Macroeconomics 21st Edition By McConnell – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

Chapter 05 Government’s Role and Government Failure Answer Key

Multiple Choice Questions

• Which of the following is a key difference between the economic activities of government and those of private firms?

• • Private firms face the constraint of scarcity; government does not.
  • Government focuses primarily on equity; private firms focus only on efficiency.
  • Private economic activities create externalities; government activities do not.

D. Government has the legal right to force people to do things; private firms do not.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• Which of the following is an activity of government that is not an activity of private firms?

• • enforcing involuntary transactions

• paying equitable wages
• creating positive externalities
• pursuing economic efficiency

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• The government’s ability to coerce can enhance economic efficiency by

• • eliminating income inequality.

B. correcting market failures.

• preventing resources from going to their most valued uses.
• restraining self-interest.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• 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.

D. cause significant negative externalities.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• How does government’s power to coerce behavior tend to reduce private-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 property resources in the economy
• The coercive power of government only increases private-sector risk.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• 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 coercion such as blackmail and extortion.

D. not affect economic activity, as incentives for theft and deception are low.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• The government of Southland wants to improve resource allocation in the country. Which of the following actions 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 positive externalities

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• Which of the following is a source of government failure?

• • the invisible hand
  • the lack of bureaucracy in government

C. the enormous size and scope of government

D. excessive flexibility

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• Information problems create inefficient outcomes in

• • the private sector but not the public sector.
  • the public sector but not the private sector.
  • neither the private nor the public sector.

D. both the private and the public sectors.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• The many layers of the federal government in the United States

• • lead to economic inefficiencies because of difficulty aggregating and conveying information.

• enhance government’s ability make effective decisions quickly.
• better allow the invisible hand to direct government resources to their best uses.
• improve accountability of government officials, thus leading to more efficient policies.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• 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 direct resources 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 decision making.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• Individual accountability within the government bureaucracy

• • tends to be greater than in private firms, making government more efficient than private firms.
  • is not a problem because government bureaucrats are not affected by the self-interest that affects private sector individuals.
  • is easy to monitor because of the small size and scope of government.

D. tends to be lacking because of civil service protections and the complexity of government.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• 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 equal marginal costs.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-01 Describe how governments power to coerce can be economically beneficial and list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• As it relates to corporations, the principal-agent problem is that

• • the goals of the corporate managers (the principals) may not match the goals of the corporate owners (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) to obtain a corporate charter from government (the agent).

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• In corporations, owners are and managers are .

• • agents; principals
  • stockholders; bondholders
  • agents; employees

D. principals; agents

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• In representative democracy, voters are and politicians are _.

• • agents; principals
  • logrollers; principals
  • agents; employees

D. principals; agents

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• As it relates to owners and managers, the principal-agent problem results from the

• • separation of corporate ownership and control.

• double taxation of corporate profit.
• limited liability of corporate owners.
• differing interests of corporate stockholders and bondholders.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• As it relates to the political process, the principal-agent problem results from the

• • negative externalities that are created by some policy actions.
  • political rules that encourage elected officials to engage in unethical and illegal behavior.

C. inconsistency between voters’ interest in programs and politicians’ interest in reelection.

D. paradox of voting.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• “Vote for my special local project and I will vote for yours.” This political technique

• • illustrates the paradox of voting.

B. is called “logrolling.”

• illustrates the median voter model.
• undermines the benefits-received principle.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Factors that impede the attainment of economic efficiency in the public sector are called

• • market failures.
  • externalities.

C. government failures.

D. voting irregularities.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• The idea of government failure includes all of the following except

• • special-interest effect.
  • bureaucratic inefficiency.
  • pressure by special-interest groups.

D. extensive positive externalities from public and quasi-public goods.

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Blooms: Understand Difficulty: 02 Medium

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 example of

• • moral hazard.
  • the principal-agent problem.
  • logrolling.

D. rent-seeking behavior.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Public choice theorists contend that

• • government can efficiently correct instances of market system failure.
  • the existence of cost-benefit analysis has brought about the efficient use of resources in the public sector.
  • public bureaucracies are inherently more efficient than private enterprises.

D. public bureaucracies are inherently less efficient than private enterprises.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• The pursuit through government of a “transfer of wealth” at someone else’s expense refers to

• • logrolling.

B. rent-seeking behavior.

• the paradox of voting.
• the median-voter model.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Economists call the pursuit of a transfer of wealth through government at someone else’s expense

• • the paradox of voting.
  • adverse selection.

C. rent-seeking behavior.

D. the benefits-received principle.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Public choice economists hold that politicians will

• • favor programs entailing immediate and clear-cut costs and vaguely defined or deferred benefits.
  • follow policies leading to an optimal allocation of resources between public and private sectors.

C. favor programs entailing immediate and clear-cut benefits and vaguely defined or deferred costs.

D. objectively weigh the costs and benefits of various government programs and vote accordingly.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Public choice economists contend public bureaucracies are inefficient primarily because

• • the value of public goods is more easily measured than is the value of private goods.

B. of the absence of competitive market pressures.

• public sector workers are more security-conscious than are private sector workers.
• relatively low pay in government attracts workers of lesser quality.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• A special-interest issue is one whose passage yields

• • private benefits equal to external benefits.
  • large external benefits compared to private benefits.
  • small economic losses to a small number of people and large economic losses to a large number of people.

D. large economic gains to a small number of people and small economic losses to a large number of people.

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Blooms: Understand Difficulty: 02 Medium

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 financing projects that produce large benefits for a relatively small number of fans and impose small costs on a relatively large number of people. Sometimes these efforts to secure public funding are successful even though the decision is not efficient. This is an example of

• • log-rolling.
  • pork-barrel politics.

C. the special-interest effect.

D. market failure.

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Blooms: Understand Difficulty: 02 Medium

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 highway system. Representative Sandy Shady adds a provision to the bill that would fund a new public art museum in her district. The authorization of expenditure for the museum would be an example of

• • an earmark.

• an unfunded liability.
• a collective action problem.
• a principal-agent problem.

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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 the best example of rent-seeking behavior?

• • Voters consider a ballot measure that would increase taxes to better fund schools.

B. Students at a university lobby the administration to improve dorms and reduce class sizes without increasing tuition.

• Consumers try to get flying cars produced by telling automakers they are willing to pay for them.
• Senators vote for what their constituents want so they can get reelected.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• The political tendency to favor spending priorities with immediate benefits but deferred costs results in

• • chronic budget deficits.
  • misdirection of stabilization policy.
  • unfunded liabilities.

D. all of these.

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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 related to the special-interest effect?

• • pork-barrel politics
  • earmarks
  • logrolling

D. all of these

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Government’s unfunded liabilities

• • result from the political bias toward immediate benefits and deferred costs.

• result in more efficient policies in an attempt to satisfy these liabilities.
• are caused primarily by market failures.
• only occur in democratically elected governments.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• The U.S. federal government’s largest unfunded liability is

• • Medicare.
  • national defense.

C. Social Security.

D. unemployment insurance.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Chronic budget deficits can be attributed to

• • unfunded liabilities.

B. voters wanting government programs but not wanting to pay taxes.

• inappropriate monetary policy.
• state budget laws.

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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 impacts would economists expect to result from chronic budget deficits?

• • greater economic efficiency resulting from the abundance of public goods produced
  • permanently high levels of output and continued economic growth
  • greater political control over monetary policy

D. government control of an inefficiently large share of the economy’s resources

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• The estimated value of the U.S. government’s unfunded liability to Social Security is

• • $4.6 trillion.
  • $4.8 trillion.
  • $15.6 trillion.

D. $20.5 trillion.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Government changes in interest rates to regulate the economy are part of

• • monetary policy.

• fiscal policy.
• debt policy.
• liability policy.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Government fiscal policy involves changing which of the following?

• • interest rates

B. taxes and government spending

• regulations on business
• the amount of money in circulation

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• To curb the problem of voters wanting immediate benefits and deferred costs, many state governments in the United States have

• • made unfunded liabilities illegal.
  • resorted to greater use of monetary policy.

C. passed laws requiring balanced budgets.

D. stopped using fiscal policy.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• A government using fiscal policy in an attempt to stimulate the economy would do which of the following?

• • raise taxes
  • raise interest rates
  • lower interest rates

D. raise government spending

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• To reduce politicization of policy making, many countries have given control of to politically independent central banks.

• • fiscal policy

B. monetary policy

• unfunded liabilities
• budget deficits

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• The U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank are all in charge of what for the countries they represent?

• • debt management
  • unfunded liabilities

C. monetary policy

D. fiscal policy

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Monetary stimulus is most helpful to an economy

• • that is experiencing high inflation.

B. that is in recession.

• experiencing significant negative externalities.
• with few public goods.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• When a nation is in a debt crisis, the government’s level of debt is so high that

• • monetary policy is ineffective.

B. the government is unable to find willing lenders so it can continue borrowing.

• it can only be solved with a fiscal stimulus of lower taxes and more government spending.
• other countries will be unwilling to buy goods and services from the nation.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• Economists (particularly public choice theorists) point out that the political process

• • differs from the marketplace in that voters and congressional representatives often face limited and bundled choices.

• is less prone to failure than is the marketplace.
• is a much fairer way to allocate society’s scarce resources than is the impersonal marketplace, which is dominated by high-income consumers.
• involves logrolling, which is always inefficient.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• When congressional representatives vote on an appropriations bill, they must vote yea or nay, taking the bad with the good. This statement best reflects the

• • paradox of voting.
  • regulatory capture effect.
  • benefits-received principle.

D. concept of limited and bundled choices.

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Blooms: Understand Difficulty: 02 Medium

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

Test Bank: I Topic: Government Failure

• 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.

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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 election you “buy” the entire range of the candidate’s positions, including some 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.

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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 sector is 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.

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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.

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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 included in more comprehensive legislation are known as

• • earmarks.

• logrolls.
• benefits-received allocations.
• progressive expenditures.

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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 included in more comprehensive spending legislation.

D. legislation focused on correcting negative externalities.

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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 occurred when which of the following is true?

• • Rules and enforcement in an industry are heavily influenced 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.

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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 regulating automobile safety and fuel requirements.

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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 expertise works in the regulated industry.

• Patent law allows firms to gain monopoly power easily and therefore control a market.
• Consumer groups are effective at lobbying the government for industry regulation.

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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

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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.

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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 best explain why regulatory capture is a problem?

• • The regulations implemented tend to reduce the profitability of the regulated industry 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 industry and therefore make poor regulatory choices.

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

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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 outcomes by increasing competition.

• is most appropriate to undertake by government agencies responsible for human safety, financial regulation, and environmental protection.
• always generates greater economic efficiency.

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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.

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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 following will tend to socialize losses and privatize gains?

• • lowering interest rates to encourage private borrowing and investment
  • government regulation to promote human safety and environmental protection
  • government creating projects rather than supporting private efforts

D. government guarantees to private investors that they will get their 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 privatize gains?

• • They encourage overly risky investments by insulating private investors from 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 expense of 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 resources for 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 problem has occurred.

D. nothing; the Road Runner Club may have donated to Senator Sly because he already supported 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 interest groups contribute to elected officials, who in turn support legislation that benefits the special interest group.
• there is pork barrel politics 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 spending occurs 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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• (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 domestic product

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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• (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 problem refers to

• • logrolling behavior that results in inefficient policies.
  • the tendency for legislatures to enact policies that are economically harmful.
  • the lack of political power 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 companies violated 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 public companies because

• • private companies have greater technical expertise than public companies.

B. public companies are less likely to 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 easier to 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 selection 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

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

• • the benefits-received principle.
  • logrolling.

C. bureaucratic inefficiency.

D. the problem of 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

• (Last Word) In 2004, Congress passed a corporate tax relief bill with 276 provisions for tax breaks to groups such as restaurant owners, Hollywood producers, and NASCAR track owners. This is an example of the

• • special-interest effect.

• 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 things can 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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• Government’s ability to enforce laws and contracts increases private-sector economic risks.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• The invisible hand guides government’s economic activity just as it does with private economic 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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• 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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• The size and scope of government inhibit the flow of information to decision makers, 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 list some of the difficulties associated with managing and directing the government.

Test Bank: I Topic: Governments Economic Role

• 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 monetary policy.

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 level of 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 limited and 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 Wall Street 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 toward monopoly or generate substantial 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 privatize gains tend to encourage risky and imprudent investment.

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

Multiple Choice Questions

• The field of economics that analyzes government decision making, politics, and elections is called

• • public finance.

B. public choice theory.

• collective economics.
• political economy.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Public choice economists

• • analyze the incidence of taxes.
  • are also known as Keynesian economists.

C. use the tools of economics to analyze decision making, politics, and elections in the public sector.

D. are, by definition, economists employed by federal, state, and local governments.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Which one of the following topics would be of the most interest to a public choice economist?

• the theory of comparative advantage
• the law of increasing opportunity cost
• inflation and unemployment

D. rent-seeking behavior

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• An economic analysis of the relationship between proposed legislation affecting major employers in each state and the voting patterns of senators and representatives in Congress on that legislation would fit within the subcategory of economics called

A. the economics of fiscal policy.

B. public choice theory.

• behavioral economics.
• monetarism.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• “Government failure” is a prominent topic in

A. public choice theory.

• Keynesian economics.
• socialist theory.
• behavioral economics.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Public choice theory focuses on the economics of

• fiscal and monetary policy.
• the behavior of business firms.
• antitrust and regulatory policy.

D. government decision making, politics, and elections.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Because majority voting fails to incorporate the strength of the preferences of individual voters, it

A. creates negative externalities.

B. under some circumstances produces economically inefficient outcomes.

• leads to market failure.
• leads to politics dominated by special-interest groups.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Suppose that Katie and Kelly each expects to receive $500 worth of marginal benefits from a proposed new recreation center, whereas Kerry expects to receive only $100 worth. If the proposed tax levied on each for the center would be

$400, a majority vote will

• defeat this project and resources will be underallocated to it.
• pass this project and resources will be efficiently allocated.
• pass this project and resources will be underallocated to it.

D. pass this project and resources will be overallocated to it.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Suppose that Steve and Susie each perceive $200 of marginal benefit from a proposed new park, whereas Elizabeth perceives $800. If the proposed tax levied on each for the park would be $300, a majority vote will

A. defeat this project and resources will be underallocated to it.

• defeat this project and resources will be efficiently allocated.
• pass this project and resources will be underallocated to it.
• pass this project and resources will be overallocated to it.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

107.

Answer the question on the basis of this table showing the marginal benefit that a particular public project will provide to each of the three members of a community. No vote trading is allowed.

Voter	Marginal Benefit
Xavier	$  500
Yoho	200
Zest	2,000

If the tax cost of this proposed project is $600 per person, a majority vote will

A. defeat this project and resources will be underallocated to it.

• defeat this project and resources will be allocated efficiently.
• pass this project and resources will be overallocated to it.
• defeat this project and resources will be overallocated to it.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

108.

Answer the question on the basis of this table showing the marginal benefit that a particular public project will provide to each of the three members of a community. No vote trading is allowed.

Voter	Marginal Benefit
Xavier	$  500
Yoho	200
Zest	2,000

If the tax cost of this proposed project is $300 per person, a majority vote will

• defeat this project and resources will be underallocated to it.
• pass this project and resources will be allocated efficiently.

C. pass this project and resources will be underallocated to it.

D. defeat this project and resources will be overallocated to it.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

109.

Answer the question on the basis of this table showing the marginal benefit a particular public project will provide to each of the three members of a community. No vote trading is allowed.

Voter	Marginal Benefit
Xavier	$800
Yoho	800
Zest	100

If the tax cost of this proposed project is $600 per person, a majority vote will

• defeat this project and resources will be underallocated to it.
• pass this project and resources will be allocated efficiently.

C. pass this project and resources will be overallocated to it.

D. pass this project and resources will be underallocated to it.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• The political technique called logrolling

• always increases economic efficiency.
• always decreases economic efficiency.

C. involves trading votes to secure favorable outcomes that otherwise could be rejected.

D. is an example of the paradox of voting.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• The trading of votes by elected officials to secure favorable outcomes is called

• • splitting the difference.
  • social engineering.

C. logrolling.

D. grandstanding.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Senator A agrees to vote for Senator K’s state project in exchange for Senator K voting for Senator A’s state project. This is an example of

A. logrolling.

• the paradox of voting.
• the principal-agent problem.
• the median voter model.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• A situation in which society may not be able to rank its preferences consistently through paired-choice majority voting refers to

A. logrolling.

B. the paradox of voting.

• the median-voter model.
• the special-interest effect.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• The principle that under some circumstances majority voting fails to make consistent choices reflecting the community’s underlying preference is best demonstrated by the

A. paradox of voting.

• concept of logrolling.
• median-voter model.
• Coase theorem.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• According to the paradox of voting,

• public goods that cost more than the total benefits they confer may get produced under majority voting.
• trading of votes may either add to or subtract from economic efficiency.
• the median voter decides what public goods all voters should have.

D. majority voting fails under some circumstances to make consistent choices that reflect the community’s underlying preferences.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Suppose that in a series of paired-choice votes, a new park is preferred to a new recreation center and a new recreation center is preferred to street widening. Also suppose that street widening is preferred to a new park. This set of votes is an example of the

• principal-agent problem.
• benefits-received principle.
• median-voter model.

D. paradox of voting.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Larry

Curley

Moe

Lighthouse

Third Choice

First Choice

Second Choice

Highway

Second Choice

Third Choice

First Choice

Submarine

First Choice

Second Choice

Third Choice

Public Good	Larry	Curley	Moe
Lighthouse	Third Choice	First Choice	Second Choice
Highway	Second Choice	Third Choice	First Choice
Submarine	First Choice	Second Choice	Third Choice

Refer to the table. In a choice between the highway and the lighthouse,

A. a majority of voters favor the lighthouse.

B. a majority of voters favor the highway.

• the voters are indifferent between the two.
• no voter decision is possible.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Larry

Curley

Moe

Lighthouse

Third Choice

First Choice

Second Choice

Highway

Second Choice

Third Choice

First Choice

Submarine

First Choice

Second Choice

Third Choice

Public Good	Larry	Curley	Moe
Lighthouse	Third Choice	First Choice	Second Choice
Highway	Second Choice	Third Choice	First Choice
Submarine	First Choice	Second Choice	Third Choice

Refer to the table. The inconsistency illustrated by the table is that, while a majority of voters prefer the

A. highway to the lighthouse and the submarine to the highway, they also prefer the lighthouse to the submarine.

• lighthouse to the highway and the lighthouse to the submarine, they also prefer the submarine to the highway.
• highway to the lighthouse and the submarine to the lighthouse, they also prefer the submarine to the highway.
• lighthouse to the submarine and the highway to the submarine, they also prefer the highway to the lighthouse.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Larry

Curley

Moe

Lighthouse

Third Choice

First Choice

Second Choice

Highway

Second Choice

Third Choice

First Choice

Submarine

First Choice

Second Choice

Third Choice

Public Good	Larry	Curley	Moe
Lighthouse	Third Choice	First Choice	Second Choice
Highway	Second Choice	Third Choice	First Choice
Submarine	First Choice	Second Choice	Third Choice

The information contained in the table illustrates

• political logrolling.
• the median-voter model.

C. the paradox of voting.

D. the principal-agent problem theorem.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Adam

Bob

Carl

Public Safety

Second Choice

Third Choice

First Choice

Parks

First Choice

Second Choice

Third Choice

Education

Third Choice

First Choice

Second Choice

Public Good	Adam	Bob	Carl
Public Safety	Second Choice	Third Choice	First Choice
Parks	First Choice	Second Choice	Third Choice
Education	Third Choice	First Choice	Second Choice

Refer to the table. In a choice between public safety and parks,

• the outcome would depend on which item was listed first on the ballot.
• a majority of voters would favor public safety.
• no voter decision is possible.

D. a majority of voters would favor parks.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Adam

Bob

Carl

Public Safety

Second Choice

Third Choice

First Choice

Parks

First Choice

Second Choice

Third Choice

Education

Third Choice

First Choice

Second Choice

Public Good	Adam	Bob	Carl
Public Safety	Second Choice	Third Choice	First Choice
Parks	First Choice	Second Choice	Third Choice
Education	Third Choice	First Choice	Second Choice

Refer to the table. In a choice between parks and education,

A. no voter decision is possible.

B. a majority of voters would favor education.

• the outcome would depend on which item was listed first on the ballot.
• a majority of voters would favor parks.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Adam

Bob

Carl

Public Safety

Second Choice

Third Choice

First Choice

Parks

First Choice

Second Choice

Third Choice

Education

Third Choice

First Choice

Second Choice

Public Good	Adam	Bob	Carl
Public Safety	Second Choice	Third Choice	First Choice
Parks	First Choice	Second Choice	Third Choice
Education	Third Choice	First Choice	Second Choice

Refer to the table. In a choice between education and public safety,

• a majority of voters would favor education.
• no voter decision is possible.

C. a majority of voters would favor public safety.

D. the outcome would depend on which item was listed first on the ballot.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Public Good

Adam

Bob

Carl

Public Safety

Second Choice

Third Choice

First Choice

Parks

First Choice

Second Choice

Third Choice

Education

Third Choice

First Choice

Second Choice

Public Good	Adam	Bob	Carl
Public Safety	Second Choice	Third Choice	First Choice
Parks	First Choice	Second Choice	Third Choice
Education	Third Choice	First Choice	Second Choice

Refer to the table. The outcomes of the three possible sets of paired-choice majority votes illustrate the

A. paradox of voting.

• inefficiency of logrolling.
• principal-agent problem.
• the benefits of majority rule.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• The median-voter model implies that

• political voting will be as economically efficient as “dollar voting” in competitive markets.
• all voters have about the same preferences for various public goods and services.

C. many people will be dissatisfied with the size of government in the economy.

D. with majority voting, there can never be a consistent ordering of public good preferences.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• The median-voter model implies that a political office seeker will

A. adopt more extreme views when seeking his or her party’s nomination than when running against the other party’s opponent.

• adopt less extreme views when seeking his or her party’s nomination than when running against the other party’s opponent.
• favor extensive government spending because demand curves for public goods are added vertically rather than horizontally.
• favor the private resolution of externality problems rather than governmental intervention.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

126.

Answer the question on the basis of the following table that shows the total costs and total benefits facing

Stadium	Total Cost	Total Benefit
A	$ 80	$140
B	100	200
C	130	250
D	165	290
E	220	300

a city of five different potential baseball stadiums of increasing size. All figures are in millions of dollars.

Suppose a five-person city council must decide via majority voting which of these stadiums to build. Also suppose that each of the stadium sizes has the support of one council member. According to the median-voter model, the council will ultimately vote in favor of stadium

• A.
• B.

C. C.

D. D.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

127.

Answer the question on the basis of the following table that shows the total costs and total benefits facing a city of five different potential baseball stadiums of increasing size. All figures are in millions of dollars.

Stadium	Total Cost	Total Benefit
A	$ 80	$140
B	100	200
C	130	250
D	165	290
E	220	300

The marginal cost and marginal benefit of stadium B (relative to A) are

• $20 million and $50 million, respectively.
• $100 million and $200 million, respectively.
• $30 million and $50 million, respectively.

D. $20 million and $60 million, respectively.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

128.

Answer the question on the basis of the following table that shows the total costs and total benefits facing a city of five different potential baseball stadiums of increasing size. All figures are in millions of dollars.

Stadium	Total Cost	Total Benefit
A	$ 80	$140
B	100	200
C	130	250
D	165	290
E	220	300

Based on cost-benefit analysis, the city should

• not build any of these stadiums.
• build stadium E.
• build stadium C.

D. build stadium D.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

129.

Answer the question on the basis of the following table that shows the total costs and total benefits facing a city of five different potential baseball stadiums of increasing size. All figures are in millions of dollars.

Stadium	Total Cost	Total Benefit
A	$80	$140
B	100	200
C	130	250
D	165	290
E	220	300

Applying the median-voter model and assuming that there are equal numbers of voters supporting each stadium, we would expect

A. stadium C to be built, which would be the most socially efficient outcome.

B. stadium C to be built, but this would not be the most socially efficient outcome.

• stadium D to be built because it produces the most socially efficient outcome.
• no stadium to be built, because of political gridlock.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Suppose three roommates cannot agree on the size of a pizza to order. Domino argues for a medium pizza, Godfather contends a large pizza will be needed, and Little Caesar wants a super-large pizza. Assuming no paradox of voting, majority voting will result in a decision to order

A. a medium pizza.

B. a large pizza.

• a super-large pizza.
• two medium pizzas.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Some people argue that the three main television networks all have similar programming. If true, this observation might best be explained by the

A. paradox of voting.

B. median-voter model.

• law of diminishing marginal utility.
• ability-to-pay principle.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Suppose that friends Jennifer, Stephanie, and Megan cannot agree on how much to spend for a bouquet of flowers to send to a person who allowed them to use her beach house for the weekend. Jennifer wants to buy a moderately priced bouquet, Stephanie wants to buy an expensive bouquet, and Megan wants to buy a very expensive bouquet. Assuming no paradox of voting, majority voting will result in the decision to buy

• an inexpensive bouquet.
• a very expensive bouquet.
• a moderately priced bouquet.

D. an expensive bouquet.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

133.

Suppose a college economics department decides to use a single economics text for all sections of principles of economics. Also assume that the three individual members of the textbook selection committee have the following preferences.

Professor	Ideal Textbook	Analytical Level of the Textbook
Adams	C/F	Very Difficult
Bennett	M/B	Moderately Difficult
Clay	O/S	Relatively Easy

Assuming all other textbook qualities except analytical level are the same, paired-choice majority voting will result in the committee

• being deadlocked and unable to decide on a book.
• selecting the C/F book.

C. selecting the M/B book.

D. selecting the O/S book.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• “Pork-barrel” legislation that contains funding for hundreds of earmarks throughout numerous states often reflects

A. the paradox of voting.

B. logrolling.

• the benefits-received principle.
• adverse selection.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• (Consider This) Voter failure describes the situation where

• an insufficient number of voters turn out to express their preferences.
• voter preferences cannot be adequately captured because of a voting paradox.

C. voters support policies that would reduce productive and allocative efficiency.

D. government officials make poor decisions that contradict voter preferences.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• (Consider This) Suppose voters pass laws that restrict immigration, which results in lower national output and higher prices for consumer goods. This would be an example of

A. the paradox of voting.

B. voter failure.

• logrolling.
• adverse selection.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• (Consider This) Which of the following is an example of voter failure?

A. Voters support adding stoplights that would increase congestion and travel costs without increasing safety or convenience.

• Government officials ignore voter calls for regulations that would reduce negative externalities and enhance efficiency.
• Voters wanting greater highway safety are unable to express their preferences on how to achieve it because the voting system doesn’t allow it.
• Voters wanting more government services are divided on what services they most prefer, leaving government officials to determine what is best.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

True / False Questions

• Logrolling can either increase or diminish economic efficiency.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Even if a majority of the population wants a law and the law is passed, the outcome may still be economically inefficient.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• The paradox of voting is that under majority voting rules, the median voter decides the election outcome.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

• Majority voting assures that government will provide a public good if it yields total benefits in excess of total costs.

FALSE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: I Topic: Public Choice Theory and Voting Paradoxes

Multiple Choice Questions

• In the U.S. market economy, the government performs the following prominent roles, except

• provide public goods and services.
• promote economic stability and growth.

C. set prices for most resources.

D. modify the distribution of income.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• One major role that the government plays in the market economy of the U.S. is

• setting production targets for major industries.
• requiring minimum levels of employment in major industries.
• allocating resources in various market activities.

D. setting laws governing economic activity.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• One key difference between government activities and private transactions is that

A. government can enforce involuntary transactions, whereas private transactions are mostly voluntary.

• government can produce only services, whereas private producers can produce both goods and services.
• government does not run any production operations, whereas private firms have the main purpose of running production operations.
• government does not earn revenues from its activities, whereas private firms aim to earn revenues and profits.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• The ability to impose fines, revoke licenses, and put people into jail allows the government to

• ensure positive profits for its agencies.
• maximize revenues from its operations.

C. enforce involuntary transactions.

D. set market prices for goods and services.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Government’s ability to force people to do things involuntarily is

• unconstitutional in the United States and other market economies.
• always going to lead to lower economic efficiency.

C. beneficial if it is used to improve economic efficiency.

D. always beneficial in reducing the deadweight loss in the economy.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• In a market economy, the government’s ability to coerce is beneficial in the following cases, except in

• correcting for positive externalities.
• correcting for negative externalities.
• producing public goods.

D. fixing resource prices.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Government in a market system can increase economic efficiency by collecting taxes in order to subsidize the production of

A. goods with negative externalities.

B. goods with positive externalities.

• private sector goods.
• complementary goods.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Government can use its ability to coerce toward improving economic efficiency by

• reducing the production of output with external benefits.
• reducing the production of output with public-goods characteristics.

C. increasing the production of output with external benefits.

D. increasing the production of output with external 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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Making blackmail, extortion, and other forms of private coercion illegal is one way that government

A. reduces private-sector economic risk.

• increases private-sector economic risk.
• reduces the market’s economic efficiency.
• increases the economy’s deadweight losses.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Government can raise economic efficiency through all of the following policies, except

• outlawing various forms of commercial deception.
• imposing pollution taxes on polluting firms.
• using tax money to subsidize goods with external benefits.

D. fixing the prices of various resources and products.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• In a market economy, private parties are more willing to do transactions when they know that the government is able to

A. investigate and arrest people at random.

B. force people to honor contracts or outlaw private coercion.

• discriminate against one group or another in society.
• revoke private agreements and contracts.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Government’s ability to reduce private-sector economic risks through laws and regulations would encourage all of the following, except

• higher levels of private economic investment.
• formation of new businesses.
• introduction of new products and processes.

D. reduction of private goods and services.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

154.

Refer to the provided graph. Suppose that it shows the S and D graphs in a market where production entails a significant amount of pollution. In this case, the government should use its coercive power to make

A. the supply curve shift to the left.

• the supply curve shift to the right.
• the demand curve shift to the left.
• the demand curve shift to the right.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

155.

Refer to the provided graph. Suppose that it shows the S and D graphs in a market where the product has all the characteristics of a public good. In this case, the government should use its coercive power to make

A. the supply curve shift to the left.

B. the supply curve shift to the right.

• the demand curve shift to the left.
• the demand curve shift to the right.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

156.

Refer to the provided graph. Suppose that it shows the S and D graphs in a market where usage of the product generates a lot of external benefits. In this case, the government should use its coercive power to make

• the supply curve shift to the left.
• the supply curve shift to the right.
• the demand curve shift to the left.

D. the demand curve shift to the right.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• The difficulties in managing government in a market economy include the following, except

• the need for complex bureaucracy of various levels.
• the need for detailed paperwork and inflexibility.

C. the close resemblance of government to the “invisible hand.”

D. the lack of accountability in government.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Government laws and policies need to be uniformly enforced. But this leads to all of the following problems, except

• inflexibility.
• massive paperwork.
• excessively detailed rules.

D. haphazard application.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• The problem of effectively aggregating and conveying information from bottom layers to top layers in massive government bureaucracies makes it hard for the high-level officials to

A. discern the prices of specific goods and services in the economy.

B. comprehensively assess the marginal costs and benefits of specific programs.

• monitor the incomes of individual firms and households.
• estimate the total amount of spending incurred by the government.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Even in democratic governments, we tend to have a problem with accountability due to the following reasons, except

• so many government activities are undertaken simultaneously.
• civil-service protections apply to many bureaucrats.
• the electorate cannot monitor each and every action of the government.

D. there is the markets’ self-correcting mechanism in government.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• In assessing the efficiency of government policy, economic analysis would focus on

A. the size of government: big versus small.

B. marginal benefits versus costs of government policy and action.

• presence or absence of the invisible hand.
• revenues and profitability of the government agencies.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• The term government failure refers to the

• large losses suffered by publicly owned water, gas, and electric companies.
• large number of bankruptcies that have occurred recently among local governments.

C. economically inefficient outcomes caused by voting problems or incentive structures in government.

D. inability of government agencies to provide adequate police protection in low-income neighborhoods.

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: II Topic: Government Failure

• The principal-agent problem refers to the problem of

• communication between sports and entertainment stars with their agents.
• how to split profits between labor and management.

C. the interests of delegates deviating from the interests of the delegators.

D. how stockholders of a corporation can elect a board of directors.

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: II Topic: Government Failure

• The situation where politicians make decisions that will raise their chances of reelection, even if those decisions are detrimental to the general public, is referred to as the

A. moral hazard problem.

B. principal-agent problem.

• adverse selection problem.
• common good 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: II Topic: Government Failure

• In the corporate world of business, the principal-agent problem arises between

A. workers and managers.

B. managers and stockholders.

• stockholders and bondholders.
• corporations and their banks.

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: II Topic: Government Failure

• Which statement best describes a special-interest issue?

• It is a program or policy that is adopted during a special session of Congress or a state legislature.
• It is a policy issue in which both the supporters and opponents employ paid lobbyists to represent their interests.
• It is a program or policy which one political party strongly supports and other political parties strongly oppose.

D. It is a program or policy in which a large number of people will suffer small costs, while a small number will receive large gains.

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: II Topic: Government Failure

• The special-interest effect in government decision making is significant because

A. it corrects instances of spillover costs and benefits.

B. it can lead to programs with concentrated benefits and diffuse costs.

• capitalistic economies are based upon the pursuit of self-interest.
• it allows us to avoid the collective-action 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: II Topic: Government Failure

• The situation where “the few who yell the loudest get heard” is referred to as the

A. special-interest effect.

• principal-agent problem.
• moral hazard problem.
• adverse selection 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: II Topic: Government Failure

• The so-called collective-action problem refers to the fact that

A. it is always difficult to collect fees from users of a service.

B. larger groups are more difficult to organize and motivate than smaller ones.

• larger groups often have more power than smaller groups.
• collection agencies often abuse their power over individual consumers.

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: II Topic: Government Failure

• The so-called pork-barrel politics refers to congressional members

• trading votes with one another.
• receiving perks and freebies from businesses trying to sway their votes.
• paying not much attention to the vocal special-interest groups.

D. inserting provisions for local narrow projects into comprehensive legislation.

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: II Topic: Government Failure

• Rent-seeking behavior in public choice theory refers to

• politicians trading votes with one another.
• receiving perks and freebies from businesses trying to sway their votes.

C. specific groups appealing to government for special benefits at someone else’s expense.

D. politicians getting low rent for their living quarters when government is in session.

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: II Topic: Government Failure

• The so-called collective action problem helps explain why

• minorities always bear the costs of programs voted for by the majority.
• businesses often find it difficult when they have to deal with a labor union.
• it is hard for the government to discern the true preferences of everyone in society.

D. special-interest groups could have the costs of their narrowly focused programs be paid for by the general taxpayers.

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: II Topic: Government Failure

• The so-called collective action problem is the reason why

A. taxpayers are not able to effectively counter special-interest groups.

• pork-barrel politics often fail to pass legislation.
• we have local and national elections.
• majority voting can lead to economically inefficient 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: II Topic: Government Failure

• Lobbying actions that seek government legislation to provide tax breaks to specific organizations or industries would be an example of

• how the median-voter model works.
• how political choices are bundled.

C. rent-seeking behavior.

D. the paradox of voting.

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: II Topic: Government Failure

• Politicians seeking reelection tend to do the following, except

• inserting “earmarks” in legislation.
• favoring projects with clear benefits and hidden costs.

C. favoring long-term projects over short-term ones.

D. engaging in pork-barrel politics.

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: II Topic: Government Failure

• Politicians who have to go through elections tend to focus on the short-term net benefits of projects because of

A. voters’ tendency to more easily see short-term benefits rather than long-term ones.

• the special-interest effect of specific groups among the electorate.
• the ability of government to coerce people to do things involuntarily.
• pork-barrel politics and the 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: II Topic: Government Failure

• “Unfunded liability” refers to a government commitment to

A. not pay the government bonds that are coming due.

B. spend in the future without also committing to collect enough tax money to pay for it.

• support the retirement funds of businesses that have gone bankrupt.
• put money in specific mutual funds in order to vouch for the funds’ liabilities.

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: II Topic: Government Failure

• The government’s budget deficit refers to the

• total amount of debt that the government has incurred over the years.
• difference between the nation’s amount of exports and its total amount of imports.

C. gap between government spending and its lower tax revenues.

D. decrease in the amount of government spending from one year to the next.

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: II Topic: Government Failure

• To make up for a shortfall in its annual budget, the government must borrow money by

A. issuing government (Treasury) bonds.

• buying government (Treasury) bonds.
• reducing its total public debt.
• selling government stock.

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: II Topic: Government Failure

• The government adds to its overall public debt whenever it

A. runs a budget deficit.

• increases money supply in the economy.
• buys government bonds.
• raises tax collection.

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: II Topic: Government Failure

• The government would be running a budget surplus if

• government spending were lower than consumer spending.
• tax revenues were less than government spending.
• it imported less from abroad than it exported.

D. government spent less than it collected in taxes.

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: II Topic: Government Failure

• Many governments end up with chronic budget deficits because

A. many government programs are popular with voters, but hardly any voter likes paying taxes.

• the nation simply cannot produce everything that it consumes, so it has to rely on other nations.
• some resources are not available from within, so they have to be bought from other nations.
• businesses do not want to have “big government” around too much.

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: II Topic: Government Failure

• The public (or national) debt refers to the

• same thing as a budget deficit.
• deadweight loss in a market.

C. accumulation of all past budget deficits.

D. sum of all the debts of households and businesses.

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: II Topic: Government Failure

• Chronic budget deficits can lead to all of the following, except

A. overallocation of resources to the government sector, away from the private sector.

B. “smaller government” in the economy.

• investors losing faith in the government’s ability to repay its debts.
• government being forced to make drastic cuts in its spending.

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: II Topic: Government Failure

• Many state and local governments in the U.S. have balanced-budget laws in order to prevent politicians from

A. creating a “small government” economy.

B. succumbing to voters’ strong preference for budget deficits.

• facing a principal-agent problem.
• collecting too much taxes.

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: II Topic: Government Failure

• All of the following are consequences of a government’s having to deal with a “debt crisis,” except

• very restricted ability to borrow money.
• being forced to drastically raise taxes.
• being forced to make drastic cuts in spending.

D. being forced to make huge increases in government spending.

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: II Topic: Government Failure

• In the U.S., the Federal government runs a chronic budget deficit, whereas many state and local governments do not, because

A. many state and local governments have balanced-budget laws that make deficits illegal, while the Federal government does not.

• voters in Federal elections tend to favor budget deficits, while voters in state and local elections do not.
• many state and local governments face stricter accounting standards than the Federal government does.
• elections at the state and local levels tend to occur more frequently than at the Federal level.

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: II Topic: Government Failure

• So-called business cycles refer to the multiyear periods

• from when new products are launched to the point when they become obsolete.
• between the purchases of new capital equipment and the point when they become junk.
• from the origination of a business loan to the retirement or full repayment of the loan.

D. during which the economy’s overall output and employment alternately expands and contracts.

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: II Topic: Government Failure

• Governments try to smooth business cycles by using the following policies, except

• tax policies.
• interest rate policies.

C. wage rate policies.

D. government-spending policies.

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: II Topic: Government Failure

• Monetary policy refers to the government’s attempt at smoothing business cycles through the use of changes in

A. tax rates.

B. interest rates.

• wage rates.
• government spending.

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: II Topic: Government Failure

• Fiscal policy refers to the government’s attempt at stabilizing the economy through the use of changes in

A. taxes and government spending.

• interest rates and borrowing.
• wage rates and employment contracts.
• exchange rates and foreign trade.

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: II Topic: Government Failure

• During a period when output and employment are falling, the government will try to

• increase tax rates.
• increase interest rates.
• reduce government spending.

D. stimulate borrowing and spending.

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: II Topic: Government Failure

• When fiscal and monetary policies become highly politicized, these policies tend to

• become more effective at stabilizing the economy.
• lose any effect at all on the economy.

C. become destabilizing, instead of promoting stability.

D. lead to rising budget surpluses.

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: II Topic: Government Failure

• To prevent monetary policy from becoming highly politicized, many countries have

A. made their central banks be politically independent.

• put their central banks under the full control of their law-making agencies.
• allowed the heads of their central banks to serve for very short terms.
• made elected officials be the heads of their central banks.

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: II Topic: Government Failure

• The concept of limited and bundled choice, as used in public choice theory, refers to the fact that

• politicians may not be objective in evaluating economic policy programs due to their individual biases.
• because of the importance of television and other modern communication media, the best and brightest candidates may not be the ones elected by voters.

C. in an election, each voter must select a candidate who has various preferences (in a wide array of issues) that do not exactly match the preferences of the voter.

D. the most economically efficient public policy programs may not be selected because political leaders do not know enough about economics.

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: II Topic: Government Failure

• In presidential elections, voters often find that they do not agree with any single candidate on all the issues that matter to them (the voters). This is known as the

A. principal-agent problem.

B. limited and bundled choice problem.

• rent-seeking behavior problem.
• lack of accountability 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: II Topic: Government Failure

• Some economists contend that government agencies are generally less efficient than private businesses due to the following reasons, except

• government bureaucracies do not face the profit motive, which is a major incentive that guides private firms
• government bureaucrats tend to deal with failing programs by putting more resources into the programs, rather than eliminating the program.

C. incompetent workers gravitate toward government, while motivated workers gravitate toward the private sector.

D. bureaucrats, along with the special-interest groups they serve, often gain enough political clout to keep their agencies going regardless of performance.

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: II Topic: Government Failure

• A 2015 study of hospitals, power plants, and water utilities found that government-owned and operated companies were more likely than private companies to violate health and safety laws. Possible explanations for this include the following,

except

• Government-owned companies may have difficulty getting taxpayers and politicians to approve the funding needed to improve their facilities.
• The health and safety laws appear to be applied much more leniently against government-owned companies than against private companies.

C. Government-owned companies tend to be run by less qualified and less competent managers than the private companies.

D. Government-owned companies are under less pressure to comply with the laws, because fines for violations are often delayed or even avoided.

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: II Topic: Government Failure

• “Regulatory capture” refers to the situation where a government agency charged with supervising and regulating a particular industry is

A. strongly influenced by the firms in the very industry that it is regulating.

• headed by bureaucrats who have a “lock” on their positions, without any rivals.
• completely dominating and controlling the actions of firms in the industry.
• headed by unelected government officials who have no strong desire to regulate.

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: II Topic: Government Failure

• One primary reason why regulatory capture may occur in an industry is that

• the government designates unelected officials to head the various regulatory agencies of different industries.
• there is a lot of bribery and corruption going on in all major industries that the government seeks to regulate.
• the industry’s leaders are the ones who pushed for the government to impose supervision and regulation over their industry.

D. people who are qualified to supervise and regulate the industry often come from the industry itself.

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: II Topic: Government Failure

• Deregulation can solve the problem of regulatory capture and increase economic efficiency

A. if the deregulated industry quickly evolves into a monopoly.

B. if the deregulated industry becomes more competitive.

• when the regulations covering the industry are tightened.
• when the industry ends up generating substantial external costs.

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: II Topic: Government Failure

• Loan guarantees provided by the government for specific private-sector investments tend to

• generate high positive returns for the government.
• increase the financial risk faced by the private investors.

C. attract private investors into the specific project.

D. eliminate the moral hazard problem among investors.

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: II Topic: Government Failure

• When the government provides loan guarantees and in effect “socializes losses and privatizes gains” of a project or firm, it can lead to a

A. moral hazard problem among investors.

• regulatory capture problem.
• principal-agent problem within the firm.
• limited and bundled choice 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: II Topic: Government Failure

• The provision of loan guarantees can improve economic efficiency when

A. there’s a moral hazard problem among investors.

B. the project supported has significant external benefits.

• there is regulatory capture in the industry.
• the private investors are providing too much funds to the project.

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: II Topic: Government Failure

• In which of the following cases has political corruption definitely occurred?

• Political candidates accept campaign contributions from people.
• Government agencies impose fines for such things as traffic violations.

C. A bureaucrat allows someone to look at confidential documents for an informal fee.

D. A government agency receives donations for distribution to charity.

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: II Topic: Government Failure

• Which of the following countries had the least corruption, as reported in the Global Corruption Barometer survey in 2013?

A. Mexico

B. Italy

• India
• South Africa

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: II Topic: Government Failure

• Political corruption occurs in the following instances, except when

• government officials use their powers for personal gain.
• people pay a government official to do what she should be doing.
• people pay a bureaucrat to do something that he should not be doing.

D. businesses pay property taxes and license fees.

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: II Topic: Government Failure

• What is a likely explanation for why the budget of a government agency might increase beyond its optimal size?

• the paradox of voting
• the influence of the median voter

C. the power of special-interest groups

D. the allocative efficiency of government

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: II Topic: Government Failure

• Based on our study of market failure and government failure, the main conclusion that one should arrive at is that

• the market system is highly vulnerable to imperfections, and therefore the socialist system is a much better system to adopt.
• the government has much imperfection and creates a lot of inefficiencies; therefore, it is best to adopt a pure market system.
• it is best to always compare perfect markets against an idealized benevolent government that efficiently responds to the wants of society.

D. we must carefully compare the benefits of government intervention in our markets against the costs of such intervention.

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: II Topic: Government Failure

True / False Questions

• The government’s ability to coerce people to do things is always detrimental to the achievement of economic efficiency.

FALSE

AACSB: Analytical Thinking 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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• In order to achieve economic efficiency in market economies like the U.S., the government must be stripped of its power to coerce.

FALSE

AACSB: Analytical Thinking 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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• If the government implements regulations and policies in the economy, it tends to replace the function of the invisible hand.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• In making sure that laws are uniformly enforced and applied, one consequence is that government creates inflexibility.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• As long as government officials have to be elected, they are always held accountable for their policy decisions and choices.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• Economic analysis would focus on the size of the government, in order to assess whether or not it fosters economic efficiency.

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 list some of the difficulties associated with managing and directing the government.

Test Bank: II Topic: Governments Economic Role

• It is generally believed that, because of the election process, the incentives and pressures for internal efficiency are stronger in the public sector than in the private sector.

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: II Topic: Government Failure

• Critics of government contend that the market system creates incentives and pressures for internal efficiency that are absent in the public sector.

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: II Topic: Government Failure

• “Good economics” is about marginal costs and marginal benefits of specific projects; “good politics” is more about clear benefits and hidden costs.

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: II Topic: Government Failure

• The “principal-agent problem” often arises in public choice when politicians pursue the best interests of their constituents.

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: II Topic: Government Failure

• In thinking about the “principal-agent problem” in a democratic government, we assign the role of “principal” to the government.

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: II Topic: Government Failure

• The special-interest effect in government is the reason why firms in some industries are willing to pay huge amounts of money to lobbyists.

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: II Topic: Government Failure

• When the special-interest effect is the major reason for the passage of a government policy or project, then economic efficiency will always improve.

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: II Topic: Government Failure

• The “pork” in pork-barrel politics refers to government projects that politicians try to secure in favor of the common good for the whole nation.

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: II Topic: Government Failure

• Nobody gains from pork-barrel politics other than the politicians.

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: II Topic: Government Failure

• Pork-barrel politics is a good illustration of the “clear benefits, hidden costs” perspective of politicians.

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: II Topic: Government Failure

• Unfunded liabilities are one consequence of the preference for “clear benefits, hidden costs” by politicians.

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: II Topic: Government Failure

• Unfunded liabilities occur when the government considers long-term benefits and costs of projects, and approves only those with positive long-term net benefits.

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: II Topic: Government Failure

• A budget deficit will require the government to issue bonds to fill in the gap in the budget.

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: II Topic: Government Failure

• Budget deficit is another name for the public debt.

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: II Topic: Government Failure

• If the government runs a smaller budget deficit, then the public debt will decrease.

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: II Topic: Government Failure

• Only politicians, not the voters, are to blame for the problem of chronic budget deficits that many nations face.

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: II Topic: Government Failure

• Voters’ preference for having government programs serve them is inherently in conflict with their preference to pay no taxes.

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: II Topic: Government Failure

• Monetary and fiscal policies are tools that the government can use to try to stabilize the economy.

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: II Topic: Government Failure

• The politicization of monetary and fiscal policies tends to enhance their effectiveness in stabilizing the economy.

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: II Topic: Government Failure

• Because of the so-called “bundled choice” problem, voters often vote for candidates that they are not entirely happy with.

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: II Topic: Government Failure

• The collective action problem is the reason why there are no lobbyists representing the interest of general taxpayers or consumers in Washington, DC.

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: II Topic: Government Failure

• The collective action problem makes it hard for voters to counter the influence of special-interest groups.

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: II Topic: Government Failure

• Unintended consequences can result from the government’s desire to enforce laws uniformly.

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: II Topic: Government Failure

• Regulatory capture in government happens because the people who are most qualified to supervise and regulate an industry oftentimes are or have been the leaders of the industry.

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: II Topic: Government Failure

• Deregulation of an industry will always lead to an improvement in economic efficiency.

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: II Topic: Government Failure

• Loan guarantees provided by government will reduce the willingness of investors to take on the risk in a project.

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: II Topic: Government Failure

• “Informal payments” or “under-the table fees” are a common form of corruption.

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: II Topic: Government Failure

• The U.S. is among the countries that have very low levels of political corruption, as reported in the Global Corruption Barometer of 2013.

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: II Topic: Government Failure

Multiple Choice Questions

• The study of public choice theory involves the economic analysis of the following, except

• government decision making.
• actions by elected officials.

C. the impact of budget deficits on the public debt.

D. voting and elections.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Problems with collective decision making and policy making in government are subjects that are studied in an area of economics called public

A. finance.

B. choice.

• policy.
• interest.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Even in a democratic government, elected officials may end up pursuing policies that go against the preferences of the people due to the following reasons, except

A. the special-interest effect.

B. the invisible hand of the market.

• limited and bundled choice in elections.
• the majority voting system.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Majority voting fails to incorporate the strength of the preferences of individual voters and therefore

• reduces the power of the median voter.
• is the primary reason for public sector failure.

C. may produce economically inefficient outcomes.

D. creates the opportunity for the fallacy of limited decisions.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Matt, Joe, and Teresa are the only citizens in a community. A proposed public good has a total cost of $1,000. All three citizens will share an equal portion of this cost in taxes. The benefit of the public good is $500 for Matt, $280 for Joe, and $260 for Teresa. In a majority vote, this proposal will most likely be

A. accepted, two in favor and one against.

B. defeated, two against and one in favor.

• accepted, three in favor and none against.
• defeated, none in favor and three against.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Matt, Joe, and Teresa are the only citizens in a community. A proposed public good has a total cost of $1,000. All three citizens will share an equal portion of this cost in taxes. The benefit of the public good is $500 for Matt, $280 for Joe, and $260 for Teresa. In a majority vote, this proposal will most likely be

A. accepted; the public good is produced, even though it is economically inefficient.

B. defeated; the public good is not produced, even though it would have been efficient to do so.

• accepted; the public good is produced, which is economically efficient.
• defeated; the public good is not produced, which is the proper outcome.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Matt, Joe, and Teresa are the only citizens in a community. A proposed public good has a total cost of $1,000. All three citizens will share an equal portion of this cost in taxes. The benefit of the public good is $ 380 for Matt, $ 360 for Joe, and $ 200 for Teresa. In a majority vote, this proposal will most likely be

A. accepted; the public good is produced, even though it is economically inefficient.

• defeated; the public good is not produced, even though it would have been efficient to do so.
• accepted; the public good is produced, which is economically efficient.
• defeated; the public good is not produced, which is the proper outcome.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Abby, Ben, and Clara are the only citizens in a community. A proposed public good has a total cost of $1,000. All three citizens will share an equal portion of this cost in taxes. The benefit of the public good is $400 each to Abby, Ben, and Clara. In a majority vote, this proposal will most likely be

• accepted; the public good is produced, even though it is economically inefficient.
• defeated; the public good is not produced, even though it would have been efficient to do so.

C. accepted; the public good is produced, which is economically efficient.

D. defeated; the public good is not produced, which is the proper outcome.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Abby, Ben, and Clara are the only citizens in a community. A proposed public good has a total cost of $1,000. All three citizens will share an equal portion of this cost in taxes. The benefit of the public good is $400 each to Abby, Ben, and Clara. Based on economic analysis, the public good should

A. be produced, because the benefits are greater than the costs.

• not be produced, because the costs are greater than the benefits.
• be put to a vote and produced only if voters approve it.
• not be produced, even if voters vote in favor of it.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Abby, Ben, Clara, Joe, and Matt are the only citizens in a community. A proposed public good has a total cost of $1,000. All five citizens will share an equal portion of this cost in taxes. The benefit of the public good is $220 to Abby, $210 to Ben, $210 to Clara, $180 to Joe, and $120 to Matt. In a majority vote, this proposal will most likely be

• accepted, four in favor and one against.
• defeated, one in favor and four against.

C. accepted, three in favor and two against.

D. defeated, two in favor and three against.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Abby, Ben, Clara, Joe, and Matt are the only citizens in a community. A proposed public good has a total cost of $1,000. All five citizens will share an equal portion of this cost in taxes. The benefit of the public good is $220 to Abby, $210 to Ben, $210 to Clara, $180 to Joe, and $120 to Matt. Who are likely to vote in favor of this proposal?

• Abby, Ben, Clara, and Joe
• Ben, Clara, Joe, and Matt
• Ben, Clara, and Joe

D. Abby, Ben, and Clara

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Assume that Abby, Ben, Clara, Joe, and Matt are the only citizens in a community. A proposed public good has a total cost of $1,000. All five citizens will share an equal portion of this cost in taxes. The benefit of the public good is $220 to Abby, $210 to Ben, $210 to Clara, $180 to Joe, and $120 to Matt. In a majority vote, this proposal will most likely be

A. accepted; the public good is produced, even though it is economically inefficient.

• defeated; the public good is not produced, even though it would have been efficient to do so.
• accepted; the public good is produced, which is economically efficient.
• defeated; the public good is not produced, which is the proper outcome.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Majority voting may produce economically inefficient outcomes because it

• does not always lead to fair results.
• requires everyone to vote and bear the costs.

C. does not consider the strength of individual voters’ preferences.

D. does not provide benefits to everyone.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Interest groups result when people

A. in a certain zip code vote together.

B. who share strong preferences on a choice band together.

• do not all vote in elections.
• do not have strong preferences on the issues to be voted on.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• The trading of votes to secure favorable outcomes on decisions that would otherwise be defeated is called

• median-voter trading.
• the special-interest effect.

C. political logrolling.

D. the paradox of voting.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Inefficiencies associated with majority voting may get resolved through

• using the median-voter model.
• bureaucratic inefficiency.
• the paradox of voting.

D. political logrolling.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Which of the following would be an avenue for resolving the inefficiencies associated with majority voting?

A. political logrolling

• progressive taxation
• proportional taxation
• the paradox of voting

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Which would be an avenue for resolving the inefficiencies associated with majority voting?

• the paradox of voting
• progressive taxation
• proportional taxation

D. special-interest groups

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• A situation in which society may not be able to rank its preferences consistently through paired-choice majority voting is

A. the fallacy of limited decisions.

B. the paradox of voting.

• the median-voter model.
• political logrolling.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• The major problem with paired-choice majority voting is that the outcome

• is constant.
• is subject to bribery and abuse.

C. may depend on the order of the voting.

D. results in clear preferences among the choices.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

Public Good

Voter X

Voter Y

Voter Z

Stadium

2

3

1

Park

1

2

3

Jail

3

1

2

Public Good	Voter X	Voter Y	Voter Z
Stadium	2	3	1
Park	1	2	3
Jail	3	1	2

Refer to the provided table, which shows the ranked preferences of voters for three alternative projects, with “1” being the top preference. In a paired-choice vote between a stadium and a park,

A. a majority of the voters would favor the park, 2-to-1.

• a majority of the voters would favor the stadium, 2-to-1.
• a majority of the voters would favor the park, 3-to-0.
• a majority of the voters would favor the stadium, 3-to-0.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

Public Good

Voter X

Voter Y

Voter Z

Stadium

2

3

1

Park

1

2

3

Jail

3

1

2

Public Good	Voter X	Voter Y	Voter Z
Stadium	2	3	1
Park	1	2	3
Jail	3	1	2

Refer to the provided table, which shows the ranked preferences of voters for three alternative projects, with “1” being the top preference. In a paired-choice vote between a jail and a stadium,

A. a majority of the voters would favor the jail, 2 to 1.

B. a majority of the voters would favor the stadium, 2 to 1.

• a majority of the voters would favor the jail, 3 to 0.
• a majority of the voters would favor the stadium, 3 to 0.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

Public Good

Voter X

Voter Y

Voter Z

Stadium

2

3

1

Park

1

2

3

Jail

3

1

2

Public Good	Voter X	Voter Y	Voter Z
Stadium	2	3	1
Park	1	2	3
Jail	3	1	2

Refer to the provided table, which shows the ranked preferences of voters for three alternative projects, with “1” being the top preference. In a paired-choice vote between a park and a jail,

• a majority of the voters would favor the jail, 3 to 0.
• a majority of the voters would favor the park, 3 to 0.

C. a majority of the voters would favor the jail, 2 to 1.

D. a majority of the voters would favor the park, 2 to 1.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

Public Good

Voter X

Voter Y

Voter Z

Stadium

2

3

1

Park

1

2

3

Jail

3

1

2

Public Good	Voter X	Voter Y	Voter Z
Stadium	2	3	1
Park	1	2	3
Jail	3	1	2

Refer to the provided table, which shows the ranked preferences of voters for three alternative projects, with “1” being the top preference. This situation illustrates the voting inconsistency where a majority of voters prefer the

• stadium over the park, the park over the jail, and the jail over the stadium.
• park and jail over the stadium, and the jail over the park.

C. stadium over the jail, the jail over the park, and the park over the stadium.

D. stadium and jail over the park, and the park over the jail.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• The sometimes inconsistent results coming from a series of paired-choice voting is due to

• voters changing their preferences.
• irrational preferences among some voters.

C. a normal consequence of majority voting.

D. voters not having a good idea of their preferences.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Voters are making a choice to spend money on three projects: a dam, a school, or a road. In the choice between the dam and the school, the majority favors the school. In a choice between a dam and a road, the majority favors a dam. In a choice between a road and a school, the majority favors a road. These rankings indicate that majority voting may

• result in economically efficient outcomes because of rent-seeking behavior.
• reflect irrational preferences.

C. produce inconsistent choices.

D. lead to consistent choices in spite of irrational community preferences.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• When politicians support policies such as imposing punitive tariffs on imports, which are popular among voters but which also reduce economic efficiency, we refer to this as

A. regulatory capture.

B. voter failure.

• limited and bundled choice.
• paradox of voting.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• It is observed that the person representing the middle position on an issue will most likely determine the outcome of an election. This view is most closely associated with the

• fallacy of limited decisions.
• special-interest effect.
• paradox of voting.

D. median-voter model.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• When voters have different opinions about an issue, the position that is most likely to be adopted is that of the

• lobbyist.
• logroller.
• rent seeker.

D. median voter.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• The median-voter model indicates that political parties will

• target only those voters who can be influenced by rent seeking.
• direct their work to voters who can be influenced by special interests.
• campaign at one end of the distribution of voter sentiments.

D. try to appeal to the sentiments of the voter holding the middle position.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• The reason why, under majority voting and consistent voter preferences, the median voter’s choice will tend to predominate is because

• the median voter has the strongest preferences compared to the other voters.
• most voters strongly prefer the median view.

C. extreme voters on either side of the median would prefer the median over the opposite extreme.

D. voters’ preferences are bell-shaped, with most of them falling on the median.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• One implication of the median-voter model is that at any point in time, most voters will

• be happy with the amount of government involvement in the economy.
• find government involvement in the economy to be too much.
• find government involvement in the economy to be too little.

D. be unhappy with the amount of government involvement in the economy.

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• As voters “vote with their feet” and move to political districts where the median voter’s preference is closer to their own, the median voter’s preference will

• strengthen.
• weaken.

C. shift.

D. stagnate.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

True / False Questions

• Majority voting produces efficient outcomes because it takes into account the strength of the preferences of individual voters.

FALSE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Majority voting on whether or not a public good should be produced could lead to a result where a public good whose costs are bigger than the benefits would end up getting approved by the voters.

TRUE

AACSB: Knowledge Application Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• If a public good provides social benefits that are greater than its costs, then the majority of voters would always vote in favor of producing the good.

FALSE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Special-interest groups result from people with strong preferences on a particular issue banding together to let policymakers know their preferences and could thereby lead to efficient outcomes.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Political logrolling, or vote trading, can turn a potentially inefficient voting outcome into an efficient one.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• If choice A wins over choice B in a majority vote, while choice B wins over choice C in a majority vote, then we can conclude that choice A would win over choice C.

FALSE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Political logrolling always produces economically inefficient outcomes.

FALSE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• The appeal to government for special benefits at taxpayers’ or someone else’s expense is called the paradox of voting.

FALSE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• Even if individual voters have clear preferences, and they stay consistent in their preferences, we could still end up with the paradox of voting.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• One consequence of the paradox of voting is that whoever sets the agenda of a vote could practically predetermine the results of the vote.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• In the median-voter model, the median voter refers to the voter who makes her choice at the midpoint of the voting period.

FALSE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• In the median-voter model, half the voters have stronger or more positive preferences than the median voter, while half of the voters have weaker or more negative preferences.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• One prediction of the median-voter model is that during elections, candidates will tend to become “centrists.”

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• One implication of the median-voter model, as applied to a vote regarding how much government involvement to have in the economy, is that most voters would find the resulting government involvement either too large or too small.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes

• “Voter failure” is one cause of government failure.

TRUE

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 05-03 Appendix: Explain the difficulties of conveying economic preferences through majority voting.

Test Bank: II Topic: Public Choice Theory and Voting Paradoxes