduce their oil consumption the most.
C. force everyone to reduce oil consumption equally.
D. force rich people to reduce oil consumption proportionally more than poor people.
8-27
69. Economists generally oppose direct regulation because:
A. it is unlikely to achieve the desired end as efficiently as possible.
B. it assumes that people behave rationally.
C. it is generally unfair.
D. it does not assume that people behave rationally.
70. A market incentive plan:
A. regulates the amount of a resource a person can consume through direct limits.
B. requires that people choose to consume until the marginal costs exceed the marginal
benefits.
C. makes the price of a resource reflect not only the marginal private costs but also the
marginal social costs of consuming that resource.
D. makes the price of a resource reflect the marginal private costs of consuming that
resource.
71. To address the problems created by negative externalities, economists prefer programs that:
A. require government to conserve, using general tax revenues to pay for the program.
B. require all people to reduce consumption equally.
C. make people who have the lowest benefit of reducing consumption choose to undertake
the most reduction.
D. make people who have the lowest cost of reducing consumption choose to undertake the
most reduction.
8-28
72. The following table shows four firms, the amount each pollutes, the marginal cost for each
firm to clean up pollution, and the total cost to each firm of eliminating all pollution.
The total discharge of these four companies is 300 tons. Assume there is no one else who
pollutes.
Refer to the table shown. If the goal of the government is to reduce pollution by 50 percent,
the cheapest way would be to have:
A. all four firms cut their discharge by 50 percent
B. have each firm reduce discharge by 37.5 tons.
C. have firms A and D stop discharging and allow B and C to continue.
D. have firms B and C stop discharging and allow A and D to continue.
8-29
pollutes.
Refer to the table shown. Assume that these firms want to maximize profits. If the
government wishes to cut discharge by 50 percent, it could do so by establishing an effluent
fee of:
A. $3.00.
B. $4.50.
C. $5.50.
D. $10.00.
8-30
pollutes.
Refer to the table shown. If the government establishes an effluent fee of $7.00, how much
tax would firms pay to the government?
A. $660
B. $1,050
C. $1,820
D. $2,100
8-31
pollutes.
Refer to the table shown. If the government establishes an effluent fee of $7.00, how much
would the firms spend on reducing pollution?
A. $660
B. $1,710
C. $1,820
D. $2,100
8-32
pollutes.
Refer to the table shown. If the government establishes a regulation requiring each company
to reduce pollution by 50 percent, what will be spent on reducing pollution?
A. $660
B. $910
C. $1,050
D. $1,710
8-33
pollutes.
Refer to the table shown. Suppose that the government gives each company a pollution
permit equal to 50 percent of its present discharge. However, companies are allowed to
reduce pollution more than 50 percent and sell their permit or reduce less than 50 percent
and buy a permit from another company. If firms maximize profits, what would happen?
A. Each firm would reduce pollution by 50 percent.
B. Firms A and D would eliminate pollution and sell their permits to B and C, which would
continue to pollute as before.
C. Firms B and C would eliminate pollution and sell their permits to A and D, which would
D. There is not enough information to answer this question.
78. An effluent fee is an example of:
A. a voluntary approach to pollution.
B. a direct regulation of pollution.
C. a tax incentive policy.
D. a market incentive policy.
8-34
79. Based on economic theory, most economists believe market incentive plans are:
A. equitable.
B. efficient.
C. inefficient.
D. unfair.
80. In a tax incentive program, the person who conserves the most pays:
A. relatively less tax.
B. relatively more tax.
C. no tax.
D. no penalties.
81. Which of the following methods of reducing the amount of trash society generates is most
likely to be efficient?
A. A mandatory recycling program
B. A completely voluntary recycling program
C. A "trash tax"
D. Landfills and incinerators
82. Which policy is likely to be the most efficient in dealing with automobile emission pollution?
A. A mandatory requirement to reduce pollution
B. Voluntary emission control guidelines
C. Subsidizing research and development for alternative forms of transportation
D. An emission tax
8-35
83. A policy that requires all the people to certify that they have reduced total consumption, not
necessarily their own individual consumption, by a specified amount, is a(n):
A. external incentive plan.
B. internal incentive plan.
C. tax incentive plan.
D. market incentive plan.
84. Suppose Mary finds it easier to conserve than Jim does. The difference between a tax
incentive program and a marketable certificate plan in this case is that:
A. Mary undertakes most of the conservation in the case of a tax incentive program and least
in the marketable certificate program.
B. Mary undertakes least of the conservation in the case of a tax incentive program and most
in the marketable certificate program.
C. Mary takes on most of the conservation in both cases but is paid by Jim in the marketable
certificate program.
D. Jim takes on most of the conservation in both cases but is paid by Mary in the marketable
certificate program.
85. If markets are perfectly competitive and production of a good results in water pollution, the
imposition of a tax on that good will:
A. increase the price of that good and increase pollution.
B. reduce the price of that good and increase pollution.
C. reduce the price of that good and decrease pollution.
D. increase the price of that good and reduce pollution.
8-36
86. If markets are perfectly competitive and production of a good results in water pollution, the
imposition of a tax on the good will:
A. reduce the number of firms producing that good in the long run.
B. increase the number of firms producing that good in the long run.
C. reduce the number of firms producing that good in the short run.
D. increase the number of firms producing that good in the short run.
87. An individual with a highly elastic demand for gasoline will:
A. cut consumption more than an individual with a highly inelastic demand when price goes
up.
B. cut consumption less than an individual with a highly inelastic demand when price goes
up.
C. refuse to cut consumption for any reason.
D. stop using gasoline entirely if a tax is imposed.
88. A firm with a highly inelastic demand for coal will:
A. cut consumption more than a firm with a highly elastic demand when price goes up.
B. cut consumption less than a firm with a highly elastic demand when price goes up.
8-37
89. A policy is considered optimal if it:
A. is supported by a majority of voters.
B. equates total costs with total benefits.
C. equates marginal costs with marginal benefits.
D. forces people to conserve on scarce resources.
90. An optimal corrective tax levied on polluters will:
A. be equal to the marginal cost of their actions imposed on third parties.
B. not generate enough revenue to pay for the cost of the damage resulting from pollution
that occurs at the efficient output of the good.
C. decrease pollution to zero.
D. increase the supply of polluting goods.
91. A policy in which the marginal costs of undertaking the policy equal the marginal benefits of
that policy is best called an:
A. equality policy.
B. incentive policy.
C. optimal policy.
D. opportunity policy.
8-38
92. An efficient policy to reduce pollution would reduce pollution to the point where:
A. the marginal costs of reducing pollution equal the marginal benefits of reducing pollution.
B. it is eliminated.
C. the marginal costs of reducing pollution are greater than the marginal benefits of reducing
pollution.
D. the marginal costs of reducing pollution are less than the marginal benefits of reducing
pollution.
93. The efficient amount of pollution control is:
A. the amount for which the total social benefit equals the total social cost of pollution.
B. the amount for which the marginal social benefit equals the marginal social cost of
pollution.
C. always zero.
D. always a 100 percent abatement.
94. The optimal quantity of pollution control occurs at the point where the:
A. level of pollution is reduced to zero.
B. marginal social benefit is at its maximum.
C. marginal social cost equals the marginal social benefit of pollution.
D. total benefit equals the total cost of pollution.
8-39
95. Economists' attitude toward voluntary programs causes them to:
A. actively oppose them on the grounds that they will do more harm than good.
B. actively oppose them on the grounds that they are unfair.
C. be skeptical of the potential success of such programs
D. favor these programs over alternative solutions.
96. Economists tend to distrust voluntary approaches as a way to deal with externalities. What is
their most common concern?
A. Voluntary approaches do not make people develop an awareness of the problem that
would lead them to make good lifestyle changes.
B. Voluntary approaches often are perceived as unfair, imposing a heavy burden on the poor.
C. Voluntary approaches usually require people to ignore their self-interest, and economists
do not think people do that well.
D. Voluntary approaches are often too effective and lead to excessive reduction in the
externality.
97. Public television periodically runs pledge drives to raise money. Only a small percentage of
the people who benefit from public television are willing to pay. What do economists call the
people who do not pay?
A. Free riders
B. Excludables
C. Adverse selectors
D. Thieves
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the people who benefit from public television are willing to pay. This low percentage of
people willing to contribute illustrates a difficulty with:
A. government regulation.
B. voluntary programs.
C. tax incentive policies.
D. market incentive programs.
99. Economists are most likely to suggest that societies address the inefficiencies created by
negative externalities by:
A. direct regulation.
B. voluntary conservation.
C. making the price people pay reflect the cost of the externality.
D. leaving environmental problems alone so that the market can deal effectively with them.
100.In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide emissions,
giving electric utilities an allowance of a set amount of emissions and allowing the utilities to
trade their allowances. This type of plan is:
A. more efficient than direct regulation because utilities that receive a high marginal benefit
from emissions can gain additional allowances through trade.
B. more efficient than direct regulation because it forces each utility company to reduce
sulfur dioxide emissions by the same amount.
C. less efficient than direct regulation because utilities that receive a high marginal benefit
from emissions can gain additional allowances through trade.
D. less efficient than direct regulation because it forces each utility company to reduce sulfur
dioxide emissions by the same amount.
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101.If government undertakes to reduce water usage by using a market incentive plan:
A. each consumer will have to reduce his or her water usage by an equal amount.
B. consumers who reduce water usage by more than the required amount can sell
marketable certificates to consumers who seek to reduce usage by less than the required
amount.
C. consumers who do not reduce usage by the required amount will have to pay taxes on the
extra water usage.
D. consumers will be asked to reduce water usage voluntarily.
102.Since trash generation involves an externality, the way economists might address the
problem of trash generation that is most likely to be optimal is by:
A. integrating the cost of the externality into the initial price of the good.
B. having the government require mandatory sorting and recycling of trash.
C. having the cost of the externality be paid by the government.
D. not allowing persons to throw away more trash than is acceptable as a maximum.
103.An economist is most likely to support all of the following methods to address the negative
externalities created by the waste from newspapers except:
A. requiring publishers to cut the volume of newspapers generated but allowing them to sell
certificates so that others can meet those requirements for them.
B. taxing the suppliers of newspaper by the pound.
D. ensuring that the social cost of buying a newspaper is reflected in its price.
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104.The inefficiency associated with negative externalities is most likely the result of:
A. special interest groups.
B. the fallacy of composition.
C. government intervention.
D. poorly specified property rights.
105.A per-unit tax designed to internalize the costs of production imposed on third parties is
called:
A. an excise tax.
B. an effluent fee.
C. a sin tax.
D. a tariff.
106.The Environment Ministry in Japan proposed a new carbon tax to meet Japan's obligations to
reduce carbon dioxide emissions under the Kyoto Treaty. The tax would be levied on
producers and importers of fossil fuels, and the expectation is that it would be largely passed
on to consumers. This proposal is an example of a:
A. progressive tax.
B. voluntary program.
C. tax incentive policy.
D. free rider problem.
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producers and importers of fossil fuels, and the expectation is that it would be largely passed
on to consumers. The rationale for this tax is that it will:
A. reduce a negative externality.
B. reduce a positive externality.
C. turn a private good into a public good.
D. turn a public good into a private good.
producers and importers of fossil fuels and raise the cost of using fossil fuels. How do most
economists view a tax such as this?
A. They prefer direct regulation to taxes because taxes create deadweight loss.
B. They prefer voluntary programs to taxes because they reduce the role of compulsion.
C. They do not believe any government intervention is necessary because the invisible hand
of the market will correct the problem.
D. They support taxes on pollution as a way of making decision makers consider all costs.
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109.
Refer to the graph shown. The price and quantity that would prevail if all social costs and
benefits were taken into account is:
A. $5 and 2,600 units.
B. $3.50 and 2,000 units.
C. $3.95 and 6,800 units.
D. $1.80 and 2,000 units.
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110.
Refer to the graph shown. The amount of a tax sufficient to reduce quantity supplied to the
level that individuals would have supplied had they included the cost in their decision on
third parties is:
A. $2.50.
B. $1.70.
C. $1.00.
D. $0.80.
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111.
Refer to the graph shown. The free market equilibrium in the graph is at a price and quantity
of:
B. $3.50 and 2,000 units.
C. $2.50 and 2,600 units.
D. $3.50 and 3,100 units.
112.A good that if supplied to one person is supplied to all and whose consumption by one
individual does not prevent its consumption by another individual is known as:
A. a private good.
B. a public good.
C. an external good.
D. an internal good.
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113.Public television periodically runs pledge drives to raise money. Only a small percentage of
the people who benefit from public television are willing to pay. Why does public television
have a problem in collecting money from its viewers?
A. Broadcast television has public good aspects.
B. Public television has problems of adverse selection.
C. Public television is an example of government failure.
D. Broadcast television has problems of informational problems.
114.When you purchase and eat a hamburger, no one else can eat the same hamburger. When
you download a file on the Internet, the file is still available for others to download.
Economists explain this difference between hamburgers and computer files by saying that
the hamburger is:
A. excludable whereas the computer file is not.
B. non-excludable whereas the computer file is not.
C. rival in consumption whereas the computer file is not.
D. nonrival in consumption whereas the computer file is not.
115.Television broadcasts are often given as examples of a public good. However, it is possible to
code a broadcast so that only people who pay for the decoder box can view it. The use of a
coded signal does what to a television broadcast?
A. Makes it rival
B. Makes it nonrival
C. Makes it excludable
D. Makes it non-excludable
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116.A meeting of the United Nations Convention on International Trade in Endangered Species
ended with greater protection given to great white sharks. Why should sharks need special
protection?
A. There is an informational problem in the market; people do not understand the full
consequences of their actions.
B. Sharks are not privately owned and can be subject to a tragedy of the commons problem.
C. Sharks are what economists call a public good, and hence there are no incentives to
produce or protect them.
D. Sharks are subject to adverse selection problems.
117.A system in which power plants buy and sell the right to pollute in the form of emission
credits is known as:
A. a voluntary program.
B. direct regulation.
C. a tax incentive program.
D. a market incentive program.
118.Do economists tend to favor a system in which power plants buy and sell the right to pollute
in the form of emission credits?
A. No; these programs are ineffective because they encourage major polluters to free ride on
the efforts of others.
B. No; it is possible for some firms to do nothing if they simply buy enough credits.
C. Yes; they encourage all firms to cut pollution by the same percentage.
D. Yes; they believe that such a proposal would achieve a level of pollution reduction with the
lowest cost to society.
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119.Suppose there are only two firms that pollute, A and B, and each emits 10 tons of waste into
the air. Firm A can reduce its pollution at a cost of $100 per ton, and Firm B can reduce its
pollution at a cost of $500 per ton. Each has been given an emission credit that allows it to
pollute 6 tons. If firms maximize profits, what will happen?
A. Each firm will clean up 4 tons and pollute 6 tons.
B. Firm B will buy four credits from A; B will emit 10 tons, and A 2 tons.
C. Firm A will buy four credits from B; A will emit 10 tons, and B 2 tons.
D. Firm B will buy one credit from A; it will cut pollution to 7 tons, and firm A will cut it to 5
tons.
120.Which of the following does not illustrate the free rider problem?
A. Amy does not contribute to public television, but she watches it every day.
B. Roger refuses to help pay for the private security officer who patrols his neighborhood.
C. Amanda, a taxpayer, prefers to check out books from her local library rather than
purchasing them herself.
D. Frank enjoys the fireworks from his lawn and does not purchase a ticket to view the
display from the stadium.
121.The unwillingness of individuals to share in the cost of a public good is called the:
A. free rider problem.
B. social conscience problem.
C. volunteer problem.
D. public choice problem.
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122.Which of the following is not a characteristic of a public good?
A. Non-exclusivity
B. Available to nonbuyers
C. Nonrivalry in consumption
D. Can be consumed only once
123.Since consumption of a public good by one person does not preclude consumption by others,
public goods are said to be:
A. non-exclusive.
B. nonrival.
C. exclusive.
D. rival.
124.Once a public good is provided, those who do not pay cannot be denied the benefits. For this
reason, public goods are said to be:
A. non-exclusive.
B. nonrival.
C. exclusive.
D. rival.
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125.If air pollution control is a public good, it follows that:
A. the efficient output of air pollution control is zero.
B. additional persons can benefit from a given amount of air pollution control without
reducing the benefits enjoyed by others.
C. the efficient output of air pollution control can be attained by selling it by the unit in a
market.
D. the more air pollution control enjoyed by any one person, the less is available to others.
126.The free rider problem:
A. can never prevent pure public goods from being supplied.
B. results because people act unselfishly.
C. results because people behave irrationally.
D. prevents voluntary cost sharing from achieving the efficient output of a public good.
127.The best example of a public good is:
A. competition.
B. government-subsidized lunches.
C. pollution.
D. national defense.
128.In economic terminology, a free rider is someone who:
A. does not pay for his or her own consumption of a public good.
B. chooses not to consume a public good.
C. is earning economic profit.
D. raises his or her prices because all other prices are rising.
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129.In the case of a public good, a demand curve that shows the marginal benefit of the good is:
A. nonexistent.
B. the horizontal sum of individual demand curves.
C. the vertical sum of individual demand curves.
D. perfectly inelastic.
130.If the marginal benefit of one more unit of a public good is $500 for Sam and $800 for Alex,
the social benefit of one more unit of a public good is:
A. $500 since the benefit will go to the person who values it least.
B. $800 since the benefit will go to the person who values it most.
C. $1,300 since the benefit of one more unit goes to both individuals.
D. more than $1,300 since the benefits to society exceed the sum of individual benefits.
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131.This table shows the marginal benefits from widgets obtained by the only three people who
value them.
Refer to the table shown. Suppose widgets cost $8.50 to produce. If widgets are a private
good, how many will be produced by market incentives, and is that the right (efficient)
number?
A. Zero will be produced, and this is below the socially optimal amount.
B. One will be produced, and this is the socially optimal amount.
C. One will be produced, and this is below the socially optimal amount.
D. Two will be produced, and this is the socially optimal amount.
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132.This table shows the marginal benefits from widgets obtained by the only three people who
value them.
Refer to the table shown. Suppose widgets cost $8.50 to produce. If widgets are a public
number?
133.Basic research is more likely to be funded by the federal than by state and local government
because basic research:
A. is usually conducted by oligopoly, the market structure that is most conducive to

preliminary research.
B. has negative externalities that are passed on to those who live outside the state.
C. is largely a public good; benefits flow to the whole world, not just the state.
D. has information problems that cause adverse selection.
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134.Music spreads easily and cheaply on computer networks. As a result, music has become
more like:
A. a private good.
B. a public good.
C. a merit good.
D. an inferior good.
135.The Apple iPod is able to play digital music that has a special encoding that makes pirating
music more difficult. In economic terms, this encoding is an attempt to:
A. make digital music more like a private good and less like a public good.
B. reduce the negative externalities of digital music.
C. reduce the adverse selection problem of digital music.
D. increase the marginal social benefit of digital music.
136.If the benefit of a public good is small to each individual in a society of millions of
individuals:
A. it will never be efficient for government to provide the public good.
B. the total benefit will be large since social benefit is the sum of all individual benefits.
C. the total benefit will be small since individuals cannot share the benefits of public goods.
D. it cannot really be a public good since the benefit of public goods is always large.
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137.With regard to a public good provided by the government:
A. individuals reveal their demand when they buy the good.
B. a free rider problem is unlikely.
C. individuals have an incentive to conceal their willingness to buy the good.
D. individuals have an incentive to exaggerate their willingness to buy the good.
138.Real-world markets:
A. often involve deception, cheating, and inaccurate information.
B. ensure that sellers will always be honest and provide accurate information because those
who are dishonest or provide inaccurate information go out of business.
C. can operate efficiently only if government takes steps to correct informational problems.
D. provide no mechanism for solving informational problems.
139.If a consumer is willing to pay $100 for a used Blu-ray player that is a "cherry" and $30 for a
used Blu-ray player that is a "lemon," the consumer will offer:
A. $30 for any used Blu-ray player even if the probability that it is a "lemon" is 50 percent.
B. $100 for any used Blu-ray player even if the probability that is a "cherry" is 50 percent.
C. $65 for any used Blu-ray player if the probability that it is a "lemon" is 50 percent.
D. $130 for any used Blu-ray player if the probability that it is a "cherry" is 50 percent.
140.Adverse selection is most likely to be a problem when:
A. one side of the market, either buyer or seller, has better information than the other side.
B. there are public goods involved.
C. the good being exchanged has negative externalities.
D. the good being exchanged has free rider problems.
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141.In economics, the term "signaling" refers to a way of lessening the problem of:
A. free riders.
B. negative externalities.
C. bad information by all market participants.
D. unequal information between buyers and sellers.
142.At one time many economists were suspicious of brand names. They saw them as a barrier
to entry with no benefits to consumers. In the 1970s economists began to see a possible
benefit of brand names to consumers. They discovered that brand names were a way to:
A. signal quality.
B. market public goods.
C. overcome negative externalities.
D. overcome the free rider effect.
143.John and Jack are both trying to sell a used car to Jim. John's car is a lemon, a car that has a
serious but nonobvious problem. Jack's car is a cherry, a car that has no problems. Jim
cannot tell the difference between the cars. Economists say this information problem might
be solved with signaling. Who has an incentive to find a way to signal quality?
A. Both Jack and John
B. Jack but not John
C. John but not Jack
D. Jim
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144.A lawyer who drives a beat-up car and wears frumpy clothes may have a hard time getting
clients. Potential clients may conclude from his appearance that he is poor, and if he is poor,
he probably is not very good. If this is true for a lawyer, dressing in expensive and stylish
clothing is a way of:
A. internalizing externalities.
B. changing a nonrival good into a rival good.
C. changing a non-excludable good into an excludable good.
D. signaling quality.
145.In the early days of the Internet, selling and buying from other individuals were dangerous
because one never knew if the person on the other side of the transaction was honest.
eBay.com became successful because it lessened that problem with its feedback rating
system that let buyers and sellers develop a reputation. eBay.com's innovation is an example
of overcoming:
A. the free rider effect.
C. positive externalities.
D. an information problem.
146.How do economists explain the value firms and consumers place on brand names?
A. Brand names show that firms can easily manipulate consumers.
B. Brand names are a way firms can provide information about quality to consumers.
C. Brand names are a way of turning private goods into public goods, increasing their value to
both seller and buyer.
D. Brand names are an example of adverse selection, by which producers advertise the
options to consumers.
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147.The Consumer Product Safety Commission (CPSC) is charged with protecting the public from
unreasonable risks of serious injury or death from more than 15,000 types of consumer
products. The CPSC is designed to overcome:
A. information problems.
B. positive externalities.
C. negative externalities.
D. direct regulation.
148.Which of the following is an argument an economist would use to argue against market
regulation designed to protect consumers?
A. Information is costless and readily available, and so it is up to consumers to beware.
B. When a brand name product is found unsafe, the value of the brand is reduced, which
gives companies with brand names an incentive to produce high-quality products.
C. Manufacturers have no incentive to stop the sale of counterfeit products.
D. Government is more likely to have consumers' interest in mind than does the market.
149.If a consumer is willing to pay $5,000 for a used car that is a free of mechanical problems
and $1,000 for a used car that will require extensive repairs, the consumer will offer:
A. $1,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
B. $3,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
C. $5,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
D. $6,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
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150.If buyers cannot distinguish between "lemons" and "cherries" in the used car market but
sellers can, the price buyers are willing to pay for used cars will be:
A. high enough to guarantee that at least 50 percent of the used cars offered for sale are
"cherries."
B. so low that sellers with "cherries" will be unwilling to sell.
C. so low that sellers with "lemons" will be unwilling to sell.
D. equal to zero since no one will take the chance of purchasing a "lemon" even if the value
of a car known to be a lemon is greater than zero.
151.If medical insurers could use information contained in DNA to predict the likelihood of major
medical illnesses, the most likely outcome is that:
A. there would be an adverse selection problem and average insurance rates would rise.
B. there would be an adverse selection problem and average insurance rates would fall.
C. the adverse selection problem would be decreased and average insurance rates would
rise.
D. the adverse selection problem would be decreased and average insurance rates would fall.
152.The reason the Federal Trade Commission regulates advertising to prevent false and
misleading claims is:
A. that firms that make false and misleading claims would earn lower profit, resulting in many
firms being forced to shut down and many workers losing their jobs.
B. to create a market for information.
C. to prevent a market failure caused by inaccurate information.
D. to eliminate persuasive advertising.
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153.Economists believe that if government provides information about product quality:
A. there will be less incentive for consumers to pay extra for quality guarantees supplied by
firms.
B. consumers will be forced to pay for information when otherwise it would have been
available for free.
C. the overall quality of products sold will increase substantially, eliminating the information
problem.
D. the cost of providing information will be zero.
154.A market for information is more likely to develop even in the absence of government
regulation of information as long as the marginal:
A. cost of information is zero.
B. benefit of information is zero.
C. cost of information exceeds the marginal benefit.
D. benefit of information exceeds the marginal cost.
155.The basis of the argument favoring government intervention to correct informational and
rationality problems is that:
A. if information is not perfect or if one trader is not rational, a trade can result in one party
benefiting and the other losing.
B. entry into certain markets may be restricted so that excess profits cannot be eliminated by
the forces of competition.
C. people cannot possibly know how well off they will be as a result of a trade until after the
trade has occurred.
D. if individuals are free to produce whatever goods they want, when excess profit is being
made, more people will enter into the production of that good and consumers will benefit
as the price is pushed down.
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156.Milton Friedman argues that medical licensure benefits doctors because it:
A. allows them to restrict supply, increase prices, and significantly increase their incomes.
B. protects them from malpractice suits.
C. ensures that they will not have to compete against one another for patients.
D. prevents other doctors from advertising and stealing their patients.
157.Which of the following is not a question raised by critics of medical licensure?
A. Why, if licensed medical treatment is so great, do we even need formal restrictions to keep
other types of medicine from being practiced?
B. Whom do these restrictions benefit: the general public or the doctors who practice
mainstream medicine?
C. What have the long-run effects of licensure been?
D. Why does the public need to have accurate information about a doctor's competency?
158.Which of the following is the best example of an adverse selection problem?
A. Once individuals are insured, they are less likely to take efficient precautions.
B. Individuals are unlikely to pay for something if they can receive the benefits for free.
C. When a firm pollutes the air, families living nearby suffer the consequences.
D. Individuals who seek to purchase health insurance have better information about their
health than do insurance companies.
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159.If employers were made responsible for injuries suffered by employees while working at
home:
A. there might be an adverse selection problem since employees have better information
about the safety conditions of their own homes than employers do.
B. employers would never permit employees to work at home.
C. more employees would be able to work safely at home.
D. there might be an adverse selection problem since employers have better information
about the safety conditions of their employees than the employees have themselves.
160.The problem that arises when people don't have to bear the negative consequence of their
actions is known as:
A. adverse selection.
B. externality.
C. moral hazard.
D. signaling.
161.A person who has auto insurance is likely to drive a little less safely and to take less care in
parking the car in a safe place off the street. This is an example of a problem called:
A. signaling.
B. moral hazard.
C. externality.
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162.A life insurance company is likely to require a health examination of a person applying for
insurance. This helps reduce the informational problem through the process of:
A. signaling.
B. screening.
C. creating an externality.
D. government regulation.
163.A person buying a used car could ask the seller for permission to take the car to a mechanic
for an inspection. If the seller says no, the prospective buyer has gained information about
the car. This process is known as:
A. screening.
B. signaling.
C. licensing.
D. internalizing the externality.
164.Which of the following is an example of screening?
A. Selling pollution permits to polluters to induce the lowest-cost pollution reducers to cut
back on pollution
B. Reducing pollution to the point at which the marginal cost of the pollution equals the
marginal benefit
C. A car buyer asking the seller if the car is a lemon
D. An employer requiring job applicants to provide references
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165.Opponents of government intervention in the economy argue that government's attempts to
correct informational problems:
A. are justified in most cases though politically difficult to implement.
B. are not necessary since an efficiently operating market system ensures that adequate
information will be provided.
C. often create greater problems, such as FDA restrictions on experimental drugs for AIDS
which could save lives.
D. will make market transactions much more efficient.
166.Opponents of government intervention in the economy argue that externalities:
A. do not create problems for the model.
B. are themselves the inevitable result of government policies.
C. should be corrected with regulations rather than subsidies.
D. may not be effectively corrected by the government.
167.Suppose that a negative externality creates $1 billion worth of costs to third parties. The
government attacks the problem with regulations that cut the cost of the externality to $500
million but cost business and consumers $1.5 billion. This situation illustrates the idea that:
A. regulations are an effective way to curb externalities.
B. externalities can never be corrected.
C. correcting market failure can result in government failure.
D. getting rid of externalities requires a great deal of necessary sacrifice for all of us.
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168.Opponents of government intervention argue that government makes decisions based on:
A. marginal social costs and marginal social benefits.
B. marginal political costs and marginal political benefits.
C. irrational choices.
D. total costs and total benefits.
169.Both opponents of and proponents of government intervention most likely would agree with
which of the following?
A. Government can and does create proper incentives to correct for externalities.
B. Property rights eliminate the need for government.
C. The market is inherently fair.
D. Property rights must exist for a market to operate.
170.Government failure occurs when:
A. government fails to implement policy designed to correct a market failure.
B. government intervention in the market to improve a market failure succeeds.
C. government intervention in the market to correct a market failure makes things worse.
D. there is no need for government intervention into the market because there is no market
failure.
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171.Suppose a public good that is worth $1 billion is not produced by the market, and so the
government provides it, but at a cost of $3 billion. This attempt to correct a market failure
has:
A. been successful since the public good is now produced.
B. given rise to the problem of free riders.
C. resulted in a government failure since use of resources is now less efficient.
D. resulted in an information asymmetry for the government.
172.A European Union official, Mr. McGreevey, claims a portion of EU law involves overregulation.
McGreevey is suggesting the EU suffers in part from:
A. market failure
B. fairness.
C. government failure.
D. the rule of law.
173.All of the following are justifications for government intervention except:
A. too much competition.
B. informational problems.
C. externalities.
D. public goods.
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174.Government may not have an incentive to correct a market failure because:
A. government doesn't have the information it needs to correct the market failure.
B. government reflects politics, which reflects individuals' interests in trying to gain more for
themselves.
C. policy makers fear that intervention will lead to a Pareto optimal outcome.
D. the benefit of correcting the market failure might exceed the cost of correcting the market
failure.
175.Government failure is likely to occur for all of the following reasons except:
A. special interest groups might lobby government to the detriment of the public good.
B. individuals have better information about a situation that affects them than does
government.
C. intervention in markets is always simpler than it initially seems.
D. the bureaucratic nature of government intervention does not allow fine-tuning.
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Chapter 08 Market Failure versus Government Failure Answer Key
True / False Questions
1. Externalities can be either positive or negative.
TRUE
Positive externalities have positive effects on third parties, and negative externalities have
negative effects.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-01 Explain what an externality is and show how it affects the market outcome.
Topic: Externalities
2. Economists generally prefer direct regulation to incentive-based programs because

explicit regulation tends to be more efficient.
FALSE
Direct regulation is not generally as efficient as incentive-based programs.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-02 Describe three methods of dealing with externalities.
Topic: Direct Regulation
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3. Direct regulation means that government sets specific limits on the use of scarce
resources.
TRUE
See the definition of direct regulation in the textbook.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
4. Economists are likely to oppose direct regulation because they do not believe there is any
need for government to take action when negative externalities exist.
FALSE
Economists' opposition to direct regulation generally is based on their findings that direct
regulation doesn't accomplish a given goal as efficiently as possible.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
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5. Economists tend to believe that market incentive plans are generally more efficient than
direct regulation.
TRUE
Market incentive plans are more likely to make marginal costs equal marginal benefits and
thus are likely to be more efficient.
AACSB: Analytic
Blooms: Understand
Topic: Tradable Permits
6. An optimal policy is one in which the marginal cost of undertaking a policy is less than the
FALSE
An optimal policy is one in which the marginal cost of undertaking a policy equals the
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Topic: Marginal Costs and Marginal Benefits
8-72
7. If a program requires people to pay a price that reflects the cost of an externality
associated with their actions that they previously did not pay, it will be in their best
interest to change their behavior.
TRUE
If a person were required to pay the higher price that reflects the cost of an externality,
that person would reduce quantity demanded (law of demand).
AACSB: Analytic
Blooms: Understand
Topic: Tax and Subsidy Programs
8. Government provides secondary education because of its private good aspects.
FALSE
Education has public good aspects, and that is one reason government provides it.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 08-03 Define public good and explain the problem with determining the value of a public good to
society.
Topic: Public Goods
8-73
9. Economists believe that free riders often can undermine the social commitment of many in
the society, causing voluntary policies to fail.
TRUE
Economists believe that the incentive facing individuals is to maximize individual utility.
This would lead to an individual cheating (free riding) to reduce marginal cost while
enjoying the benefits of others' actions.
AACSB: Analytic
Blooms: Understand
society.
Topic: Voluntary Programs
10. Adverse selection problems can occur when buyers and sellers have different amounts of
information about a good for sale.
TRUE
This is the way in which adverse selection problems are defined.
AACSB: Analytic
Blooms: Understand
Learning Objective: 08-04 Explain how informational and moral hazard problems can lead to market failure.
Topic: Informational Problems
8-74
11. Moral hazard problems can occur when insured individuals change their behavior to the
TRUE
Moral hazard is a problem that arises when people don't have to bear the negative
consequences of their actions. In this case, the insurer bears the consequences.
AACSB: Analytic
Blooms: Understand
12. Government attempts to offset market failures can prevent the market from dealing with a
problem more effectively.
TRUE
The market's way of dealing with problems generally works only in the long run. If
government deals with the problems in the short run, it may eliminate incentives that
would have brought about a long-run market solution.
AACSB: Analytic
Blooms: Understand
Learning Objective: 08-05 Explain why market failure is not necessarily a reason for government intervention.
Topic: Government Failure
8-75
13. If government action is likely to do some good, it is always best for government to
intervene in the marketplace.
FALSE
Even in those cases in which government action might do some good, it could lead to
additional intervention in cases in which it could make the situation worse.
AACSB: Analytic
Blooms: Understand
Multiple Choice Questions
14. What do economists mean when they say there is "market failure"?
A. Business has introduced a product that consumers did not want.
B. Free markets have led to excessive profits.
C. Markets have surpluses or shortages so that government rationing is necessary.
D. Free markets yield results that economists do not consider socially optimal.
Economists define socially optimal in terms of economic efficiency. Market failure means
that there is lost value—it is at least theoretically possible to change something to
increase end value.
AACSB: Analytic
Blooms: Understand
8-76
Topic: Market Failure
15. Some economists believe that the market will not solve all problems. They are referring
to:
A. market failure.
B. market incentive plans.
C. optional policy.
D. the need to balance the good of the individual with the good of society as a whole.
Market failures are market results that are less than optimal.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
16. All of the following are considered sources of market failure except:
A. public goods.
B. imperfect information.
C. profit-maximizing behavior.
D. externalities.
Profit-maximizing behavior is assumed in the competitive market model; it is not itself a

source of market failure.
AACSB: Analytic
Blooms: Understand
8-77
17. The criterion that no person can be made better off without another being made worse off
is known as the:
A. normative criterion.
B. Pareto criterion.
C. nirvana criticism.
D. second-best criticism.
Refer to Added Dimension: Pareto Optimality and the Perfectly Competitive Benchmark in
the text.
AACSB: Analytic
Blooms: Understand
Topic: Pareto Optimality
18. John has 10 apples and six bananas. Jane has two bananas and two apples. If this
situation is Pareto optimal, what mutually beneficial exchange could be made?
A. None; there is no exchange that can help one without hurting the other.
B. Fruit should be taken from John and given to Jane to equalize their holdings.
C. Jane should give up apples to get bananas.
D. Jane should give up bananas to get apples.
No voluntary exchange will take place if the start is Pareto optimal.
AACSB: Analytic
Blooms: Understand
8-78
19. The perfectly competitive output level is Pareto optimal because at this output level:
A. the total cost to society equals the total benefit.
B. the marginal cost to society equals the marginal benefit.
C. the marginal cost to society is minimized.
D. the marginal benefit to society is maximized.
the text.
AACSB: Analytic
Blooms: Understand
20. The economist who mathematically proved that a complete set of competitive markets
could yield a socially (or Pareto) optimal result was:
A. Adam Smith.
B. Kenneth Arrow.
C. Milton Friedman.
D. Ronald Coase.
the text.
AACSB: Analytic
Blooms: Understand
8-79
21. If there is a complete set of markets that are perfectly competitive:
A. the marginal cost of producing goods will exceed their marginal benefit.
B. the marginal cost of producing goods will be less than their marginal benefit.
C. every person's utility function is at a maximum.
D. the invisible hand guides the economy to a Pareto optimal position.
the text.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
22. If a system has multiple defects but those defects in effect offset each other, curing one
defect may make the system perform more poorly. This possibility is known as:
A. the Hume dictum.
B. the normative criticism of Pareto optimality.
C. the second best criticism of Pareto optimality.
D. the nirvana criticism of Pareto optimality.
For example, a firm that is a monopolist and a polluter causes two market failures.
Monopoly makes it produce too little; the externalities make it produce too much. Curing
one problem could move the system further from efficiency. See Added Dimension: Pareto
Optimality and the Perfectly Competitive Benchmark in the text.
AACSB: Analytic
Blooms: Understand
8-80
Difficulty: 3 Hard
23. Can outcomes that are not Pareto optimal be considered better than outcomes that are
Pareto optimal?
A. No; Pareto optimal is defined as the best possible outcome.
B. Yes, if the non-Pareto optimal outcome is more efficient than the Pareto optimal
outcome.
C. Yes, if the distribution of wealth in the Pareto optimal outcome is considered

undesirable.
D. Yes, if there are too many market failures in the Pareto optimal outcome.
Pareto optimality is defined without consideration to the distribution of wealth. A situation

in which one person has everything may be Pareto optimal, but few would consider it a
good outcome. Note that this requires reading the box, "Pareto Optimality and the
Perfectly Competitive Benchmark."
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-81
24. If a market has no externalities, marginal private costs:
A. exceed marginal social costs.
B. equal marginal social costs.
C. are below marginal social costs.
D. intersect marginal social costs.
The difference between marginal social costs and marginal private costs is due to
externalities.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
25. Economists generally call the effect of an agreement on others that is not taken into
account by the parties making the agreement:
A. excess burden.
B. welfare loss.
C. Pareto optimality.
D. an externality.
The effects on third parties not taken into account by the parties making the agreement.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-82
26. The best example of a positive externality is:
A. roller coaster rides.
B. pollution.
C. alcoholic beverages.
D. education.
Pollution is an example of a negative externality. Roller coaster rides and alcoholic

beverages are private goods.
AACSB: Analytic
Blooms: Apply
27. Alex is playing his music at full volume in his dorm room. The other people living on his
floor find this to be nuisance, but Alex does not care. Alex's music playing is an example of
a:
A negative externality is a spillover effect that harms third parties.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-83
28. Alex is playing his music at full volume in his dorm room. The other people living on his
floor are enjoying his music, but Alex does not know or care. Alex's music playing is an
example of a:
A positive externality is a spillover effect that benefits third parties.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
29. James enjoys gardening in the nude because he says it puts him in touch with nature. His
neighbors find his gardening routine very offensive, but James replies that they should
mind their own business and not watch him. To an economist this situation illustrates the
concept of:
A. the tragedy of the commons.
C. a positive externality.
A negative externality is a spillover effect that harms third parties.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-84
30. Carbon dioxide emissions are thought to contribute to global warming, and there is
concern that changes in climate will be costly. Emitting carbon dioxide is an example of:
A. a public good.
C. an adverse selection problem.
D. an effluent fee.
If climate-changing emissions of carbon dioxide impose costs on society, it is an example

of a negative externality.
AACSB: Analytic
Blooms: Apply
8-85
31. In the Flint Hills area of Kansas, proposals to build wind turbines to generate electricity
have pitted environmentalist against environmentalist. Members of the Kansas Sierra Club
support the turbines as a way to reduce use of fossil fuel, but local chapters of the Nature
Conservancy say they will befoul the landscape. The Sierra Club argues that wind
turbines:
Burning fossil fuels creates a variety of types of air pollution, a negative externality. The
attraction of wind power to many is that it reduces that negative externality. The Nature
Conservancy is pointing out another negative externality created by the windmills.
AACSB: Analytic
Blooms: Apply
8-86
32. Proposals in Flint Hills, Kansas, to build wind turbines to generate electricity have pitted
environmentalist against environmentalist. Members of the Kansas Sierra Club support
the turbines as being a way to reduce use of fossil fuel, but local chapters of the Nature
Conservancy say they will befoul the landscape. The chapters of the Nature Conservancy
argue that wind turbines:
If the windmills are an eyesore, they are creating a negative externality.
AACSB: Analytic
Blooms: Apply
8-87
33. College education provides higher income for the individual but also a more productive
and more educated person who will contribute to society in many ways. Higher education
is an example of:
A. a positive externality.
C. a non-excludable service.
The spillover effect of a person who is educated making others around him more
productive is a positive externality. It is a primary justification for the state subsidizing
higher education.
AACSB: Analytic
Blooms: Apply
8-88
34. Richard Vedder argues that the states that have spent the most on higher education in the
last 25 years have experienced the least economic growth. One might conclude that higher
education:
A. does not have important positive externalities.
B. does not have important negative externalities.
C. is a non-excludable service.
D. has problems of adverse selection.
The spillover effects of a person who is educated—making others around her more
productive—is a positive externality. It is a primary justification for the state subsidizing
higher education. Vedder's findings indicate that these positive externalities do not exist or
at least that they are outweighed by other costs.
AACSB: Reflective Thinking

Blooms: Apply
8-89
35. Under the Texas law known as "rule of capture," land owners "get to pump as much of the
water under it as they want. . . . 'This means whoever sucks it out first, it's their water'—
even if that means there isn't enough left for others." Under this law, pumping large
amounts of water:
A. imposes a negative externality on others.
B. imposes a positive externality on others.
C. imposes the free rider effect on others.
D. is a private decision with no effects on others.
When property rights are poorly allocated, there can be effects on third parties not
involved in the trade, as in this case.
AACSB: Analytic
Blooms: Understand
36. Which of the following is not an example of an externality?
A. Carbon dioxide from energy generation that adds to the worldwide long-term
greenhouse effect
B. Heat from a factory that makes the neighboring tomato patches more productive
C. A defective part that causes an automobile to break down three months after purchase
D. Acidic by-products of fossil fuel combustion that produce acid rain
An externality is the effect of a decision on a third party not taken into account by the
decision makers. The defective part is affecting one of the decision makers, not a third
party.
AACSB: Analytic
8-90
Blooms: Apply
Difficulty: 3 Hard
37. An externality is present in a free market whenever:
A. a monopolist spends funds to keep potential competitors out of the market.
B. an activity generates costs or benefits that are not reflected in market prices.
C. firms hire employees from outside the firm to fill positions normally filled by promotion
from within the firm.
D. a tax is imposed on the supplier of a good.
Externalities cause marginal social costs and benefits and marginal private costs and
benefits to differ. Thus, marginal costs and benefits are not reflected in market prices.
AACSB: Analytic
Blooms: Understand
8-91
38. When negative externalities are present, market failure often occurs because:
A. the cost borne by a third party not involved in the trade is not reflected in the market
price.
B. the borne by a third party not involved in the trade is reflected in the market price.
C. the existence of imports from foreign countries takes jobs (and income) away from U.S.
citizens.
D. consumers will consume the good at a level at which their individual marginal benefits
exceed the marginal costs borne by the firm producing the good.
Externalities cause marginal social costs and marginal private costs to differ. Thus, costs
and benefits are not reflected in market prices.
AACSB: Analytic
Blooms: Understand
39. The existence of negative externalities:
A. prevents the market from working efficiently.
B. prevents government from intervening in the marketplace.
C. causes the market to work more effectively.
D. necessarily means that government must intervene in the marketplace.
Externalities are one type of market failure. As the text later shows, it is not always
beneficial to have government intervention.
AACSB: Analytic
Blooms: Understand
8-92
40. An example of a negative externality is the:
A. decrease in your real income that results when photographic equipment you purchase
increases in price because of increased demand by others for these items.
B. cost you bear when your neighbor has a noisy party and does not compensate you for
your discomfort.
C. benefit you receive without paying when your neighbor installs a smoke detector.
D. decrease in income to farmers that results from a drought.
Negative externalities are negative effects of trades not taken into account by the decision
makers. The smoke detector has a positive effect on a third party and is an example of a
positive externality. The decrease in your real income from higher photographic equipment
prices is a monetary externality that does not generate a net cost to society. It is not a
negative externality.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-93
41. If a negative externality is associated with burning firewood:
A. the marginal social cost of burning firewood falls short of its price.
B. the marginal social cost of burning firewood is exactly equal to its price.
C. less than the efficient amount of firewood for burning will be used each year.
D. the marginal social cost of burning firewood exceeds the price of burning firewood.
A negative externality causes the marginal social cost to exceed the marginal private cost
(the market price).
AACSB: Analytic
Blooms: Apply
42. When negative externalities exist in the production of a good, the marginal social cost of
producing the good:
A. is equal to the marginal benefit received by consumers if competitive markets exist and
there is no government intervention.
B. equals the marginal cost borne by the firm minus marginal cost borne by a third party
that results from the production and consumption of the good.
C. is less than the marginal cost borne by the firm.
D. equals the marginal cost borne by the firm plus the marginal cost borne by third parties
from the production and consumption of the good.
A negative externality causes the marginal social cost to exceed the marginal private cost.
The difference between the two is the cost borne by third parties.
AACSB: Analytic
Blooms: Understand
8-94
43. The cost of running an electrical utility includes costs for fuel, labor, and capital. In
addition, there are sometimes costs associated with pollution from the utility, such an
increased health-care costs for people living near the utility. To an economist, the costs
associated with the pollution resulting from additional electricity are:
A. marginal private costs.
B. marginal social costs.
C. the difference between marginal social costs and marginal private costs.
D. the sum of marginal social costs and marginal private costs.
The costs the producer bears (the marginal private costs) plus the costs imposed on third
parties equal the marginal social costs. The cost associated with the pollution is marginal
social cost minus marginal private cost.
AACSB: Analytic
Blooms: Understand
8-95
44. If a positive externality is associated with the purchase of smoke detectors:
A. the marginal social benefit of smoke detectors exceeds their price.
B. the marginal social benefit of smoke detectors is zero.
C. the marginal social benefit of smoke detectors equals their price.
D. more than the efficient quantity of smoke detectors will be sold.
A positive externality causes the marginal social benefit to exceed the marginal private
benefit (and marginal private cost, or price).
AACSB: Analytic
Blooms: Apply
45. When positive externalities exist in the consumption of a good, the marginal social
benefit:
A. equals the marginal benefit received by consumers of the good minus the marginal
benefit to third parties.
B. equals the marginal cost of producing the good plus the marginal cost to third parties.
C. equals the marginal benefit received by consumers of the good plus the marginal
benefit to third parties.
D. could be either greater than or less than the marginal benefit received by consumers of
the good depending on the equilibrium price determined in competitive markets.
Positive externalities are not included in the marginal benefit to those involved in the
trade. The marginal social benefit is the benefit to the trader plus the benefit to third
parties.
AACSB: Analytic
8-96
Blooms: Understand
46. If a negative externality exists in the production of paper and paper is sold in a perfectly
competitive market, at the equilibrium output:
A. additional net gains to society are possible by reducing the output of paper.
B. additional net gains to society are possible by increasing the output of paper.
C. the marginal social benefit of paper equals its marginal social cost.
D. additional net gains to society are not possible from either increasing or decreasing the
output of paper.
If negative externalities exist, the marginal social cost exceeds the marginal private cost
and too much of the good is produced. Net social gains are possible by reducing
production.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-97
47. If a positive externality exists in the provision of education when education is provided in a
perfectly competitive market without government intervention, at the market equilibrium
level of education:
A. additional net gains to society are possible by reducing the level of education.
B. additional net gains to society are possible by raising the level of education.
C. the marginal social benefit of education equals the marginal social cost.
D. additional net gains to society are not possible by either increasing or decreasing the
level of education.
Since there is a positive externality, marginal social benefit exceeds marginal private
benefit. The market equilibrium occurs where marginal private benefit equals marginal
private cost, but the socially optimal level is where marginal social benefit equals marginal
private cost.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-98
48. If a negative externality exists in the market for dirt bikes and that market is perfectly
competitive:
A. less than the efficient output of dirt bikes will be produced.
B. the price of dirt bikes exceeds the marginal social cost.
C. the price of dirt bikes equals the marginal social cost.
D. the price of dirt bikes is less than the marginal social cost.
A negative externality causes the marginal social cost to exceed the marginal social
benefit. Too much of the good is produced, and too low a price is charged consumers.
AACSB: Analytic
Blooms: Understand
8-99
49.
Refer to the graph shown. There is a $.010 per-gallon marginal cost external to the trade
associated with the use of gasoline. Assuming that gasoline is sold in perfectly
competitive markets, the market equilibrium price will be:
A. $0.95
B. $1.00
C. $1.05.
D. $1.10.
Equilibrium is where MC = MB, point G.
AACSB: Analytic
Blooms: Apply
8-100
50.
Refer to the graph shown. If the marginal cost external to the trade associated with the
use of gasoline is $0.10 per gallon, the point on the graph corresponding to the efficient
quantity and price is:
A. G.
B. H.
C. K.
D. L.
The efficient point is where MSC = MSB, point K.
AACSB: Analytic
Blooms: Apply
8-101
51.
Refer to the graph shown. Assuming a $0.10-per-gallon marginal cost external to the trade
that is associated with gasoline, the market price of gasoline necessary to induce
consumers to purchase the efficient quantity each year is:
A. $1.10.
B. $1.00.
C. $1.05.
D. $0.95.
The externality, $0.10 per gallon, must be internalized by a tax to result in an efficient
point, K. Some of the tax burden is borne by producers.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: Tax and Subsidy Incentives
8-102
Assuming a marginal cost external to the trade equals the tax shown in the graph, the
market price necessary to induce consumers to purchase the efficient quantity each year
is:
A. P1.
B. P2.
C. P3.
D. P4.
The efficient price is where MSC = MSB, or P2.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-103
53. Once vaccinated, a person cannot catch a cold or give a cold to someone else. As a result,
the marginal social benefit resulting from consumption of the vaccine:
A. exceeds the marginal benefit received by consumers of the vaccine.
B. equals the marginal social cost of producing the vaccine in a competitive equilibrium.
C. equals the marginal benefit received by consumers of the vaccine in a competitive

equilibrium.
D. is less than the marginal benefit received by consumers of the vaccine.
There is a positive externality associated with the vaccine. The MSB curve is to the right of
the demand curve for the vaccinated person.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-104
54.
Refer to the graph shown, which shows the demand and supply for a new vaccine against
the common cold. Once vaccinated, a person cannot catch a cold or give a cold to
someone else. As a result, the marginal social benefit curve will:
A. coincide with the market demand curve.
B. lie strictly below the market supply curve.
C. lie below the market demand curve.
D. lie above the market demand curve.
(above) the demand curve shown.
AACSB: Analytic
Blooms: Apply
8-105
55.
someone else. At the competitively determined output level, the marginal social benefit
will be:
A. equal to P0.
B. less than P0.
C. greater than or less than P0 depending on the income elasticity of demand and the
D. greater than P0.
the demand curve shown. Without intervention, equilibrium price (MB) is P0. Thus, MSB is
greater than P0 at Q0.
AACSB: Analytic
Blooms: Apply
8-106
56.
someone else. The socially efficient level of output is:
A. less than Q0.
B. greater than or less than Q0 depending on the income elasticity of demand and the
C. greater than Q0.
D. equal to Q0.
the demand curve shown. Without intervention, the equilibrium quantity is Q0. The efficient
level of output is where MSB = MC, greater than Q0.
AACSB: Analytic
Blooms: Apply
8-107
57.
someone else. If government does not subsidize the production of this vaccine:
A. the number of workers hired to produce the vaccine will be less than the socially
efficient level.
B. the firm producing the vaccine will use too much capital in producing the vaccine.
C. the vaccine will be overproduced because consumers will not take into account the fact
that many of their neighbors and co-workers will consume the vaccine.
D. no positive externality can be created.
the demand curve shown. Without intervention, too little vaccine will be produced to
equate marginal social benefits and marginal social costs.
AACSB: Analytic
Blooms: Apply
8-108
The point on the graph corresponding to the socially optimal output per year and the price
sellers must receive to make that amount available is shown by point:
A. G.
B. H.
C. I.
D. K.
The efficient output is where MSC = MSB.
AACSB: Analytic
Blooms: Apply
8-109
59. If a negative externality is to be internalized to the decision maker, the:
A. producers' marginal costs should be increased by an amount equal to the marginal cost
to those outside the trade that results from production of the good.
B. producers' marginal costs should be reduced by an amount equal to the marginal cost
to those outside the trade that results from production of the good.
C. consumer of the good should receive a subsidy equal to the marginal cost to those
outside the trade that results from production of the good.
D. consumer of the good should pay a tax equal to the marginal benefit to those outside
the trade that results from consuming the good.
To internalize a negative externality, MC must be increased by the amount of the

externality.
AACSB: Analytic
Blooms: Understand
8-110
60. If a positive externality is to be taken full advantage of, the:
A. consumer of the good should receive a subsidy equal to the marginal cost imposed on
third parties that results from production (or consumption) of the good.
B. producers' marginal costs should be increased by an amount equal to the marginal

benefit to third parties that results from production of the good.
C. consumer of the good should pay a tax equal to the marginal benefit to third parties
that results from production (or consumption) of the good.
D. producers' marginal costs should be decreased by an amount equal to the marginal

cost imposed on third parties that results from production of the good.
To internalize a positive externality, the marginal benefit must be increased by the amount
of the externality. That is, consumers must be subsidized.
AACSB: Analytic
Blooms: Understand
8-111
61. If a corrective tax on gasoline results in the efficient output of gasoline by internalizing
negative externalities associated with pollution:
A. pollution from gasoline will increase because people are also harmed by the tax.
B. there will be no effect on pollution from gasoline because the tax is paid by the
supplier.
C. pollution from gasoline will be zero because environmental cleanliness is priceless.
D. the tax will generate enough revenue to compensate society for the damages resulting
from the pollution that still occurs.
Since the tax is equal to the marginal cost of the consumption of gasoline imposed on
third parties, the revenue generated by the tax equals the total cost of the pollution to
society.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-112
62.
production of the good depicted. The marginal social benefit from consuming this good at
the competitive equilibrium output level is:
A. greater than P0.
B. equal to P0.
C. either greater than or less than P0, depending on the elasticities of supply and demand.
D. less than P0.
If there is a negative externality, the marginal social cost is to the left of the supply curve.
However, the competitive equilibrium remains at Q0, P0. Since the marginal social benefit
is still given by the demand curve and the externality is not charged for, the competitive
equilibrium remains at P0 and Q0.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-113
63.
production of the good depicted. The marginal social cost from consuming this good at the
A. either greater than or less than P0, depending on the elasticities of supply and demand.
B. greater than P0.
C. less than P0.
D. equal to P0.
The competitive equilibrium remains at Q0, P0, where MSC > MC = P0.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-114
64.
Refer to the graph shown. There is a negative externality associated with the production of
the good depicted. The socially efficient level of output is:
A. either greater than or less than Q0, depending on the elasticities of supply and demand.
B. less than Q0.
C. equal to Q0.
D. greater than Q0.
The efficient level of output is to the left of the competitive equilibrium.
AACSB: Analytic
Blooms: Apply
8-115
65. The rule for making optimal decisions is that an activity should be increased until:
A. average costs are minimized.
B. total costs are minimized.
C. total benefits are maximized.
D. marginal benefits equal marginal costs.
We want to maximize net benefits, the excess of total benefits over total costs. This
happens when marginal benefits equal marginal costs.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
66. A strategy that achieves a goal at the lowest cost in total resources without consideration
of who pays those costs is:
A. efficient.
B. inefficient.
C. impossible.
D. always the most profitable to the firm.
See the definition of efficient in the textbook.
AACSB: Analytic
Blooms: Understand
8-116
67. Direct regulation is inefficient because:
A. affected firms ignore regulations, for example, by dumping toxic waste illegally.
B. it does not take into account that the costs of reducing consumption are the same for
all individuals.
C. it does not take into account the fact that the costs of reducing consumption may differ
among individuals.
D. it does not take negative externalities into account.
The purpose of regulation is to correct for negative externalities by reducing consumption

to the socially optimal level, but the costs of reducing consumption differ among
individuals, and so an optimal policy would not require the same reduction for everyone.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-117
68. Suppose that government wants a policy that will encourage people to use less oil. For
this policy to be efficient, it must:
A. induce those with the highest cost of conserving to reduce their oil consumption the
most.
B. induce those with the lowest cost of conserving to reduce their oil consumption the
most.
C. force everyone to reduce oil consumption equally.
D. force rich people to reduce oil consumption proportionally more than poor people.
Efficiency means that marginal costs equal marginal benefits. If the marginal cost of
reducing consumption is less for some individuals, it is efficient that they reduce
consumption the most.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
69. Economists generally oppose direct regulation because:
A. it is unlikely to achieve the desired end as efficiently as possible.
B. it assumes that people behave rationally.
C. it is generally unfair.
D. it does not assume that people behave rationally.
Because direct regulation is less likely to make marginal costs equal marginal benefits, it
is not as efficient as market incentive plans.
AACSB: Analytic
8-118
Blooms: Understand
70. A market incentive plan:
A. regulates the amount of a resource a person can consume through direct limits.
B. requires that people choose to consume until the marginal costs exceed the marginal
benefits.
C. makes the price of a resource reflect not only the marginal private costs but also the
marginal social costs of consuming that resource.
D. makes the price of a resource reflect the marginal private costs of consuming that
resource.
See the definition of market incentive plan in the textbook.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-119
71. To address the problems created by negative externalities, economists prefer programs
that:
A. require government to conserve, using general tax revenues to pay for the program.
B. require all people to reduce consumption equally.
C. make people who have the lowest benefit of reducing consumption choose to
undertake the most reduction.
D. make people who have the lowest cost of reducing consumption choose to undertake
the most reduction.
Economists prefer efficient programs, that is, those which require that individuals equate
marginal costs and marginal benefits. This means that those people for whom reducing
consumption is less costly will undertake the greatest reduction.
AACSB: Analytic
Blooms: Understand
8-120
pollutes.
Refer to the table shown. If the goal of the government is to reduce pollution by 50
percent, the cheapest way would be to have:
A. all four firms cut their discharge by 50 percent
B. have each firm reduce discharge by 37.5 tons.
C. have firms A and D stop discharging and allow B and C to continue.
D. have firms B and C stop discharging and allow A and D to continue.
A and D have the lowest per unit cost of cleanup. If we want to use the fewest resources
to get a 50 percent reduction in pollution, this is the low-cost way to do it.
AACSB: Analytic
Blooms: Apply
8-121
pollutes.
Refer to the table shown. Assume that these firms want to maximize profits. If the
government wishes to cut discharge by 50 percent, it could do so by establishing an
effluent fee of:
A. $3.00.
B. $4.50.
C. $5.50.
D. $10.00.
A and D would find it cheaper to clean up their pollution than pay the tax, whereas firms B
and C would find it cheaper to pay the tax than clean up.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-122
pollutes.
Refer to the table shown. If the government establishes an effluent fee of $7.00, how
much tax would firms pay to the government?
A. $660
B. $1,050
C. $1,820
D. $2,100
A and D clean up for a cost of $660. B and C pay the tax for a cost of $1,050.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-123
pollutes.
Refer to the table shown. If the government establishes an effluent fee of $7.00, how
much would the firms spend on reducing pollution?
A. $660
B. $1,710
C. $1,820
D. $2,100
A and D clean up for a cost of $660. B and C pay the tax for a cost of $1,050, but this is not
part of the cost of cleanup.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-124
pollutes.
Refer to the table shown. If the government establishes a regulation requiring each
company to reduce pollution by 50 percent, what will be spent on reducing pollution?
A. $660
B. $910
C. $1,050
D. $1,710
If all the firms clean up completely, the total cost will be $1,820. If each has to pay half of
that, the total is $910. The difference between $910 and $660, the least-cost way of
reducing pollution by 50 percent, is the efficiency cost of this regulation.
AACSB: Analytic
Blooms: Apply
8-125
pollutes.
Refer to the table shown. Suppose that the government gives each company a pollution
permit equal to 50 percent of its present discharge. However, companies are allowed to
reduce pollution more than 50 percent and sell their permit or reduce less than 50 percent
and buy a permit from another company. If firms maximize profits, what would happen?
A. Each firm would reduce pollution by 50 percent.
B. Firms A and D would eliminate pollution and sell their permits to B and C, which would
C. Firms B and C would eliminate pollution and sell their permits to A and D, which would
D. There is not enough information to answer this question.
The market price of the permits should be between $5.00 and $7.50. At that price, A and D
will find it profitable to clean up and sell their permits, and B and C will find it profitable to
buy the permits and continue polluting. Any other solution results in less profit, which
violates the assumption in the question that firms are maximizing profits.

Blooms: Apply
Difficulty: 3 Hard
8-126
78. An effluent fee is an example of:
A. a voluntary approach to pollution.
B. a direct regulation of pollution.
C. a tax incentive policy.
D. a market incentive policy.
An effluent fee is a tax on pollution. The more one pollutes, the more one pays. Hence,
there is an incentive to reduce pollution in order to reduce the tax.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
79. Based on economic theory, most economists believe market incentive plans are:
A. equitable.
B. efficient.
C. inefficient.
D. unfair.
Economic theory tells us that the plans are efficient; it says nothing about equity or
fairness.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-127
80. In a tax incentive program, the person who conserves the most pays:
A. relatively less tax.
B. relatively more tax.
C. no tax.
D. no penalties.
Tax incentive programs impose a tax on the consumption of a good. Those who consume
the least pay the least tax.
AACSB: Analytic
Blooms: Understand
81. Which of the following methods of reducing the amount of trash society generates is most
likely to be efficient?
A. A mandatory recycling program
B. A completely voluntary recycling program
C. A "trash tax"
D. Landfills and incinerators
Market-based programs such as a trash tax are more likely to equate marginal benefit and
marginal cost.
AACSB: Analytic
Blooms: Understand
8-128
82. Which policy is likely to be the most efficient in dealing with automobile emission
pollution?
A. A mandatory requirement to reduce pollution
B. Voluntary emission control guidelines
C. Subsidizing research and development for alternative forms of transportation
D. An emission tax
Taxes are more likely to equate marginal benefit and marginal cost.
AACSB: Analytic
Blooms: Understand
83. A policy that requires all the people to certify that they have reduced total consumption,
not necessarily their own individual consumption, by a specified amount, is a(n):
A. external incentive plan.
B. internal incentive plan.
C. tax incentive plan.
D. market incentive plan.
See the definition of market incentive plan in the textbook.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-129
84. Suppose Mary finds it easier to conserve than Jim does. The difference between a tax
incentive program and a marketable certificate plan in this case is that:
A. Mary undertakes most of the conservation in the case of a tax incentive program and
least in the marketable certificate program.
B. Mary undertakes least of the conservation in the case of a tax incentive program and
most in the marketable certificate program.
C. Mary takes on most of the conservation in both cases but is paid by Jim in the
marketable certificate program.
D. Jim takes on most of the conservation in both cases but is paid by Mary in the
marketable certificate program.
Since Mary finds it easier to conserve, she conserves the most in both cases. In the
market incentive plan, however, Jim pays Mary to conserve for him. Thus, she gains
financially.
AACSB: Analytic
Blooms: Understand
8-130
85. If markets are perfectly competitive and production of a good results in water pollution,
the imposition of a tax on that good will:
A. increase the price of that good and increase pollution.
B. reduce the price of that good and increase pollution.
C. reduce the price of that good and decrease pollution.
D. increase the price of that good and reduce pollution.
Market supply shifts to the left, and so equilibrium price rises and equilibrium quantity
falls, thereby reducing pollution.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
86. If markets are perfectly competitive and production of a good results in water pollution,
the imposition of a tax on the good will:
A. reduce the number of firms producing that good in the long run.
B. increase the number of firms producing that good in the long run.
C. reduce the number of firms producing that good in the short run.
D. increase the number of firms producing that good in the short run.
By assumption, the number of firms in a perfectly competitive industry can change only in
the long run.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-131
87. An individual with a highly elastic demand for gasoline will:
A. cut consumption more than an individual with a highly inelastic demand when price
goes up.
B. cut consumption less than an individual with a highly inelastic demand when price
goes up.
Since that person finds it easy to conserve gasoline, he or she will reduce consumption of
gasoline by a lot.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
88. A firm with a highly inelastic demand for coal will:
A. cut consumption more than a firm with a highly elastic demand when price goes up.
B. cut consumption less than a firm with a highly elastic demand when price goes up.
Since that firm finds it difficult to conserve gasoline, it will reduce consumption of gasoline
by comparatively less.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-132
89. A policy is considered optimal if it:
A. is supported by a majority of voters.
B. equates total costs with total benefits.
C. equates marginal costs with marginal benefits.
D. forces people to conserve on scarce resources.
See the definition of optimal policy.
AACSB: Analytic
Blooms: Understand
90. An optimal corrective tax levied on polluters will:
A. be equal to the marginal cost of their actions imposed on third parties.
B. not generate enough revenue to pay for the cost of the damage resulting from pollution
that occurs at the efficient output of the good.
C. decrease pollution to zero.
D. increase the supply of polluting goods.
An optimal policy equates marginal costs (including costs imposed on third parties) with
marginal benefits. Because the amount of the tax equals the total cost of the pollution
imposed on third parties, it equals the cost of the pollution to society.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-133
91. A policy in which the marginal costs of undertaking the policy equal the marginal benefits
of that policy is best called an:
A. equality policy.
B. incentive policy.
C. optimal policy.
D. opportunity policy.
See the definition of optimal policy in the textbook.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
92. An efficient policy to reduce pollution would reduce pollution to the point where:
A. the marginal costs of reducing pollution equal the marginal benefits of reducing
pollution.
B. it is eliminated.
C. the marginal costs of reducing pollution are greater than the marginal benefits of
reducing pollution.
D. the marginal costs of reducing pollution are less than the marginal benefits of reducing
pollution.
Economists believe in efficient policies, that is, policies that equate marginal costs and
marginal benefits.
AACSB: Analytic
8-134
Blooms: Understand
93. The efficient amount of pollution control is:
A. the amount for which the total social benefit equals the total social cost of pollution.
B. the amount for which the marginal social benefit equals the marginal social cost of
pollution.
C. always zero.
D. always a 100 percent abatement.
The efficient amount of pollution control is where MC = MB.
AACSB: Analytic
Blooms: Understand
94. The optimal quantity of pollution control occurs at the point where the:
A. level of pollution is reduced to zero.
B. marginal social benefit is at its maximum.
C. marginal social cost equals the marginal social benefit of pollution.
D. total benefit equals the total cost of pollution.
The optimal amount of pollution control is where MC = MB.
AACSB: Analytic
Blooms: Understand
8-135
95. Economists' attitude toward voluntary programs causes them to:
A. actively oppose them on the grounds that they will do more harm than good.
B. actively oppose them on the grounds that they are unfair.
C. be skeptical of the potential success of such programs
D. favor these programs over alternative solutions.
The worst that can happen is that people will not alter their behavior.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-136
96. Economists tend to distrust voluntary approaches as a way to deal with externalities. What
is their most common concern?
A. Voluntary approaches do not make people develop an awareness of the problem that
would lead them to make good lifestyle changes.
B. Voluntary approaches often are perceived as unfair, imposing a heavy burden on the
poor.
C. Voluntary approaches usually require people to ignore their self-interest, and

economists do not think people do that well.
D. Voluntary approaches are often too effective and lead to excessive reduction in the
externality.
Voluntary programs ignore self-interest and often work against it. Economists are
specialists in understanding the role of self-interest.
AACSB: Analytic
Blooms: Understand
8-137
the people who benefit from public television are willing to pay. What do economists call
the people who do not pay?
A. Free riders
B. Excludables
C. Adverse selectors
D. Thieves
Free riders enjoy public goods for free because they are non-excludable.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Topic: Public Goods
the people who benefit from public television are willing to pay. This low percentage of
people willing to contribute illustrates a difficulty with:
A. government regulation.
B. voluntary programs.
C. tax incentive policies.
D. market incentive programs.
Pledge drives by public television are an illustration of a voluntary program. Few public
television stations are able to obtain enough donations to operate; usually the subscription
drives supplement other, larger sources of revenue.
AACSB: Analytic
Blooms: Understand
8-138
Difficulty: 1 Easy
99. Economists are most likely to suggest that societies address the inefficiencies created by
negative externalities by:
A. direct regulation.
B. voluntary conservation.
C. making the price people pay reflect the cost of the externality.
D. leaving environmental problems alone so that the market can deal effectively with
them.
Economists prefer programs that are market-based. An unregulated market with negative
externalities will not lead to an efficient solution.
AACSB: Analytic
Blooms: Understand
8-139
100. In 1990, the Clean Air Act was amended to place a national cap on sulfur dioxide
emissions, giving electric utilities an allowance of a set amount of emissions and allowing
the utilities to trade their allowances. This type of plan is:
A. more efficient than direct regulation because utilities that receive a high marginal
benefit from emissions can gain additional allowances through trade.
B. more efficient than direct regulation because it forces each utility company to reduce
C. less efficient than direct regulation because utilities that receive a high marginal
benefit from emissions can gain additional allowances through trade.
D. less efficient than direct regulation because it forces each utility company to reduce
A market incentive plan is more efficient than direct regulation because it allows for
variation in emissions reduction.

Blooms: Apply
Difficulty: 3 Hard
8-140
101. If government undertakes to reduce water usage by using a market incentive plan:
A. each consumer will have to reduce his or her water usage by an equal amount.
B. consumers who reduce water usage by more than the required amount can sell
marketable certificates to consumers who seek to reduce usage by less than the
required amount.
C. consumers who do not reduce usage by the required amount will have to pay taxes on
the extra water usage.
D. consumers will be asked to reduce water usage voluntarily.
Market incentive plans result in reduced total consumption but allow those for whom the
cost of reduction is lowest to reap financial rewards by selling marketable certificates to
those for whom the cost of reduction is greatest.
AACSB: Analytic
Blooms: Understand
8-141
102. Since trash generation involves an externality, the way economists might address the
problem of trash generation that is most likely to be optimal is by:
A. integrating the cost of the externality into the initial price of the good.
B. having the government require mandatory sorting and recycling of trash.
D. not allowing persons to throw away more trash than is acceptable as a maximum.
When people must pay a price that reflects the true cost to society, they will alter their
behavior so that the optimal level of the good is consumed. In the case of an externality,
the social cost must be added to the private cost.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
103. An economist is most likely to support all of the following methods to address the negative
externalities created by the waste from newspapers except:
A. requiring publishers to cut the volume of newspapers generated but allowing them to
sell certificates so that others can meet those requirements for them.
B. taxing the suppliers of newspaper by the pound.
D. ensuring that the social cost of buying a newspaper is reflected in its price.
Economists tend to favor market-based programs. Requiring government to pay the cost of
an externality is not such a program.
AACSB: Analytic
Blooms: Understand
8-142
Difficulty: 3 Hard
104. The inefficiency associated with negative externalities is most likely the result of:
A. special interest groups.
B. the fallacy of composition.
C. government intervention.
D. poorly specified property rights.
Poorly specified property rights result in effects of decisions not taken into account by
decision makers. No one owns the right and cannot control the effect on those not
involved in the trade. Refer to Applying the Tools: Common Resources and the Tragedy of
the Commons in the text.
AACSB: Analytic
Blooms: Understand
105. A per-unit tax designed to internalize the costs of production imposed on third parties is
called:
A. an excise tax.
B. an effluent fee.
C. a sin tax.
D. a tariff.
See the definition of effluent fee in the textbook.
AACSB: Analytic
8-143
Blooms: Understand
Difficulty: 1 Easy
106. The Environment Ministry in Japan proposed a new carbon tax to meet Japan's obligations
to reduce carbon dioxide emissions under the Kyoto Treaty. The tax would be levied on
producers and importers of fossil fuels, and the expectation is that it would be largely
passed on to consumers. This proposal is an example of a:
A. progressive tax.
B. voluntary program.
C. tax incentive policy.
D. free rider problem.
A carbon tax is an example of a tax incentive program. See the textbook.
AACSB: Analytic
Blooms: Apply
8-144
producers and importers of fossil fuels, and the expectation is that it would be largely
passed on to consumers. The rationale for this tax is that it will:
A. reduce a negative externality.
B. reduce a positive externality.
C. turn a private good into a public good.
D. turn a public good into a private good.
A pollution tax has long been a proposal made by economists; it usually is opposed by
business and sometimes by environmentalists who either do not understand it or oppose it
on philosophical grounds.
AACSB: Analytic
Blooms: Apply
8-145
producers and importers of fossil fuels and raise the cost of using fossil fuels. How do
most economists view a tax such as this?
A. They prefer direct regulation to taxes because taxes create deadweight loss.
B. They prefer voluntary programs to taxes because they reduce the role of compulsion.
C. They do not believe any government intervention is necessary because the invisible
hand of the market will correct the problem.
D. They support taxes on pollution as a way of making decision makers consider all costs.
Economists prefer policies that internalize the externality. A tax on pollution is one way;
another is tradable pollution permits. They dislike direct regulation and voluntary programs
because the first uses too many resources to get any level of reduction and the second
often works poorly.
AACSB: Analytic
Blooms: Apply
8-146
109.
Refer to the graph shown. The price and quantity that would prevail if all social costs and
benefits were taken into account is:
B. $3.50 and 2,000 units.
C. $3.95 and 6,800 units.
D. $1.80 and 2,000 units.
Equilibrium would be where marginal social cost intersects marginal social benefit.
AACSB: Analytic
Blooms: Apply
8-147
110.
Refer to the graph shown. The amount of a tax sufficient to reduce quantity supplied to
the level that individuals would have supplied had they included the cost in their decision
on third parties is:
A. $2.50.
B. $1.70.
C. $1.00.
D. $0.80.
Evaluated at the socially optimal output (2,000), the tax would need to shift the supply
curve upward by $1.70 to move equilibrium to where MSC = MSB.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-148
111.
Refer to the graph shown. The free market equilibrium in the graph is at a price and
quantity of:
B. $3.50 and 2,000 units.
C. $2.50 and 2,600 units.
D. $3.50 and 3,100 units.
Free market equilibrium is where marginal private costs equal marginal private benefits.
AACSB: Analytic
Blooms: Apply
8-149
112. A good that if supplied to one person is supplied to all and whose consumption by one
individual does not prevent its consumption by another individual is known as:
A. a private good.
B. a public good.
C. an external good.
D. an internal good.
This is the textbook definition of a public good.
AACSB: Analytic
Blooms: Understand
society.
Topic: Public Goods
the people who benefit from public television are willing to pay. Why does public television
have a problem in collecting money from its viewers?
A. Broadcast television has public good aspects.
B. Public television has problems of adverse selection.
C. Public television is an example of government failure.
D. Broadcast television has problems of informational problems.
There is no penalty for not contributing because broadcast television is a public good.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
society.
8-150
Topic: Public Goods
114. When you purchase and eat a hamburger, no one else can eat the same hamburger. When
you download a file on the Internet, the file is still available for others to download.
Economists explain this difference between hamburgers and computer files by saying that
the hamburger is:
A. excludable whereas the computer file is not.
B. non-excludable whereas the computer file is not.
C. rival in consumption whereas the computer file is not.
D. nonrival in consumption whereas the computer file is not.
Public goods are nonrival in consumption, which means everyone can use them. Private
goods are rival, which means that if one person uses a private good, another cannot.
AACSB: Analytic
Blooms: Understand
Topic: Public Goods
8-151
115. Television broadcasts are often given as examples of a public good. However, it is possible
to code a broadcast so that only people who pay for the decoder box can view it. The use
of a coded signal does what to a television broadcast?
A. Makes it rival
B. Makes it nonrival
C. Makes it excludable
D. Makes it non-excludable
It is still nonrival because lots of people can get the signal without affecting others, but
now those who do not pay can be excluded.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
society.
Topic: Public Goods
8-152
116. A meeting of the United Nations Convention on International Trade in Endangered Species
ended with greater protection given to great white sharks. Why should sharks need special
protection?
A. There is an informational problem in the market; people do not understand the full
consequences of their actions.
B. Sharks are not privately owned and can be subject to a tragedy of the commons
problem.
C. Sharks are what economists call a public good, and hence there are no incentives to
produce or protect them.
D. Sharks are subject to adverse selection problems.
Things that are not owned but available to all can be overused. Economists argue that the
development of property rights can be seen as a way of overcoming this problem. The
tragedy of the commons was discussed in Added Dimension: Common Resources and the
Tragedy of the Commons in the text.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
8-153
117. A system in which power plants buy and sell the right to pollute in the form of emission
credits is known as:
A. a voluntary program.
B. direct regulation.
C. a tax incentive program.
D. a market incentive program.
See the textbook. Trading emission credits is something a market incentive program does.
AACSB: Analytic
Blooms: Apply
118. Do economists tend to favor a system in which power plants buy and sell the right to
pollute in the form of emission credits?
A. No; these programs are ineffective because they encourage major polluters to free ride
on the efforts of others.
B. No; it is possible for some firms to do nothing if they simply buy enough credits.
C. Yes; they encourage all firms to cut pollution by the same percentage.
D. Yes; they believe that such a proposal would achieve a level of pollution reduction with
the lowest cost to society.
Economists like tradable emissions credits because they achieve any level of pollution
reduction by using the least costly method. Some environmentalists do not like them
because they do not understand economics, and others because they consider factors
such as fairness that are outside economists' normal range of consideration.
AACSB: Analytic
8-154
Blooms: Apply
119. Suppose there are only two firms that pollute, A and B, and each emits 10 tons of waste
into the air. Firm A can reduce its pollution at a cost of $100 per ton, and Firm B can
reduce its pollution at a cost of $500 per ton. Each has been given an emission credit that
allows it to pollute 6 tons. If firms maximize profits, what will happen?
A. Each firm will clean up 4 tons and pollute 6 tons.
B. Firm B will buy four credits from A; B will emit 10 tons, and A 2 tons.
C. Firm A will buy four credits from B; A will emit 10 tons, and B 2 tons.
D. Firm B will buy one credit from A; it will cut pollution to 7 tons, and firm A will cut it to 5
tons.
The credits are more valuable to B than to A, so Firm B will buy all of Firm A's credits.
Both firms benefit from the trade.
AACSB: Analytic
Blooms: Apply
8-155
120. Which of the following does not illustrate the free rider problem?
A. Amy does not contribute to public television, but she watches it every day.
B. Roger refuses to help pay for the private security officer who patrols his neighborhood.
C. Amanda, a taxpayer, prefers to check out books from her local library rather than
purchasing them herself.
D. Frank enjoys the fireworks from his lawn and does not purchase a ticket to view the
display from the stadium.
Since public funds are used to purchase books for the library, Amanda is not enjoying
something for free that others have paid for (assuming she pays her taxes). In the other
cases, the person described is enjoying a benefit that others have paid for.
AACSB: Analytic
Blooms: Apply
society.
Topic: Public Goods
121. The unwillingness of individuals to share in the cost of a public good is called the:
A. free rider problem.
B. social conscience problem.
C. volunteer problem.
D. public choice problem.
See the definition of the free rider problem.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-156
society.
Topic: Public Goods
122. Which of the following is not a characteristic of a public good?
A. Non-exclusivity
B. Available to nonbuyers
C. Nonrivalry in consumption
D. Can be consumed only once
Public goods are nonexclusive and nonrival by definition. Since they are nonexclusive, they
are available to nonbuyers (which is what creates the possibility of a free rider problem).
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
society.
Topic: Public Goods
123. Since consumption of a public good by one person does not preclude consumption by
others, public goods are said to be:
A. non-exclusive.
B. nonrival.
C. exclusive.
D. rival.
It is possible for a good to be nonrival without being nonexclusive. For example, nonpayers
could be excluded from a national park, but enjoyment of the scenery by one person does
not preclude enjoyment by another.
AACSB: Analytic
8-157
Blooms: Understand
Difficulty: 1 Easy
society.
Topic: Public Goods
124. Once a public good is provided, those who do not pay cannot be denied the benefits. For
this reason, public goods are said to be:
A. non-exclusive.
B. nonrival.
C. exclusive.
D. rival.
It is possible for a good to be nonexclusive without being nonrival. For example, once a
freeway has been provided (without a tollbooth or computer sensors), nonpayers cannot
be excluded, but if there is heavy traffic, consumption is rival.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
society.
Topic: Public Goods
8-158
125. If air pollution control is a public good, it follows that:
A. the efficient output of air pollution control is zero.
B. additional persons can benefit from a given amount of air pollution control without
reducing the benefits enjoyed by others.
C. the efficient output of air pollution control can be attained by selling it by the unit in a
market.
D. the more air pollution control enjoyed by any one person, the less is available to others.
See the definition of a public good in the textbook.
AACSB: Analytic
Blooms: Understand
society.
Topic: Public Goods
126. The free rider problem:
A. can never prevent pure public goods from being supplied.
B. results because people act unselfishly.
C. results because people behave irrationally.
D. prevents voluntary cost sharing from achieving the efficient output of a public good.
The free rider problem is an individual's unwillingness to share in the cost of a public
good. It prevents cost sharing.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
society.
8-159
Topic: Public Goods
127. The best example of a public good is:
A. competition.
B. government-subsidized lunches.
C. pollution.
D. national defense.
A public good is one that when consumed by one individual does not prevent its
consumption by others. National defense protects all individuals in a country. If it is
provided for some, it must also be provided for all.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
society.
Topic: Public Goods
128. In economic terminology, a free rider is someone who:
A. does not pay for his or her own consumption of a public good.
B. chooses not to consume a public good.
C. is earning economic profit.
D. raises his or her prices because all other prices are rising.
A free rider is a person who participates in something for free because others have paid
for it.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-160
society.
Topic: Public Goods
129. In the case of a public good, a demand curve that shows the marginal benefit of the good
is:
A. nonexistent.
B. the horizontal sum of individual demand curves.
C. the vertical sum of individual demand curves.
D. perfectly inelastic.
This is the case because the full benefit of the total output is received by everyone.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
society.
Topic: Public Goods
130. If the marginal benefit of one more unit of a public good is $500 for Sam and $800 for Alex,
the social benefit of one more unit of a public good is:
A. $500 since the benefit will go to the person who values it least.
B. $800 since the benefit will go to the person who values it most.
C. $1,300 since the benefit of one more unit goes to both individuals.
D. more than $1,300 since the benefits to society exceed the sum of individual benefits.
The social benefit in the case of a public good is the sum of the individual benefits since
each individual gets the benefit of the good.
AACSB: Analytic
8-161
Blooms: Apply
society.
Topic: Public Goods
131. This table shows the marginal benefits from widgets obtained by the only three people
who value them.
Refer to the table shown. Suppose widgets cost $8.50 to produce. If widgets are a private
number?
Helen will buy one because she gets more value than it costs to produce. The second is
not worth producing because it costs $8.50 but provides value of only $8.
AACSB: Analytic
Blooms: Apply
society.
Topic: Public Goods
8-162
132. This table shows the marginal benefits from widgets obtained by the only three people
who value them.
Refer to the table shown. Suppose widgets cost $8.50 to produce. If widgets are a public
number?
Helen will buy one because she gets more value than it costs to produce. However, a
second also is worth producing because it provides value of $9, which is more than the
cost of production.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
society.
Topic: Public Goods
8-163
133. Basic research is more likely to be funded by the federal than by state and local
government because basic research:
A. is usually conducted by oligopoly, the market structure that is most conducive to

preliminary research.
B. has negative externalities that are passed on to those who live outside the state.
C. is largely a public good; benefits flow to the whole world, not just the state.
D. has information problems that cause adverse selection.
Basic research usually is funded by the federal government because it is often a public
good. For this research to pass a cost/benefit test for California, the benefits must be
much greater than the cost because most of them will flow out of the state. If the research
results in a private good, more of the benefits could be captured by California, but if the
prospect of arriving at a private good, that is, something protected by patent, were high
enough, private firms would be conducting it.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
society.
Topic: Public Goods
8-164
134. Music spreads easily and cheaply on computer networks. As a result, music has become
more like:
A. a private good.
B. a public good.
C. a merit good.
D. an inferior good.
A public good is nonrival and non-exclusive. So is digital music.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
society.
Topic: Public Goods
135. The Apple iPod is able to play digital music that has a special encoding that makes
pirating music more difficult. In economic terms, this encoding is an attempt to:
A. make digital music more like a private good and less like a public good.
B. reduce the negative externalities of digital music.
C. reduce the adverse selection problem of digital music.
D. increase the marginal social benefit of digital music.
Encoding is an attempt to make digital music excludable, that is, to exclude those who do
not pay. Hence, digital music would become more like a private good and less like a public
good.
AACSB: Analytic
Blooms: Apply
8-165
society.
Topic: Public Goods
136. If the benefit of a public good is small to each individual in a society of millions of
individuals:
A. it will never be efficient for government to provide the public good.
B. the total benefit will be large since social benefit is the sum of all individual benefits.
C. the total benefit will be small since individuals cannot share the benefits of public
goods.
D. it cannot really be a public good since the benefit of public goods is always large.
Since there are millions of individuals, summing each person's benefit will result in a large
amount of total or social benefit.
AACSB: Analytic
Blooms: Understand
society.
Topic: Public Goods
137. With regard to a public good provided by the government:
A. individuals reveal their demand when they buy the good.
B. a free rider problem is unlikely.
C. individuals have an incentive to conceal their willingness to buy the good.
D. individuals have an incentive to exaggerate their willingness to buy the good.
Public goods are nonrival and non-exclusive, and so there is an incentive to exaggerate
willingness to buy because people can free ride.
AACSB: Analytic
8-166
Blooms: Understand
society.
Topic: Public Goods
138. Real-world markets:
A. often involve deception, cheating, and inaccurate information.
B. ensure that sellers will always be honest and provide accurate information because
those who are dishonest or provide inaccurate information go out of business.
C. can operate efficiently only if government takes steps to correct informational

problems.
D. provide no mechanism for solving informational problems.
Deception, cheating, and inaccurate information characterize real-world markets, but

informational problems can be solved either through government intervention or through
markets. For example, a consumer can hire a mechanic to check out a used car before
purchasing it.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-167
139. If a consumer is willing to pay $100 for a used Blu-ray player that is a "cherry" and $30 for
a used Blu-ray player that is a "lemon," the consumer will offer:
A. $30 for any used Blu-ray player even if the probability that it is a "lemon" is 50 percent.
B. $100 for any used Blu-ray player even if the probability that is a "cherry" is 50 percent.
C. $65 for any used Blu-ray player if the probability that it is a "lemon" is 50 percent.
D. $130 for any used Blu-ray player if the probability that it is a "cherry" is 50 percent.
The expected value of a used Blu-ray player is equal to the probability that it is a lemon
multiplied by the value if it is a lemon plus the probability that it is a cherry multiplied by
the value if it is a cherry.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
140. Adverse selection is most likely to be a problem when:
A. one side of the market, either buyer or seller, has better information than the other
side.
B. there are public goods involved.
C. the good being exchanged has negative externalities.
D. the good being exchanged has free rider problems.
Adverse selection is a problem in markets with informational problems.
AACSB: Analytic
Blooms: Understand
8-168
141. In economics, the term "signaling" refers to a way of lessening the problem of:
A. free riders.
C. bad information by all market participants.
D. unequal information between buyers and sellers.
Signaling, or transmitting information about quality in a way that is hard to fake, is a way
of overcoming the problem of informational problems.
AACSB: Analytic
Blooms: Understand
8-169
142. At one time many economists were suspicious of brand names. They saw them as a
barrier to entry with no benefits to consumers. In the 1970s economists began to see a
possible benefit of brand names to consumers. They discovered that brand names were a
way to:
A. signal quality.
B. market public goods.
C. overcome negative externalities.
D. overcome the free rider effect.
Brand names were a form of signaling, of transmitting information about quality in a way
that is hard to fake, and thus a way of overcoming the problem of informational problems.
When a company has invested a large amount of money creating a meaningful brand
name, it is very costly to produce poor-quality products under that brand name because it
will ruin the brand. Usually a company that has a valuable brand will market lower-quality
products under a different name. The beer market has a lot of examples.
AACSB: Analytic
Blooms: Understand
8-170
143. John and Jack are both trying to sell a used car to Jim. John's car is a lemon, a car that has
a serious but nonobvious problem. Jack's car is a cherry, a car that has no problems. Jim
cannot tell the difference between the cars. Economists say this information problem
might be solved with signaling. Who has an incentive to find a way to signal quality?
A. Both Jack and John
B. Jack but not John
C. John but not Jack
D. Jim
John has an incentive to communicate the truth about the condition of his car in a way
that Jack cannot duplicate. If he can find a way to do it, he will sell his car at a fair price. If
he cannot, he will have to take a price that reflects the risk that Jim faces. In many
markets manufacturers use some sort of guarantee or warranty to signal quality.
AACSB: Analytic
Blooms: Apply
8-171
144. A lawyer who drives a beat-up car and wears frumpy clothes may have a hard time getting
clients. Potential clients may conclude from his appearance that he is poor, and if he is
poor, he probably is not very good. If this is true for a lawyer, dressing in expensive and
stylish clothing is a way of:
A. internalizing externalities.
B. changing a nonrival good into a rival good.
C. changing a non-excludable good into an excludable good.
D. signaling quality.
Signaling is an attempt to communicate attributes in a way that is difficult to do for those

who do not have the attributes, though in this case, it can be faked to some extent.
AACSB: Analytic
Blooms: Understand
8-172
145. In the early days of the Internet, selling and buying from other individuals were dangerous
because one never knew if the person on the other side of the transaction was honest.
eBay.com became successful because it lessened that problem with its feedback rating
system that let buyers and sellers develop a reputation. eBay.com's innovation is an
example of overcoming:
A. the free rider effect.
C. positive externalities.
D. an information problem.
Transactions between complete strangers are hard because either side may cheat—there
is nothing to lose. eBay's innovation gave cheating a cost and honesty a benefit.
AACSB: Analytic
Blooms: Apply
8-173
146. How do economists explain the value firms and consumers place on brand names?
A. Brand names show that firms can easily manipulate consumers.
B. Brand names are a way firms can provide information about quality to consumers.
C. Brand names are a way of turning private goods into public goods, increasing their
value to both seller and buyer.
D. Brand names are an example of adverse selection, by which producers advertise the
options to consumers.
Brand names are one of the ways in which markets overcome the problem of informational
problems.
AACSB: Analytic
Blooms: Apply
147. The Consumer Product Safety Commission (CPSC) is charged with protecting the public
from unreasonable risks of serious injury or death from more than 15,000 types of
consumer products. The CPSC is designed to overcome:
A. information problems.
B. positive externalities.
C. negative externalities.
D. direct regulation.
Presumably, the problem is that consumers are not well informed and need more
information.
AACSB: Analytic
Blooms: Apply
8-174
148. Which of the following is an argument an economist would use to argue against market
regulation designed to protect consumers?
A. Information is costless and readily available, and so it is up to consumers to beware.
B. When a brand name product is found unsafe, the value of the brand is reduced, which
gives companies with brand names an incentive to produce high-quality products.
C. Manufacturers have no incentive to stop the sale of counterfeit products.
D. Government is more likely to have consumers' interest in mind than does the market.
Firms do have an incentive to produce safe products. Those which do not will go out of
business or at least suffer loss of sales. Information is not costless.
AACSB: Analytic
Blooms: Apply
8-175
149. If a consumer is willing to pay $5,000 for a used car that is a free of mechanical problems
and $1,000 for a used car that will require extensive repairs, the consumer will offer:
A. $1,000 for a used car if the probability that it is free of mechanical problems is 50
percent.
B. $3,000 for a used car if the probability that it is free of mechanical problems is 50
percent.
C. $5,000 for a used car if the probability that it is free of mechanical problems is 50
percent.
D. $6,000 for a used car if the probability that it is free of mechanical problems is 50
percent.
The expected value of a used car is equal to the probability that it is free of mechanical
problems multiplied by the value if it is free of mechanical problems plus the probability
that it will require extensive repairs multiplied by the value if it will require extensive
repairs. A risk-neutral consumer will offer that expected value.
AACSB: Analytic
Blooms: Apply
8-176
150. If buyers cannot distinguish between "lemons" and "cherries" in the used car market but
sellers can, the price buyers are willing to pay for used cars will be:
A. high enough to guarantee that at least 50 percent of the used cars offered for sale are
"cherries."
B. so low that sellers with "cherries" will be unwilling to sell.
C. so low that sellers with "lemons" will be unwilling to sell.
D. equal to zero since no one will take the chance of purchasing a "lemon" even if the
value of a car known to be a lemon is greater than zero.
With uncertainty, buyers would not offer a price high enough to induce the owner of a
"cherry" used car to sell. Eventually, buyers would realize that all the used cars offered for
sale must be "lemons," and so the price would fall even more, but not to zero unless the
value of a car known to be a "lemon" is zero.
AACSB: Analytic
Blooms: Apply
8-177
151. If medical insurers could use information contained in DNA to predict the likelihood of
major medical illnesses, the most likely outcome is that:
A. there would be an adverse selection problem and average insurance rates would rise.
B. there would be an adverse selection problem and average insurance rates would fall.
C. the adverse selection problem would be decreased and average insurance rates would
rise.
D. the adverse selection problem would be decreased and average insurance rates would
fall.
Rates probably would fall on average because those with a very low likelihood of having a
major medical illness could purchase insurance at a much lower rate. Currently, an
adverse selection problem exists because individuals have better information about their
health than do insurance providers.

Blooms: Apply
Difficulty: 3 Hard
8-178
152. The reason the Federal Trade Commission regulates advertising to prevent false and
misleading claims is:
A. that firms that make false and misleading claims would earn lower profit, resulting in
many firms being forced to shut down and many workers losing their jobs.
B. to create a market for information.
C. to prevent a market failure caused by inaccurate information.
D. to eliminate persuasive advertising.
If sellers are allowed to make false and misleading claims about their products, consumers
may end up assuming that all advertising information is false. When advertising
information is accurate, consumers can make more efficient choices. Sellers engage in
persuasive advertising because this is not considered false or misleading.
AACSB: Analytic
Blooms: Understand
8-179
153. Economists believe that if government provides information about product quality:
A. there will be less incentive for consumers to pay extra for quality guarantees supplied
by firms.
B. consumers will be forced to pay for information when otherwise it would have been
available for free.
C. the overall quality of products sold will increase substantially, eliminating the
information problem.
D. the cost of providing information will be zero.
Left on their own, without government regulation, information markets will develop to
provide the information that people need and are willing to pay for. The market solution is
likely to be more efficient (less costly) than government regulation.
AACSB: Analytic
Blooms: Understand
154. A market for information is more likely to develop even in the absence of government
regulation of information as long as the marginal:
A. cost of information is zero.
B. benefit of information is zero.
C. cost of information exceeds the marginal benefit.
D. benefit of information exceeds the marginal cost.
Consumers will pay for information if it makes them better off.
AACSB: Analytic
Blooms: Understand
8-180
155. The basis of the argument favoring government intervention to correct informational and
rationality problems is that:
A. if information is not perfect or if one trader is not rational, a trade can result in one
party benefiting and the other losing.
B. entry into certain markets may be restricted so that excess profits cannot be
eliminated by the forces of competition.
C. people cannot possibly know how well off they will be as a result of a trade until after
the trade has occurred.
D. if individuals are free to produce whatever goods they want, when excess profit is
being made, more people will enter into the production of that good and consumers will
benefit as the price is pushed down.
The usual case for the market assumes good information and rationality.
AACSB: Analytic
Blooms: Understand
8-181
156. Milton Friedman argues that medical licensure benefits doctors because it:
A. allows them to restrict supply, increase prices, and significantly increase their incomes.
B. protects them from malpractice suits.
C. ensures that they will not have to compete against one another for patients.
D. prevents other doctors from advertising and stealing their patients.
Licensure reduces the supply of doctors, raising the price for their services. They still have
to compete against other licensed doctors.
AACSB: Analytic
Blooms: Understand
157. Which of the following is not a question raised by critics of medical licensure?
A. Why, if licensed medical treatment is so great, do we even need formal restrictions to

keep other types of medicine from being practiced?
B. Whom do these restrictions benefit: the general public or the doctors who practice
mainstream medicine?
C. What have the long-run effects of licensure been?
D. Why does the public need to have accurate information about a doctor's competency?
Problems with information is one reason licensing is supported. Refer to Added

Dimension: Licensure and Surgery in the text.
AACSB: Analytic
Blooms: Understand
8-182
158. Which of the following is the best example of an adverse selection problem?
A. Once individuals are insured, they are less likely to take efficient precautions.
B. Individuals are unlikely to pay for something if they can receive the benefits for free.
C. When a firm pollutes the air, families living nearby suffer the consequences.
D. Individuals who seek to purchase health insurance have better information about their
health than do insurance companies.
The text uses the example of health insurance to illustrate the adverse selection problem.
The incorrect responses illustrate moral hazard, the free rider problem, and negative
externalities.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-183
159. If employers were made responsible for injuries suffered by employees while working at
home:
A. there might be an adverse selection problem since employees have better information
about the safety conditions of their own homes than employers do.
B. employers would never permit employees to work at home.
C. more employees would be able to work safely at home.
D. there might be an adverse selection problem since employers have better information
about the safety conditions of their employees than the employees have themselves.
Although such a policy was recently considered, the plan was rejected because of a likely
adverse selection problem. Making employers responsible for injuries suffered by
employees working at home probably would reduce the incidence of at-home work but
would not eliminate it entirely.
AACSB: Analytic
Blooms: Apply
160. The problem that arises when people don't have to bear the negative consequence of their
actions is known as:
A. adverse selection.
B. externality.
C. moral hazard.
D. signaling.
See the definition of moral hazard in the text.
AACSB: Analytic
8-184
Blooms: Apply
161. A person who has auto insurance is likely to drive a little less safely and to take less care
in parking the car in a safe place off the street. This is an example of a problem called:
A. signaling.
B. moral hazard.
C. externality.
Moral hazard occurs when an insured individual changes his or her behavior to the
AACSB: Analytic
Blooms: Apply
8-185
162. A life insurance company is likely to require a health examination of a person applying for
insurance. This helps reduce the informational problem through the process of:
A. signaling.
B. screening.
C. creating an externality.
D. government regulation.
Screening is an action taken by the uninformed party that induces the informed party to
reveal information.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
163. A person buying a used car could ask the seller for permission to take the car to a
mechanic for an inspection. If the seller says no, the prospective buyer has gained
information about the car. This process is known as:
A. screening.
B. signaling.
C. licensing.
D. internalizing the externality.
reveal information.
AACSB: Analytic
Blooms: Apply
8-186
164. Which of the following is an example of screening?
A. Selling pollution permits to polluters to induce the lowest-cost pollution reducers to cut
back on pollution
B. Reducing pollution to the point at which the marginal cost of the pollution equals the
marginal benefit
C. A car buyer asking the seller if the car is a lemon
D. An employer requiring job applicants to provide references
reveal information.
AACSB: Analytic
Blooms: Apply
8-187
165. Opponents of government intervention in the economy argue that government's attempts
to correct informational problems:
A. are justified in most cases though politically difficult to implement.
B. are not necessary since an efficiently operating market system ensures that adequate
information will be provided.
C. often create greater problems, such as FDA restrictions on experimental drugs for AIDS
which could save lives.
D. will make market transactions much more efficient.
Opponents argue that correcting informational problems creates other problems.
AACSB: Analytic
Blooms: Understand
166. Opponents of government intervention in the economy argue that externalities:
A. do not create problems for the model.
B. are themselves the inevitable result of government policies.
C. should be corrected with regulations rather than subsidies.
D. may not be effectively corrected by the government.
Opponents argue that government is too cumbersome to make the fine-tuning choices to
correct them and that because of politics, they may not be effectively corrected.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
8-188
167. Suppose that a negative externality creates $1 billion worth of costs to third parties. The
government attacks the problem with regulations that cut the cost of the externality to
$500 million but cost business and consumers $1.5 billion. This situation illustrates the
idea that:
A. regulations are an effective way to curb externalities.
B. externalities can never be corrected.
C. correcting market failure can result in government failure.
D. getting rid of externalities requires a great deal of necessary sacrifice for all of us.
In this example the cure is worse than the disease. Government failure is a policy that
causes more harm than the problem it was intended to remedy.
AACSB: Analytic
Blooms: Understand
168. Opponents of government intervention argue that government makes decisions based on:
A. marginal social costs and marginal social benefits.
B. marginal political costs and marginal political benefits.
C. irrational choices.
D. total costs and total benefits.
Economists focus on incentives of decision makers. In the case of government, it is the

marginal political costs and marginal political benefits.
AACSB: Analytic
Blooms: Understand
8-189
169. Both opponents of and proponents of government intervention most likely would agree
with which of the following?
A. Government can and does create proper incentives to correct for externalities.
B. Property rights eliminate the need for government.
C. The market is inherently fair.
D. Property rights must exist for a market to operate.
Property rights must exist for markets to function. Whether those property rights are fair or
need correction is a matter of debate.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
170. Government failure occurs when:
A. government fails to implement policy designed to correct a market failure.
B. government intervention in the market to improve a market failure succeeds.
C. government intervention in the market to correct a market failure makes things worse.
D. there is no need for government intervention into the market because there is no
market failure.
The text provides five reasons that explain government failure.
AACSB: Analytic
8-190
Blooms: Understand
Difficulty: 1 Easy
171. Suppose a public good that is worth $1 billion is not produced by the market, and so the
government provides it, but at a cost of $3 billion. This attempt to correct a market failure
has:
A. been successful since the public good is now produced.
B. given rise to the problem of free riders.
C. resulted in a government failure since use of resources is now less efficient.
D. resulted in an information asymmetry for the government.
Instead of losing value of $1 billion, the economy now has lost value of $2 billion. The
allocation of resources is now inferior to what it was at the start.
AACSB: Analytic
Blooms: Understand
8-191
172. A European Union official, Mr. McGreevey, claims a portion of EU law involves
overregulation. McGreevey is suggesting the EU suffers in part from:
A. market failure
B. fairness.
C. government failure.
D. the rule of law.
Government policy may not only fail to correct a problem but make it worse. This is
government failure.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
173. All of the following are justifications for government intervention except:
A. too much competition.
B. informational problems.
C. externalities.
D. public goods.
It is true that everyone likes competition except when it affects him or her; however, too
much competition is not a justification for government intervention.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-192
174. Government may not have an incentive to correct a market failure because:
A. government doesn't have the information it needs to correct the market failure.
B. government reflects politics, which reflects individuals' interests in trying to gain more
for themselves.
C. policy makers fear that intervention will lead to a Pareto optimal outcome.
D. the benefit of correcting the market failure might exceed the cost of correcting the
market failure.
Lack of information is a reason for government failure different from incentives. The lack
of incentive to correct market failure stems from political pressures to benefit special
interest groups.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
175. Government failure is likely to occur for all of the following reasons except:
A. special interest groups might lobby government to the detriment of the public good.
B. individuals have better information about a situation that affects them than does
government.
C. intervention in markets is always simpler than it initially seems.
D. the bureaucratic nature of government intervention does not allow fine-tuning.
Intervention is almost always more complicated than it initially seems.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
8-193
8-194
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significantly told me, of the King’s own pasturage. There was nothing
to be done but to accompany them; so telling some of the Hy
Soumaulee to come to Farree the next morning to see me, and if I
were not there to go on to Ankobar, I proceeded with my guides, or
guards, to the same house I slept in the last night; and the ready
smiling welcome, the little bustle to receive me cordially, I met with
from the good-natured inmates, was some set-off to the brutal
indifference of the state-gaoler; for such office also I found was filled
by the head of the customs of Shoa, the Abigass, or frontier governor
of Efat, the obsequious spiteful pluralist the Wallasmah Mahomed.
I passed the night, having received no answer to my note from
Ankobar, wishing for the day, still hoping that I might be mistaken in
my fears, and that some of the members of the embassy would
come to congratulate me on my safe arrival, and free me from the
anxiety, restraint, and espionage I was now annoyed with; for two
sentinels were constantly on duty in the little enclosure, and always
present in the house, when I received visits even from my Hy
Soumaulee friends.
The next day came, but no news from Ankobar. I amused myself
as well as I could, writing up my notes and settling small accounts
with my escort and those of the Kafilah people, from whose
importunities on the road I had relieved myself by promises of
presents in Shoa, and who now came for paper, needles, buttons,
scissors, and razors. Almost all that I possessed was divided among
them as some little return for their continued kindness and fidelity to
me on the road; for I had little to complain of except the continual
falsehoods and petty deceits practised invariably by the Tajourah
people. Even Ohmed Medina was not altogether exempt from this
failing; but it was from a motive of well-meant kindness, so that I
should not be able to detect the number of instances that little
attempts were made to impose upon me, and which he thought
might lead to expostulation and angry discussions.
CHAPTER II.
Detained at Farree.—No news from Ankobar.—Fear all is not right.—
Escape from my confinement.—Reach Garcia Mulloo.—Followed
by officers of Wallasmah.—Compromise matters.—Return to
Farree.—Brutality of Wallasmah.—Planning escape to the coast
with Hy Soumaulee.—Arrival of Mr. Scott from Ankobar.—Chief
cause of my detention.
I stayed in Farree anxiously awaiting some news from the embassy,
until the 25th; but neither note nor messenger came to relieve the
suspense I was in. The night before, Ohmed Medina, however, had
called upon me, and told me that all was right as regarded their
personal safety, but informed me that my note from the Dinnomalee
had been intercepted by the Wallasmah, and that none of the
English in Shoa knew that I was in the country. I made up my mind,
on hearing this, to attempt getting to Ankobar the next morning, if it
were possible; and accordingly, before it was light, opened the little
wicket that served for the door, passed unobserved the two sentinels
who lay wrapped up in their body cloths fast asleep, and was soon
some distance on the wrong road; that is to say, the most circuitous
one to Ankobar. I thought that I was not exactly right, and meeting
some labourers going into the fields to work, I asked the way, by
repeating the word, Ankobar. They were too much surprised to
speak, but pointed in the direction of the road, and I left them staring
after me with a wondering look, as if to ask what would come next.
Having reached a village about five miles to the north-west of Farree,
I found it impossible to go on, it having been one continual ascent
along the roughest and most winding path that can well be imagined.
Oppressed with difficulty of breathing, fatigued, and foot-sore, I
turned toward the door of the first house, and sitting down on a
stone, made signs that I wanted some water. Hereupon such a
screaming was set up by the only inmates, two naked children, that it
could not have been exceeded if I had intimated that they were
about to be devoured. Their cries brought two other little girls, who
came running round the house, but seeing me, promptly turned
back, tumbling over each other to get out of the way, contributing as
they lay not a little to the frantic roaring of the children inside.
The noise soon brought all the disposable people, men and
women of all ages, who had not left the village for their labours in the
fields, who soon recognised in their visitor a Gypt or Egyptian, as the
Abyssinians call all white men. I was glad to find that the character
seemed to be a very respected one, although the first evidence I had
of it, was the numerous beggars for articles, the names of which I did
not understand. They invited me into the house out of the sun, and a
large wooden mortar was laid on its side for me to sit upon, whilst
several women employed themselves scorching some coffee beans,
in a coarse earthenware saucer over a little wood fire in the centre of
a circular hearth, that occupied the middle of the room. The whole
house consisted of this one apartment, the surrounding wall being
composed of sticks placed close together, and about four feet high,
upon which rested a straw thatched roof frame of light bamboo, well
blackened with the smoke.
I had not long arrived at Garcia Mulloo, the name of the village,
before I was followed by a large body of men armed with spears and
staves, and dragging along with them, most unwillingly, my old grey
mule. The misselannee of Farree, whom I knew, was at the head of
the party, and appeared very well pleased to see me, addressing me
with great politeness, though I could not understand a word that he
said. I took care, however, in Arabic, to charge him and the
Wallasmah with incivility, and want of hospitality, for detaining me so
long in Farree against my will, and also with having, like a thief,
stolen the note I had sent to Ankobar. As we had been now joined by
a man named Brekka, who understood what I said, he interpreted for
us, and afforded the misselannee an opportunity in reply, of throwing
the whole blame upon the Wallasmah, whose servant he was, at the
same time begging me to return with him, for which purpose, and for
my accommodation, he had brought my mule along with him. I
positively refused, on the plea, that their King had promised mine,
that Englishmen were to travel unmolested through the country,
alluding to the treaty, and that, accordingly, if they now used force to
take me back to Farree, it would bring the matter to an issue, and my
people would then see the real value of the word of Sahale
Selassee. Seeing I was determined not to return with them they
agreed to compromise the matter, upon my promising to remain at
Garcia Mulloo, and not attempt to proceed farther towards Ankobar,
until the King’s pleasure respecting me should be known. This I was
induced to do by the misselannee’s pacific appeal that I would not do
anything which would occasion him to be imprisoned, and all his
property confiscated.
Our interpreter, Brekka, was a scamp of a renegado, who had
been a Christian, but was converted to the Islam faith, by the
promise of a situation under the Wallasmah, whose district, the
province of Efat, is inhabited chiefly by Mahomedans. The contiguity
of the two faiths among a people of one origin, affords an interesting
opportunity of examining the first effect of differences in religious
belief, and which leads, in the course of time, to the division of one
family of man into two distinct nations, differing in customs, pursuits,
and even, after a lapse of time, in physical features.
The same dispersing operation of opinion, but more advanced, is
to be observed in the separation, at the present day, of the Dankalli
and Soumaulee tribes, and to any zealous student of the science of
all sciences, humanity, or the natural history of man, it is
indispensably necessary that he should visit the countries of
Abyssinia, of Sennaar, and Adal, where he will find collected, as at a
centre, the originals of all the different varieties into which
physiologists have divided the human race; and where, at this
moment, the principal causes of the great moral change in the
condition of man, consequent upon the flood, may be observed in full
operation, and producing the same effects of dispersion. Christian
civilization, which points to a future union, is the antagonizing
principle to the opinion disturbing one, which, I believe, alone
separates and divides mankind; and I could wish to see, here, in
intertropical Africa, a Mission of enlightened ministers of the Gospel,
whose object should be simply to spread the easily understood
doctrine of one God, and that love and truth are the redeeming
principles in the character of man, to restore him to that state of
excellence from which he has fallen.
It being arranged I should stay at Garcia Mulloo, a supply of bread
and beer was ordered by the misselanee, who had been sent for to
see after this duty; the same officer of the town of Farree, returning
there with his party, taking my mule along with them, and leaving
Brekka and another man to keep me company, as was said, but in
fact, to keep guard over me. A disjointed conversation with the
former served to amuse me during the rest of the day. He gave me
some information respecting the Embassy, and of the dislike
entertained by Sahale Selassee to the English; which surprised me
considerably, nor would I at first believe it, but ascribed the
statement to the ill feeling and jealousy with which the visit of our
Political Mission to the Court of Shoa, was viewed by the
Mahomedans of Efat.
In the afternoon, Brekka walked down to Farree, and when he
returned, told me he had seen a letter for me, and a messenger from
Ankobar, and that if I wished to see them I must go to that town. I did
not hesitate a moment, but was now as anxious to be off, as I was
before obstinately bent upon remaining. The news of Brekka being
confirmed by the arrival of a messenger from the Wallasmah, with
the same information, I started immediately. I conceived that the not
sending the letter to Garcia Mulloo, was perhaps intended as a kind
of punishment for my breaking prison in the morning.
In about an hour and a-half, we were again crossing the little
stream which flows at the base of the hill on which Farree stands;
and I was soon seated in my old quarters, whilst Brekka went to
obtain for me the expected note. When he returned, he brought me
an order to go to the Wallasmah myself, as he wanted to see me;
and who occupied a house upon one of the little eminences opposite
to mine. I was not long in presenting myself in obedience to this
summons, and found that gentleman sitting upon a large oxskin
spread upon the ground, paring his toe nails with an old pocket knife.
As I came round the low stone fence against which he leaned, he
cast his eyes upon me, and growled a very sinister kind of salutation,
asking me in broken Arabic how I did. I now requested him to give
me the letter from Ankobar, but he only shook his head. I asked to
see the messenger, and with a chuckle of triumphant cunning, he
pointed with the open knife to the fastened door of an outhouse, an
action which I readily interpreted to mean, “He is there, in prison.” I
did not say a word more, but walked away in high dudgeon,
overturning a rude Abyssinian who, with spear and shield pushed
against me, as if to prevent my exit when I made my way out through
a little wicket in the stick enclosure that surrounded the house.
The worst of my situation was, that I had no friends near, all the
Hy Soumaulee and Tajourah people being according to custom,
obliged to locate themselves during their stay in Shoa, in a little town
called Channo, situated about two miles to the north-east of Farree,
where they are compelled to leave their shields and spears when
they go farther into the interior of the country. I had to send for any of
these to come to me, but either it was too late in the day, being after
sunset, or orders had been issued to the contrary, for I could induce
no one to take a message from me either to Ohmed Medina or
Carmel Ibrahim. I was obliged, therefore, to remain quiet for the
night, being determined, however, on the morrow to escape into the
Adal country, and carry the news back, which otherwise might be a
long time in reaching Aden, of the actual condition of things in Shoa;
where, instead of the English being courted and caressed, as was
believed to be the case when I was in Tajourah, they were, in fact,
the objects of the most jealous suspicion, and subjected to the most
tyrannical surveillance, if not actually in prison.
The early part of the morning of the 26th of May was occupied in
projecting the plan of my escape with Carmel Ibrahim and Adam
Burrah, the latter of whom having assisted Lieut. Barker in getting
through the Adal country after that gentleman had left the Hurrah
Kafilah, I could the more confidently rely upon, although I had not the
least doubt of the fidelity or trustworthiness of the former. These two
had come with Allee the First to laugh with me at my attempt of
getting to Ankobar the day before, and endeavoured to soothe and
interest me, as they thought, by showing how they would
disembowel the old fat Wallasmah if they had him in their country.
My proposal to go back was met with their decided approbation. It
was accordingly arranged that Carmel and Adam should accompany
me in the evening, whilst the rest of the escort were to remain, and
during the night manage to steal my mule, and as many more as
they could, and join us at the little Wahama town Dophan, beyond
which they knew very well no attempt would be made to pursue us.
I was in the act of making a few cartridges for my anticipated
return journey, when I heard a loud cry of “Commander,
Commander,” an English word, by which the Abyssinians had been
taught to designate the head of the Mission. Two or three of the
inhabitants of Farree came also in a great hurry to call me out of the
house, and tell me that some Gypt or other was approaching. I was
equally eager, and even ran in a most undignified manner to meet
this messenger of light, who, mounted on a mule, now appeared
upon the summit or crest of the road before it descends into the little
hollow where stands the market-place. There was a great air of
civilization about him. He wore a broad-brimmed hat, somewhat like
my own, covered with white cotton cloth, a sailor’s large pea-jacket
belted round his waist, an old pair of grey check trowsers, and came
with a sober steady pace along the narrow path.
I met him as he dismounted beneath the few mimosa-trees, and
after a hearty shake of the hand, invited him to my hotel. He then
introduced himself as Mr. R. Scott, the surveying draughtsman
attached to the Mission.
His first explanation was the cause of his non-arrival sooner,
which was owing to the utter ignorance of my arrival on the part of
Captain Harris, the chief of the Embassy, until the night but one
before, when the King had forwarded by one of his pages two notes,
which I had endeavoured to send to him, the last one dated from
Dinnomalee. The other was the one which had been sent by Esau
Ibrahim, who, it will be remembered, was despatched from Mullu, on
the other side of the Hawash, with a note to Ankobar, informing
Captain Harris of my being on the road with stores. Both these
letters had been intercepted and detained, until public rumour
spreading, the King could not have kept the Embassy much longer
ignorant of my being in the country; and he therefore made a virtue
of necessity, and sent the letters before they were demanded.
An answer had been sent to me by Capt. Harris the day before by
the messenger now in prison, confined by the Wallasmah for having
brought a letter for me, after the King had issued orders that all
correspondence between the English already in the country and
those arriving should be prevented. Mr. Scott was not at all surprised
when I informed him of the circumstance, though I certainly
considered such a proceeding to be very much at variance with the
conditions and stipulations I was given to understand were contained
in the commercial treaty. I could not help remarking this, and Mr.
Scott then candidly admitted the King did not know the character or
purport of the paper he had signed; and had only been made aware
of the new responsibilities he had incurred, by a sharply worded
expostulatory letter, written by Mr. Krapf, in accordance to the
dictation of Captain Harris, on an occasion subsequently to the
signing of the treaty, when despatches and letters coming up from
the coast were intercepted and detained for some time by the orders
of the King. Singularly enough, this information was corroborated by
Ohmed Medina, who told me that my letter from Dinnomalee had not
been carried to Captain Harris, but to the King, who wanted to find
out whether the English were his friends or not, and was trying my
disposition and that of the Commander (Captain Harris) by this harsh
treatment of me; a kind of experiment, in fact, to see what would be
borne by us, and how far he had limited his authority by attaching his
signature to the treaty. Any idea of granting public benefit, at the
expense of his prerogative was never entertained for a moment, the
intentions of the King being limited to shewing personal favour alone,
which he is ever ready to concede even now to English travellers,
much as he complains of the conduct of the Mission in Shoa as
regards their political misdoings; more especially of the great insult
offered to him by the unfortunate letter before alluded to, and which
was worded so unguardedly, that the King, on receiving it, might
well, considering his great regard for Mr. Krapf previously, turn to him
and say, in a tone that implied more of sorrow than of anger, “Did
you write that, my father?”
CHAPTER III.
Staying at Farree with Mr. Scott.—Both placed under parole.—
Description of the houses of Farree.—Of the flour mill.—Some
remarks upon the origin of the Amhara.—Dr. Prichard upon
identity of the Amhara with the Antomali of Herodotus.—Physical
characters of the people.—Interview with the Wallasmah.—
Saltpetre rock.—Province of Efat.—Take leave of Escort.—
Tyrannical conduct of the Wallasmah.
May 26, 1842.—After Mr. Scott joined me at Farree, I considered
that all my troubles were at an end, although I had still to go above
fifty miles before I could meet the members of the British Political
Mission who had accompanied the King to his residence at
Angolahlah, the most western town of his dominions. An
establishment was still kept up at Ankobar, situated about one third
of the way between Farree and Angolahlah, at the head of which
was the naturalist attached to the Mission, Dr. Roth, with whom was
Mr. Bernatz, the artist, and there also Mr. Scott was stationed.
Captain Harris the Ambassador, Captain Graham, the second in
command, and Mr. Assistant-Surgeon Kirk, lived at Angolahlah,
where I now expected to be permitted to go by my gaoler the
Wallasmah. I found, however, I was reckoning without my host, for a
new difficulty had arisen, from the circumstance of Mr. Scott having
come down to Farree without the permission of Walda-anna, the
Governor of Ankobar. He was accordingly given to understand that
he must consider himself a prisoner with me until the pleasure of the
negoos should be known as to our disposal. It was in vain we
expostulated with our surly gaoler; we were to be opposed by force if
we attempted to leave Farree, and other sentinels were charged with
the care of us. Something we did effect, and that was the liberation
of the messenger who was detected bringing me a letter the day
before, for as soon as this request was made to the Wallasmah it
was at once acceded to, and the man was ordered to be set at
liberty. Taking this as an evidence of some relaxation of the harsh
treatment with which we had been treated, we sat sometime chatting
with the old gentleman, and I hinted my intention of making him
some present if he would honour me so far as to accept of my poor
gifts. When we got up from the ground where we had been sitting,
the Wallasmah directed his son, a fine young man about three or
four and twenty years old, to accompany us to our residence; a
sufficient intimation of his being graciously disposed, without the
broad hint given by one of his followers, who whispered into the ears
of Mr. Scott, “Give your memolagee to that man.” Our imprisoned
servant not making his appearance before we left the Wallasmah, we
asked where he was, and were surprised to hear that he had left
Farree for Angolahlah without seeing us, but which we supposed he
had been obliged to do, so that there should be no chance of our
slipping a note into his hands for our friends in that town.
We returned to our house, and for the rest of the day amused
ourselves with hearing and telling whatever most interested us,
whether of home or foreign news. I must observe that a present of
three pieces of calico and a pound of gunpowder was made to the
Wallasmah, who sent us back his compliments, and that he was
highly delighted with the present, but would be obliged for a little
more gunpowder.
Mr. Scott and I were entertained and taken care of for four days in
Farree, much to our discomfort and vexation. Fortunately this
gentleman had brought with him two native servants, who made
themselves useful by marketing and cooking during the term of our
confinement, so we suffered nothing from want of food. We could
also walk about the straggling town on pledging our word that we
would not attempt to escape, although our parole was not deemed
sufficient, for, like Buonaparte at St. Helena, two sentinels, on such
excursions, always followed at a certain distance in our rear.
Many of the houses in Farree, instead of being the usual circle of
closely placed sticks, some five feet high and surmounted by a high
conical straw roof, are partial excavations in the soft trachytic stone,
so as to leave a back and sides of natural rock. Over this is laid a flat
roof, consisting of untrimmed rafters covered by a thick layer of
brushwood, upon which is placed a layer of earth some inches in
thickness, well stamped down with the feet. A front of wattled sticks,
in which the entrance is made, completes the house, and in one
such as this was I lodged during my stay in this town.
The internal arrangements were equally simple. A raised platform
of stones and clay, about two feet high, occupied one half of the
single apartment, and upon one end of this, reaching to the roof,
stood a huge butt-like basket, smoothly plastered over inside and out
with clay. This was the family granary, in which was preserved the
teff seed, or wheat, from the depredations of the numerous mice that
are a thorough pest in Abyssinia. In a corner below, stood side by
side two of the peculiar handmills used in this country, each
consisting of a large flat stone of cellular lava, two feet long and one
foot broad, raised upon a rude pedestal of stones and mud, about
one foot and a half from the ground. The rough surface of this stone
sloped gradually down from behind forwards into a basin-like cavity,
into which the flour falls as it is ground. A second stone, grasped in
the hand of the woman who grinds, weighs about three pounds,
beneath which, as it is moved up and down the inclined plane of the
under millstone, the grain is crushed, and gradually converted into a
coarse flour.
This is the same kind of mill that was used by the ancient
Egyptians, and is represented in the excellent work upon those
people, recently written by Sir G. Wilkinson, although he describes it
as being used for fulling clothes, having mistaken, I suppose, the
flour represented as falling into the cup-like recipient for a stream of
water. I observe, also, in another plate in the same work, a
representation of this mill, but without any allusion to its real
purposes. Moses, in the fifth verse of the eleventh chapter of
Exodus, describes exactly the character of the occupation, and the
instrument, where he speaks “of the maid-servant that is behind the
mill,” for women are only employed on this duty, and they always
stand in the rear, leaning forward over their work. Very few houses,
those only of the poorest people, have but one mill; generally two or
more stand side by side in a row, and the number is always
mentioned when the idea is wished to be conveyed of the large
dependent retinue that the master of the house feeds.
A few large jars containing water, or ale, ranged along one side of
the house, and a shield hung from the projecting end of one of the
sticks that formed the front, were the only articles that occupied
prominent positions as furniture in my residence. Three or four
“maceroitsh,” or earthenware pots for cooking, generally lay upset in
the white wood ashes contained in the large circular hearth that
occupied a portion of the floor opposite to the mills; and some of the
necessary but small instruments for clearing or spinning cotton were
placed when not being used upon a skin bag, in which a quantity of
that useful material was contained.
I was very much struck with the extreme contrasts that could be
drawn between the inhabitants of Farree and the Dankalli Bedouins.
The large and portly forms of the former, their apparent love of quiet,
the affection they evinced for their children, and that of the children
for their parents, were all points characteristic of these great
differences. The physiognomy of the two people exhibited equally
varying features, and as the men of Farree are a good type of the
real Amhara population, I shall endeavour to give an idea of the form
of the countenance and the head peculiar to this family of man, by a
description drawn from my first observations in that town, where the
people have less admixture of Galla blood, than the inhabitants of
the table land of Shoa above and beyond them.
This will be preceded, however, by some necessary, and, I
believe, novel information respecting the origin of the Amhara, which
I became acquainted with during my residence in Shoa, and which
has been singularly confirmed by a comparison of the reports and
prejudices I noted down while in that country, with recorded
circumstances of the earlier history of Egypt, and of other powerful
empires that once existed along the course of the Nile.
Amhara, which word is at present only used to designate the
Christian population of Abyssinia, was, previous to the introduction of
the Mahomedan religion, the descriptive appellation of an extensive
red people, who principally occupied the eastern border of the
Abyssinian table land, from the latitude of Massoah in the north to
that of lake Zui in the south. To the west of these, and occupying the
portion of the table land in that direction, lived a people decidedly
different in their complexion, their features, their language, their
religion, and their customs. These were the Gongas, or Agows, who
I believe to have been the original possessors of the whole plateau,
until a period remarkable in history, when the Emperor of Meroë or
Ethiopia located upon a portion of their country, those disaffected
soldiers of Psammeticus who had sought an asylum in his kingdom.
Were I not convinced that the Amhara population of Abyssinia, at the
present day, can be physically demonstrated to be the descendants
of these fugitives from Egypt, I would not venture to advance such
an innovation upon the generally received opinion, that the Amhara
are aborigines of the country they now inhabit.
Under the term Abyssins, Dr. Prichard, in his invaluable work
upon the natural history of man, includes all the different nations that
now inhabit the lofty plain of Abisha or Abyssinia. Of one of these
nations, the Amhara, he remarks, “So striking is the resemblance
between the modern Abyssinians and the Hebrews of old, that we
can hardly look upon them but as branches of one nation, and if we
had not convincing evidence to the contrary, and knew not for certain
that the Abramidæ originated in Chaldæa, and to the northward and
eastward of Palestine, we might frame a very probable hypothesis,
which would bring them down as a band of wandering shepherds
from the mountains of Habesh, and identify them with the pastor
kings, who, according to Manetho, multiplied their bands in the land
of the Pharaohs, and being, after some centuries, expelled thence by
the will of the gods, sought refuge in Judea, and built the walls of
Jerusalem. Such an hypothesis would explain the existence of an
almost Israelitish people, and the preservation of a language so
nearly approaching to the Hebrew in intertropical Africa.” The
learned ethnologist goes on to observe—“It is certainly untrue; and
we find no other easy explanation of the facts which the history of
Abyssinia presents, and particularly of the early extension of the
Jewish religion and customs through that country, for the legend
which makes the royal house of Menilek descend from Solomon and
the Queen of Sheba, is as idle a story as ever monks invented to
abuse the reverent ignorance of their lay brethren.”
Herodotus, and other ancient historians and geographers, have
recorded the migration of a vast body of discontented native soldiers
from Egypt, in the time of Psammeticus. These, we are told, to the
number of 240,000, retired to the country of Ethiopia, where they
were kindly received by the Emperor. They assisted him in his wars,
and in return were apportioned, as a residence, some country on the
confines of Ethiopia, from which they were to drive a rebellious
people to make room for themselves. Herodotus places this country
“upon the Nile, at about the same distance beyond Meroë as this last
is from Elephantine, or fifty days’ journey;” and he also adds, that
“the Antomali (deserters) are known by the name of Asmach, which,
being translated, signifies ‘standing on the left hand’ of the King.” It is
a most remarkable circumstance that the reason or origin of the
name of the country of Gurague, literally “on the left side,” has long
been a question of interest with every Abyssinian traveller, but none
have given any satisfactory explanation for what reason this
particular, and evidently significant, name was first applied. The
situation of the Amhara with respect to the Abi or Bruce’s Nile at
once accounts for the designation, as they live upon the left hand of
the stream as it flows south from lake Dembea, whilst that portion of
this people still retaining their ancient name and purity of descent,
the present Gurague occupy a country similarly situated with respect
to the river Zebee, or Azzabi, or Assabinus, the Ethiopian Jupiter. Abi
and Abiah, other names for branches of the Nile in Abyssinia, are
expressive of father or king, evidently from having been, at a former
period, the chief objects of worship by the people inhabiting their
banks. “Asmach,” and “Gurague,” bear, therefore, the same
interpretation, “to the left of the king,” and none other can explain the
circumstance of the latter name being given to the Amhara. It
appears, however to have been bestowed in contra-distinction to the
“Gongas,” or “Kongue,” a people who originally occupied the right
banks solely of the Abi and Abiah.
This singular correspondence between “Asmach” of the Grecian
historian, and “Gurague” of modern travellers, would be alone,
perhaps, inconclusive evidence that these terms apply to the same
people or country, but some additional evidence may be drawn from
the account which Pliny gives of these Egyptian fugitives. On the
authority of Aristocreon, he states, that “Seventeen days from Meroë
is Esar, a city of those Egyptians who fled from Psammeticus, and
entered the service of the monarch of that country, and in return
received a considerable tract of territory upon the confines, from
which the Ethiopian prince ordered them to expel a tribe of people, at
that time in rebellion against him, and this migration of the Egyptian
troops, introducing the arts and manners of a refined nation, had a
very sensible effect in civilizing the Ethiopians.” The most interesting
particulars we gather from this information, is the name of the city, or,
as I presume, the chief seat of these fugitives, Esar.
By a singular coincidence in the Old Testament, we are told that
Esau is Edom, and although I am not going to infer from this alone,
any connexion between that patriarch and the Ethiopian city, Esar,
yet the philological analogy between the scriptural proper names,
curiously enough, also exists between those of profane history; for
the Esar and Amhara of our subject, express the very same idea as
Esau and Edom, which by all Biblical commentators, is allowed to be
the colour red. “And the first came out red, all over like an hairy
garment; and they called his name Esau.” (Genesis xxv. 25.)
In the present Dankalli language, and I think also, in that of
ancient Meroë, Assar signifies red. In the Persian, I am given to
understand that the planet Mars is called Azer, from its characteristic
colour, a circumstance of significant import when it is considered that
the word Calla, from which is derived Galla, “Ab” the root of Abi, and
“Nil,” from which comes Nile, with others I have yet to speak of, as
designations of places in Abyssinia, are all referable to the same
language. To return, however, to Esar, and its connexion with the
colour red, for it is the same with Esau, and that it is the same as
Edom in Hebrew, I advance the testimony of Dr. Stukeley, who,
speaking of the Red Sea, remarks, “That sea had its name from
Erythras, as the Greeks and the same Pliny write; who is Edom, or
Esau, brother of Jacob. The words are synonymous, signifying
red.”[1] Amhara, also bears the same interpretation in Amharic, and
although it has another meaning, that of beautiful, this is only
because of the national taste directing the name of the favourite
complexion among them, to be employed as the term for beauty
itself. The Dankalli slave-merchant well understands this, for a light-
red Abyssinian girl is the Circassian of oriental harems. In Arabia,
where the original word still conveys the more common idea, we find
“hamah” employed to express the colour red.
In this manner, I connect the “Asmach” of Herodotus, with
Gurague of modern travellers, and the Esar of Pliny, with the Amhara
of the present day, and from these two mutually corroborating
correspondencies, the identity of the modern Abyssinians of Dr.
Prichard with the Automali of Herodotus may perhaps be deduced,
and the difficulty of accounting for a Hebrew people, situated on the
Abyssinian plateau only requires proof to be advanced that the
revolted soldiers of Psammeticus were of the same family of man as
the fugitive Israelites who sought a refuge, under nearly similar
circumstances, in Syria, and built the walls of Jerusalem; and as
their languages are nearly the same, as also their manners,
customs, and ancient religion, previous to the introduction of
Christianity, it will not, perhaps, be difficult to adduce such evidence.
For my part, I am inclined to believe in this national relationship,
because it is partly confirmed by the received account of the
brothers, Esau and Jacob, contained in the book of Genesis, and the
connexion between the two patriarchs, and the country of Egypt, will
perhaps receive some illustration from the opinion I have ventured to
advance upon the subject. In the elder brother, Esau, I perceive the
father of the royal shepherds, and among the list of the dukes, his
descendants may be found, perhaps the pastor kings who held for
some time the sovereign power in Egypt.
The connexion also of the name Esau, or Esar, with the
profession of soldiers, is evident, for in oriental mythology it is
identified with the god Mars; whilst on the other hand, the word
Israel, in Hebrew, I believe, as in Amharic has an immediate
reference to labour, as the name Jacob has also to the heel, which
coincides very singularly with the idea prevalent in India, that the
labouring class have all sprung from the foot of Brahmah. It would be
very interesting, if future discoveries in hieroglyphics, or other
cotemporary histories, which, I believe, do exist in central Africa,
should prove that the appearance of the Jews as a family of man,
under the patriarch Abraham, marks the disruption of an African
community of castes, where the Priest class, excited by the ambition
of a Psammeticus, should determine upon the expulsion of the
soldiers, who thereupon fled to Ethiopia; and, also, that after a
tyrannical and cruel oppression should ultimately occasion the flight
of the workmen, or Israelites, into Palestine. I leave the question,
however, now, to more profound ethnologists, and shall conclude
this, I am afraid, very uninteresting subject, with a short but
necessary description of the features and physical characteristics of
the present Amhara population of Abyssinia.
In the British Museum are many Egyptian statues that possess
exactly the features of the genuine Amhara race. One more,
especially of a woman in the lower saloon marked 16, I will
particularize, to enable those who have the opportunity of examining
these relics of an extinct nation to form a proper idea of the
physiognomy of the people I am speaking of.
Their general complexion cannot be better described by reference
to a familiar object than comparing it with that of red unpolished
copper. Their skin is soft and delicate; the general stature is below
the middle height of Europeans. Their forms are not fully developed
until they have arrived at the same years of puberty as ourselves;
and it is very uncommon for women under seventeen to bear
children. The features of the women conform to a general
characteristic type, and less variations from this are observed among
them than in the men. This observation extends to other races
besides the Amhara, for I have invariably found more consistency of
countenance, more nationality preserved in the features of females
than in the males of the many different people I have met with in my
travels in Abyssinia.
The Amhara face is ovate, having a considerably greater
expression of breadth in the upper than in the lower part. The scalp
in front encroaches upon the forehead, making its length
disproportionate to its height, and, in consequence, it appears
exceedingly low. The eyes are long, but rather full, and the
separation of the eyelids longitudinal, as in Europeans. Their cheeks
are high, yet finely rounded, and sometimes, with the long forehead,
giving to the countenance a nearly triangular form. The nose straight
and well-formed, with a small and beautiful mouth, a finely-curved
edge gradually rising from the commissure to the fulness of a most
inviting pair of lips. A voluptuous fulness, in fact, pervades the whole
countenance; a something more than muscular fibre, yet not exactly
fat, giving a healthy fleshiness, that reminds you of the chubbiness of
children; and I expect the fascinating expression so generally
ascribed to Abyssinian beauties by all orientals is owing to the idea
of innocence and simplicity, that inseparably connects itself with this
infantile character of face. The hair is soft and long; it is neither
woolly, like the negro, nor is it the strong, coarse, straight hair of the
Gongas, or yellow inhabitants of the right bank of the Abi and Abiah
branches of the Azzabi, or red Nile.
I saw few or no cases of distortion among the families I met with
in Efat, and my impression is that they but rarely occur, the natural
and simple lives of the people conducing to easy parturition and a
healthy offspring. The Amhara, however, in their most unchanged
condition in Gurague, and the neighbouring Christian states, have
yet to be visited. The inhabitants of these countries may exhibit
characteristic traits that I have had no opportunities of observing, for
those I met with were the most favourable specimens of the imported
slaves, or their immediate descendants, who were married to
Mahomedans of Efat.
Individuals possessing what I believe to have been the
characteristic features of the genuine Amharic countenance are but
seldom seen on the high land of Shoa, although it might naturally be
expected that their situation would favour a lighter complexion than
the dark-brown Shoans exhibit. This is to be attributed to the very
recent period that their Galla ancestorial relations intruded
themselves into this former Amhara district, as Abyssinian history
records that the first appearance of these invaders from the low
plains of Adal occurred no later than the year 1537.
From the 27th to the 31st of May, Mr. Scott and I remained in easy
durance at Farree. We were frequently summoned to the presence
of the Wallasmah, whom we would amuse by firing off my gun, or
teaching his son, a boy about fourteen years old, to let off percussion
caps without shutting his eyes. The dreadful experiment would never
be attempted by papa, but he wonderfully enjoyed the bright promise
of his hopeful progeny, the child of his old age, who, on the other
hand, annoyed us not a little by the unsatisfied pertness with which
he demanded to be so indulged.
Day after day were we most solemnly promised that we should
start upon the morrow, but without any intention of being permitted to
do so, beyond the accident occurring of our being sent for by the
King. Perhaps our importunity excited a desire to gratify us, and what
they wished for our sake the kind-hearted people of Farree asserted
would be, because of the great probability that the messenger who
had been sent to the King to receive his commands, would return
sooner than he did.
I am not going to acquit the Wallasmah on this plea, for his want
of courtesy towards us; for from some incomprehensible antipathy,
he would, had he dared, have placed us in irons, and even on
occasions of our visiting him, when we endeavoured to do everything
we could to please him, a surly smile was our only return for some
little gratification we might afford to his boy. His people frequently
made excuses for the conduct of their chief, by stating that he either
had been drinking, or else that he had not; so, drunk or sober, it
seemed quite natural to them that the old fellow should be in a
continual ill-humour from some undefined connexion with strong
drink.
I took care to promise him another present on the occasion of our
leaving Farree, as I conceived that it might be some expectation of
the sort that was operating to cause our tiresome detention. I was
wrong in this, for it was not his pleasure, but the King’s, his master,
that we should be kept at Farree, although he tried to make us
believe it was his own, and assuming an authority that did not belong
to him, made our confinement more irksome than it needed to have
been, on purpose to evince his power. With our sentinels behind us,
however, we could wander all over the hill of Farree, and we
accordingly amused ourselves by endeavouring to extend our
information upon the various subjects of novel interest with which we
were surrounded.
One observation I cannot do better than to insert here, respecting
the rocks and soil of Farree, which abound with the nitrate of potass,
the bald face of the former, in many places, being hollowed into deep
grooves by the constant attrition of the tongues of the numerous
flocks and herds, which seem to be as fond of this salt as the same
animals are of common table salt in other countries; a circumstance
that is well shown in those saline resorts of deer and buffaloes,
called the “licks” of North America. The geological structure of the
hills in this neighbourhood is a finely-grained trachytic rock; grey,
save where the intrusion of narrow dykes of some blacker rocks, a
few feet in thickness, and evidently heated on their first appearance,
has changed the general colour to a deep red, which gradually
recovers its natural hue at the distance of some yards on either side
the dyke. This rock contains a considerable quantity of decomposing
felt-spar, supplying the potass, and, I presume, deriving from the
atmosphere, and the moisture it contains, the other necessary
elements to form the thick efflorescence of saltpetre that covers in
some places the surface of the rock.
The religion of Farree is exclusively Mahomedan, as is also that
of more than three-fourths of the towns and villages of the province
of Efat, all of which are under the hereditary viceregal Wallasmah,
who boasts a descent from the famous Mahomed Grahnè, the Adal
conqueror of many portions of the ancient Abyssinian empire, in the
sixteenth century. Efat forms a portion of the valley country, or
Argobbah, which extends from the edge of the table land of Shoa to
the Hawash, that flows along the base of this slope, from the south
towards the north. The northern boundary of Efat is the river Robee,
the southern one being the Kabani; both of them flow into the
Hawash.
Late in the afternoon of the 30th of May, the messenger returned
from Angolahlah, with orders from the King that I should be allowed
to proceed thither, and that the stores should be conveyed to his

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Market Failure versus Government Failure

True / False Questions

1. Externalities can be either positive or negative.

2. Economists generally prefer direct regulation to incentive-based programs because explicit

8. Government provides secondary education because of its private good aspects.

Multiple Choice Questions

A. Business has introduced a product that consumers did not want.

B. Free markets have led to excessive profits.

C. Markets have surpluses or shortages so that government rationing is necessary.

B. market incentive plans.

C. Jane should give up apples to get bananas.

D. Jane should give up bananas to get apples.

A. the total cost to society equals the total benefit.

B. the marginal cost to society equals the marginal benefit.

C. the marginal cost to society is minimized.

D. the marginal benefit to society is maximized.

21. If there is a complete set of markets that are perfectly competitive:

C. every person's utility function is at a maximum.

D. the invisible hand guides the economy to a Pareto optimal position.

A. the Hume dictum.

B. the normative criticism of Pareto optimality.

C. the second best criticism of Pareto optimality.

D. the nirvana criticism of Pareto optimality.

A. No; Pareto optimal is defined as the best possible outcome.

24. If a market has no externalities, marginal private costs:

A. exceed marginal social costs.

B. equal marginal social costs.

C. are below marginal social costs.

D. intersect marginal social costs.

26. The best example of a positive externality is:

A. roller coaster rides.

A. the tragedy of the commons.

C. an adverse selection problem.

A. are a source of negative externalities.

B. reduce negative externalities elsewhere in the economy.

C. create a free rider problem.

D. are a way of solving a free rider problem.

A. are a source of negative externalities.

B. reduce negative externalities elsewhere in the economy.

C. create a free rider problem.

D. are a way of solving a free rider problem.

A. does not have important positive externalities.

B. does not have important negative externalities.

D. has problems of adverse selection.

A. imposes a negative externality on others.

B. imposes a positive externality on others.

C. imposes the free rider effect on others.

D. is a private decision with no effects on others.

D. Acidic by-products of fossil fuel combustion that produce acid rain

37. An externality is present in a free market whenever:

A. a monopolist spends funds to keep potential competitors out of the market.

D. a tax is imposed on the supplier of a good.

A. prevents the market from working efficiently.

B. prevents government from intervening in the marketplace.

C. causes the market to work more effectively.