13. Why would the government want to close the gap between the poor and the upper class?
A. To increase payments to the economy
B. To increase efficiency
C. To increase the national debt
D. To decrease efficiency
E. None of the above
14. Which of the following best describes a remedy for negative externalities?
A. Increase taxes on the firm producing them.
B. Decrease taxes on the firm producing them.
C. Provide subsidies to the firm’s competitor.
D. Decrease competition for the firm that is responsible for the negative externality.
E. Increase transfer payments to society.
15. Which of the following will result in the reduction of the poverty level?
A. Increased taxes
B. Decreased taxes
C. Increased subsidies for firms
D. Increased transfer payments
E. None of the above
Answers to Review Questions
- D.If a positive externality exists, this means that people are benefiting from things they did not pay for. As a
result, the firm will decrease its productive resources to be more efficient and less wasteful.
- C.The government will increase the tax rate for a firm that is causing a negative externality. The negative
externality will be harder to produce because the firm’s production costs will rise as a result of the tax increase.
- C.Vaccines are a positive externality because people who pay for them externalize a benefit to people who did
not pay for them. Every time people come into contact with someone who has received a shot, they are benefiting
from that individual’s decision to get that shot.
- B.A free rider is a term used to describe someone who benefits from something they did not pay for. Any
nontaxpayer can be considered a free rider if they are using a public good.
- D. When the cost to society is greater than the private cost, we have a market failure. Market failures exist
because either costs are not consumed by the responsible party or paying parties do not receive full benefits.
- A.Income tax is a progressive tax because the more you earn, the more you’re taxed (percentage). Income is
separated into different brackets; with each increase in pay, an individual may enter a new bracket that commands
a higher tax percentage.
- E.The Lorenz curve measures the relationship between real GDP and population. It is the relative measure of
GDP and population; it cannot evaluate quality of life.
- D. Unemployment compensation, social security, and food stamps are all considered transfer payments. Transfer
payments are used by the government to increase the amounts of disposable income.
- B.The 45-degree line on the Lorenz curve illustrates equality between real GDP and population. Every point
along the line is an illustration of an equal distribution of income.
- B.Nonexclusionary refers to public goods. Public goods are nonexclusionary because society has access to them.
- B.Increasing subsidies for education improves the distribution income because more workers become skilled.
Skilled workers will earn more money, thereby improving human capital.
The Government’s Role, Externalities, and Efficiency
