ECON QENSTIONS AND ANSWWERS

Suppose lawyers seek legislation to limit the use of computer software that enables people to use their personal computers to self-prepare their own wills, trusts, and other legal documents. This is an example of

logrolling.

the principal-agent problem.

C. rent-seeking behavior.

D. limited and bundled choices.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

In a sporting goods store, you can buy the equipment you want and forgo the rest. But in an electionyou "buy" the entirerange of the candidate's positions, includingsome you may not agree with. This difference

reflects limited and bundled choices in the public sector.

describes the paradox of voting.

describes the principal-agent problem in the public sector.

creates bureaucratic inefficiency in the public sector.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

According to some economists, the private sectoris more efficient than the public sector mainly because

the private sector has a clear test of performance: profit and loss.

wages, salaries, and fringe benefits are higher in the private sector.

worker turnover is higher in the public sector.

of extensive negative externalities in the public sector.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

In 2015, U.S. federal government legislation authorized

152 earmarks, totaling $3.3 billion.

B. 105 earmarks, totaling $4.2 billion.

1,160 earmarks, totaling $19.6 billion.

11,700 earmarks, totaling $16.9 billion.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Narrow, specifically designated expenditures that are includedin more comprehensive legislation are known as

earmarks.

logrolls.

benefits-received allocations.

progressive expenditures.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

"Earmarks" refer to

the additional votes that must be taken when a voting paradox occurs.

taxes that redistribute wealth or income from one income group to another.

C. authorized expenditures benefiting a narrow, specifically designated group that are includedin more comprehensive spending legislation.

D. legislation focused on correcting negative externalities.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Regulatory capture is said to have occurredwhen which of the followingis true?

Rules and enforcement in an industry are heavilyinfluenced by the industry being regulated.

One firm controls an entire market,having captured customers away from other firms.

Government imposes excessive regulations in an industry, resulting in inefficiencies.

Consumers make all the rules for an industry, forcing firms into inefficient production methods.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Which of the following would be the best example of regulatory capture?

Starbucks buys up all the available supplies of coffee beans.

Nike executives influence the rules for track and field events.

Federal law makers write and pass legislation that protects domestic companies from foreign competition.

D. Executives from the Ford, General Motors, and Chrysler companies write the rules regulatingautomobile safety and fuel requirements.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Regulatory capture often occurs because of which of the following?

Government officials want stronger control over industry regulation.

B. Nearly everyone with expertiseworks in the regulatedindustry.

Patent law allows firms to gain monopoly power easilyand therefore control a market.

Consumer groups are effective at lobbyingthe government for industry regulation.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Which of the following is considered a potential solution to some regulatory capture?

bringing industry experts into the regulatory process

creating a standard set of regulations for all industries

C. deregulation of the industry

D. government subsidies for firms in the industry

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Proponents of deregulation point to all of the following industries as examples of successful deregulation except for

airlines.

B. pharmaceuticals.

railroads.

interstate trucking.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Which of the followingwould best explainwhy regulatory capture is a problem?

The regulations implemented tend to reduce the profitability of the regulatedindustry and reduce global competitiveness.

Regulatory capture unduly increases the size and power of government, increasing costs for taxpayers.

Individuals implementing the regulations lack expertise about the industryand therefore make poor regulatory choices.

D. The regulations implemented serve the private interests of the regulatedindustry, rather than addressing social interests such as consumer safety and environmental protection.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Deregulation

tends to improve outcomes in industries generating substantial negative externalities.

B. eliminates regulatory capture and can improve outcomesby increasing competition.

is most appropriate to undertake by government agencies responsible for human safety,financial regulation, and environmental protection.

always generates greater economic efficiency.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Government loan guarantees tend to have the effect of

socializing losses and privatizing gains.

socializing gains and privatizing losses.

socializing both gains and losses.

privatizing both gains and losses.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Under what circumstances would government loan guarantees be socially beneficial?

when the guarantees socialize losses and privatize gains

when the guarantees stimulate production of goods generating significant spillover costs

C. when the guarantees promote production of goods otherwise underproduced by the private sector

D. when the guarantees increase company profits

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Which of the followingwill tend to socialize lossesand privatize gains?

lowering interestrates to encourage privateborrowing and investment

government regulation to promote human safety and environmental protection

government creating projects rather than supporting privateefforts

D. government guarantees to private investorsthat they willgettheir money back even if the company fails

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

What is the main problem with government guarantees that socialize losses and privatizegains?

They encourage overly risky investments by insulatingprivate investorsfrom any losses.

The investments that do occur never generate production of goods underproduced by the private sector.

They discourage private investment in worthwhile projects.

They tend to benefit foreign companies at the expenseof domestic firms.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

The unlawful misdirection of governmental resourcesfor personal gain is known as

political corruption.

logrolling.

adverse selection.

the special-interest effect.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

The Road Runner Club contributes money to Senator Sly's reelection campaign fund, and Senator Sly helps pass legislation to add more jogging paths across the state. From this we can definitively conclude

that political corruption has occurred.

that logrolling has occurred.

that a principal-agent problemhas occurred.

D. nothing; the Road Runner Club may have donated to Senator Sly because he alreadysupported the jogging paths.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Political corruption occurs whenever

logrolling is used to secure votes for controversial legislation.

B. government officials use unlawful misdirection of governmental resources for their own personal gain.

special interestgroups contribute to elected officials, who in turn support legislation that benefits the special interest group.

there is pork barrelpolitics involved.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Consider This) From an economist's perspective,

small government is better than big government.

big government is better than small government.

regardless of size, government is incapable of achieving allocative or productive efficiency.

D. the size of government doesn't matter, as long as spendingoccurs up to where MB = MC.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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

(Consider This) From an economist's perspective, when is government too big?

Government is always too big.

when government activity exceeds 10 percent of gross domesticproduct

C. when the marginal costs from additional government spending exceed marginal benefits

D. when the marginal benefits from additional government spending exceed marginal costs

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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

(Consider This) Subsidies for mohair production illustrate

why special-interest effects are often characterized by concentrated benefits and diffuse costs.

why special-interest effects are often characterized by concentrated costs and diffuse benefits.

that larger groups carry greater political weight than smaller groups.

the moral hazard problem.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Consider This) Smaller groups are sometimes able to achieve political victories against larger groups. This is referred to as the

moral hazard problem.

featherbedding problem.

C. collective action problem.

D. pork barrel problem.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Consider This) The collective action problemrefers to

logrolling behavior that results in inefficient policies.

the tendency for legislatures to enact policies that are economically harmful.

the lack of politicalpower of small groups of people.

D. difficulty in organizing and motivating large groups to achieve desired outcomes.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Consider This) A 2015 study of hospitals, power plants, and water utilities found that

public companies violated health and safety laws more than private companies.

government employees are systematically less competent than those in the private sector.

private companiesviolated health and safety laws more than public companies.

there was no significant difference in the number of health and safety violations between public and private companies.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Consider This) According to a 2015 study, health and safety violations are more prevalent in publiccompanies because

private companieshave greater technical expertise than public companies.

B. public companies are less likelyto be fined for violating health and safety laws than private companies.

laws for public companies are more stringent, making it more difficult for public companies to comply.

public companies are more closely monitored, making it easierto detect violations.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Last Word) In 2011, Congress funded a sanctuary for white squirrels, a giant roadside coffee pot, and an antique bicycle museum. These are examples of

the paradox of voting.

B. pork barrel politics.

the benefits-received principle.

the adverse selectionproblem.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Last Word) From 2006-2010, the federal government paid $600 millionin retirement benefits to deceasedfederal employees,with the checks being illegally cashed by relatives. This example illustrates

the benefits-received principle.

logrolling.

C. bureaucratic inefficiency.

D. the problem of limitedand bundled choices.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

(Last Word) In 2004, Congress passed a corporatetax relief bill with 276 provisions for tax breaksto groups such as restaurant owners, Hollywood producers, and NASCARtrack owners. Thisisan example of the

special-interesteffect.

benefits-received principle.

paradox of voting.

principal-agent problem.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

True / False Questions

The government's ability to force people to do thingscan increase economic efficiency.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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's ability to enforce laws and contracts increases private-sector economicrisks.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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 invisible hand guides government's economic activityjust as it does with privateeconomic activity.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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

Because of the force of law and bureaucratic structure, government accountability is less of a problem than in the private sector.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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 size and scope of government inhibit the flow of information to decisionmakers, leading to inefficient outcomes.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

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 pursuit through government of a transfer of wealth at society's expense is called"rent seeking."

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

The principal-agent problem is a problem for the private sector but does not apply to political decision making.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Medicare is the U.S. government's largest unfunded liability.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

A debt crisis refers to how much government spending exceeds tax revenues in a given year.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Fiscal policy is more susceptible to politicization than monetary policy.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Changes in tax rates are a form of monetarypolicy.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Monetary policy attempts to change the levelof spending by altering interest rates.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

The problem of limitedand bundled choices explains why many voters cannot fully express their political preferences.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Regulatory capture occurs when government exerts excessive control over an industry.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

The Securities and Exchange Commission's supervision of WallStreet financial firms is a possible example of regulatory capture.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Economists widely support deregulation of industries that tend towardmonopoly or generatesubstantial negative externalities.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Deregulation is seen as a solution to regulatory capture because it eliminates the regulatory agency that can or has been captured.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Government loan guarantees tend to socialize gains and privatize losses.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-02 Discuss government failure and explain why it happens.

Test Bank: I Topic: Government Failure

Government guarantees that socialize losses and privatizegains tend to encouragerisky and imprudent investment.

TRUE