Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
There is an adverse selection problemin the market for used cars because
owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars.
owners of high-quality cars will have a strong incentive to sell their carsto obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
most people prefer new cars, but the high pricesfor new cars force most of them to buy used cars.
government actions to pass "lemon" laws have reducedinformation on used cars.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
True / False Questions
Asymmetric information occurs when the two parties in a markettransaction do not have the same amount of information regarding the product or process involved in the transaction.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
The licensing and regulation of financial advisers is one way by which the government tries to deal with the problem of inadequate information that financialfirms have about their customers.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
Adverse selection is when someone with home insurance decides to take the chancethat a dying tree would fallonthe garage, rather than spend the money to have the tree cut down.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
When the government bails out failingbanks, it creates a moral hazard problem; but when the government bails out homeownerswho are defaulting on their mortgages,there is no moral hazard problem.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
When critics of unemployment insurance claim that some of the unemployed are not exertingmuch effort to find jobs because of the unemployment benefits, they are referringto the moral hazard problem.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
eBay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potentialbuyers.
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix:Information Failures
An example of an adverse selection problemis in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
Which of the following is an activityof government that is not an activity of private firms?
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
The government's ability to coercecan enhance economic efficiency by
eliminating income inequality.
B. correcting market failures.
preventing resources from going to their most valued uses.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
In a market economy,the government's power to coerce can
undermine economic efficiency by increasing private-sector risk.
improve economic efficiency by directing all resources to their most valued uses.
C. reduce private-sector risk and increase economic efficiency.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
How does government's power to coercebehavior tend to reduceprivate-sector risk?
by enforcing contracts and discouraging illegal behavior that threatens private property
by guaranteeing that the government will financially cover any losses by private-sector firms
by strictly regulating the allocation of most propertyresources in the economy
The coercive power of government only increases private-sector risk.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
Weak government enforcement of contracts and laws tends to
increase economic efficiency by minimizing government interference.
stimulate innovation and investment.
C. discourage economic activity by encouraging private-sector coercionsuch as blackmail and extortion.
D. not affect economic activity, as incentives for theft and deceptionare low.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
The government of Southland wants to improve resource allocation in the country.Which of the followingactions by the Southland government is most likely to accomplish this?
weakening enforcement of laws and contracts
promising to cover every risk of loss for private firms
coercing all firms to innovate and invest
D. taxing polluters and subsidizing firms that are creating significant positiveexternalities
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
Which of the followingis a sourceof government failure?
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
Information problems create inefficient outcomes in
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
The many layers of the federal government in the United States
lead to economicinefficiencies because of difficultyaggregating and conveying information.
enhance government's ability make effective decisions quickly.
better allow the invisible hand to directgovernment resources to their best uses.
improve accountability of government officials, thus leading to more efficientpolicies.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
In what way, if any, does the invisible hand affect government resource allocation?
It enhances government efficiency by promoting competition for resources within government.
B. It does not help resource allocation, as there are no competitive forces within government that automatically directresources to their best uses.
It rewards government bureaucrats who are most efficient at implementing public policies.
It reduces government efficiency by sending market signals that interfere with government decisionmaking.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
Individual accountability within the government bureaucracy
tends to be greater than in privatefirms, making government more efficient than privatefirms.
is not a problem becausegovernment bureaucrats are not affectedby the self-interest that affects privatesector individuals.
is easy to monitor because of the smallsize and scope of government.
D. tends to be lacking because of civil serviceprotections and the complexity of government.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
Government officials tend to make
better economic decisions than private individuals because of the wealth of information at their disposal.
better economic decisions than private individuals because of the efficient processes and flexibility built into the government bureaucracy.
C. inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs.
D. inefficient choices because the invisible hand directs them away from the resource allocation where marginal benefits equalmarginal costs.
Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and listsome of the difficulties associated with managingand directing the government.
Test Bank: I Topic: Governments EconomicRole
As it relates to corporations, the principal-agent problem is that
the goals of the corporatemanagers (the principals) may not match the goals of the corporateowners (the agents).
B. the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).
the federal government (the agent) taxes both corporate profits and the dividends paid to stockholders (the principals).
it is costly for the corporate owners (the principals) toobtain a corporatecharter from government (the agent).
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I Topic: Government Failure
Suppose American winemakers convince the federal government to issue a directive to serve only domestically produced wine at government functions. This would be an exampleof
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I Topic: Government Failure
Professional sports teams will sometimes seek public subsidies for stadium financingprojects that produce large benefits for a relatively small numberof fans and impose small costs on a relatively large number of people. Sometimes these efforts to secure public funding are successful even though the decisionis not efficient.This is an example of
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I Topic: Government Failure
Suppose the U.S. House of Representatives is debating a bill to fund construction and maintenance for the nation’s highwaysystem. Representative Sandy Shady adds a provision to the billthat would fund a new public art museum in her district. The authorization of expenditure for the museum would be an example of