■ Tragedy of the commonsis a phrase used to describe the ownership of resources such as air, trees, and water.
■ Externalities can be both positive and negative; either one is considered market failure.
■ The government can try to eliminate an externality through output regulation or taxation.
■ The Lorenz curve is an illustration of income distribution. It measures the relationship between real GDP and
population.
■ The 45-degree line on the Lorenz curve illustrates equality between real GDP and population.
Chapter Review Questions
- What will a firm do if a positive externality exists?
A. Increase the number of resources for production
B. Charge a higher price
C. Increase the labor force
D. Reduce the number of resources for production
E. None of the above
- What will the government do if a negative externality exists?
A. Increase the amount of transfer payments to society
B. Decrease taxes for firms
C. Increase taxes for firms
D. Subsidize a competing firm
E. Tax a competing firm and leave the negative externality creating firm alone
- Which of the following are the best example(s) of a positive externality?
A. Smog
B. Traffic
C. Vaccines
D. Water pollution
E. Both A and C
- What does the term “free rider” mean?
A. A taxpayer who uses the highway system
B. A nontaxpayer who uses the public park
C. Anyone who uses the freeway
D. All taxpayers
E. Both A and D
- Which of the following is consistent with market failure?
A. When a producer bears all the costs
B. When a buyer benefits from what he pays for
C. When society’s cost is equal to private cost
D. When the cost to society is greater than private costs
E. When all markets benefit as a result of a decision
The Government’s Role, Externalities, and Efficiency
