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CHAPTER TWELVE

The Public Sector in the Global Economy

True/False

1. Moral hazard in business transactions leads to adverse selection and information asymmetry problems.Ans: FalseDif: E

2. In the U.S. the consumer watchdog and industry policeman appointed by the government is the FTC.Ans: TrueDif: E

3. Equal levels of consumer protection levels are found throughout the developed world.Ans: FalseDif: M

4. Privacy laws are tougher in the United States than in most of the rest of the world.Ans: FalseDif: M

5. The Data Protection Directive is a global agreement to limit information sharing arising from online business transactions.Ans: FalseDif: M

6. Laws granting ownership of creative ideas are called copyright laws.Ans: FalseDif: E

7. Economic profits earned by the owner of a patent represent wealth transfers from society to the patent holder.Ans: TrueDif: M

8. The majority of countries in the world immediately gain when they agree to respect international intellectual property rights.Ans: FalseDif: M

9. Gray market imports are sometimes called perpendicular imports.Ans: FalseDif: E

300

301 Chapter 12 — Test Bank

10. The multilateral TRIPS agreement currently prohibits parallel imports.Ans: FalseDif: E

11. In the country of Old Guinea no intellectual property rights are recognized. Consequently, when a local farmer invents a new harvesting machine that increases farm productivity he keeps his idea to himself. This is an example of a market failure.Ans: TrueDif: E

12. Dull Monte Farms increases vegetable output by using high powered pesticides on its farms. Unfortunately pesticide runoff destroys nearby wetlands, hurting the hunting and tourism industry. This is an example of a market failure with a negative externality.Ans: TrueDif: E

13. Private goods and services are defined as those that can be consumed by only one individual at a time.Ans: TrueDif: E

14. Police protection is arguably a public good.Ans: TrueDif: E

15. A good or service that residents of a nation determine to be socially desirable is called a public good.Ans: FalseDif: M

16. The potential for someone to enjoy a public good or service without contributing their fair share of the cost is named the Easy Rider problem after the movie of the same name.Ans: FalseDif: M

17. Generally speaking, economists prefer price based solutions instead of quantity based solutions to eliminate externalities.Ans: TrueDif: M

18. Attempting to legally minimize your tax bill is an example of the free rider problem.Ans: FalseDif: D

19. Common property is always a public good.Ans: FalseDif: D

The Public Sector in the Global Economy 302

20. Today there are many nongovernmental organizations or NGOs seeking to pursue different special interests, however, most NGOs agree that international trade degrades the global environment.Ans: FalseDif: M

21. The recently created Global Environmental Protection Agency (GEPA) has been given broad powers to limit environmental degradation caused by the growth of international trade in commodities exported from developing countries. The GEPA must work within the scope of the many prior environmental treaties however.Ans: FalseDif: M

22. The tax base divided by the tax rate equals a government’s tax revenue.Ans: FalseDif: E

23. The problem with the static view of determining tax revenues is that it ignores changes in the tax base that are induced by changing the tax rate.Ans: TrueDif: M

24. A country’s tax rate and the tax base tend to vary inversely with one another today.Ans: TrueDif: E

25. In 2001, the OECD threatened to blacklist non-OECD countries that tried to create a comparative advantage by offering low tax rates, while allowing OECD countries to continue to offer tax based comparative advantages.Ans: TrueDif: D

26. A firm paid $25,000 in taxes on $100,000 in taxable income. If another dollar of taxable income is earned, the firm will have to pay and additional $0.30 in tax. The firm’s marginal tax rate is 25%.Ans: FalseDif: E

27. In 2002 the UN proposed a move towards worldwide coordination of tax policies and perhaps the creation of a global taxing authority.Ans: TrueDif: E


Multiple Choice1. When one party in a transaction has information about the product or service that the other party does

not have this is calledA) adverse selection.B) asymmetric information.C) moral hazard.D) common problems.E) privacy protection.Ans: BDif: E

2. The potential for a party in a transaction to behave differently after the transaction than before is calledA) adverse selection.B) asymmetric information.C) moral hazard.D) common problems.E) privacy protection.Ans: CDif: E

3. The tendency for sellers of the poorest products to be the ones to most over-hype their products is calledA) adverse selection.B) asymmetric information.C) moral hazard.D) common problems.E) privacy protection.Ans: ADif: E

4. The Data Protection Directive causes online __________ and online __________.A) U.S. buyers to gain; U.S. sellers to loseB) European buyers to gain; U.S. sellers to loseC) European buyers to lose; European sellers to loseD) European buyers to gain; European sellers to loseE) European buyers to lose; European sellers to gainAns: EDif: D

5. It is difficult to balance consumer protection with gains from allowing international trade because of all but which of the following?A) The affected industry has an incentive to claim that consumer protection is necessary even if it is

not.B) The information asymmetry problem is worse when dealing with foreign sellers.C) The moral hazard problem is worse when dealing with foreign sellers because of jurisdictional

problems.D) U.S. consumer protection laws are the toughest in the world.Ans: DDif: M


6. An author’s legal title to the sole right to reproduce, distribute, perform, or display creative works is called a/anA) copyright.B) trademark.C) government grant.D) official title.E) patent.Ans: ADif: E

7. A company’s legal claim to a word or symbol that identifies its product and distinguished it from the products of others is called a/anA) copyright.B) trademark.C) government brand.D) official title.E) patent.Ans: BDif: E

8. An inventor’s legal right to be sole manufacturer, user and marketer of an invention for a specified time period is called theA) copyright.B) trademark.C) government brand.D) official title.E) patent.Ans: EDif: E

9. Which of the following intellectual property rights established by TRIPS are correct?

I. Copyrights must be granted for at least 50 years.II. Patent protection must be for at least 25 years.III. Trademarks must be internationally recognized.

A) I onlyB) I and II onlyC) I and III onlyD) II and III onlyE) I, II and IIIAns: CDif: D


10. Which one of the following statements about patents is not correct?A) Granting patents provides inventors and inducement to develop and market new ideas, thereby

benefiting society.B) The patent holder’s economic profit will fall to zero when the patent expires.C) The patent holder enjoys monopoly power for the life of the patent.D) The patent holder will restrict output relative to the perfectly competitive output level.E) The economic profit earned by the patent holder is a wealth transfer from society to the holder.Ans: BDif: M

11. An inventor was granted a patent and she sold 50,000 units per year at a price of $100 per unit. Suppose that immediately after the patent expires, the product was sold in a perfectly competitive market with 100,000 units being sold per year at a cost of $75 per unit. The annual excess profit relative to the perfectly competitive solution earned by the patent holder during the life of the patent wasA) $12,500,000.B) $5,000,000.C) $7,500,000.D) $3,500,000.E) none of the aboveAns: EDif: M

12. An inventor is granted a patent and he sells 10,000 units per year at a price of $950 per unit. Suppose that immediately after the patent expires, the product is sold in a perfectly competitive market with 30,000 units being sold per year at a cost of $625 per unit. The loss in consumer surplus caused by the patent relative to the perfectly competitive solution was (no units could have been sold if the price had been $1200)A) $8,625,000.B) $1,250,000.C) $7,375,000.D) $3,250,000.E) $6,500,000.Ans: CDif: D

13. Countries that enjoy immediate gains from recognition of intellectual property rights include all of the following countries except which one?A) United StatesB) GermanyC) ItalyD) United KingdomE) SwedenAns: DDif: D


14. Many developing nations have agreed to respect international intellectual property rights because

I. the U.S. threatened them with possible trade sanctions otherwise.II. the countries believed that greater long term capital flows would occur as a result.III. they experienced immediate gains from becoming members of TRIPS.

A) I onlyB) I and II onlyC) II and III onlyD) I and III onlyE) I, II and IIIAns: BDif: D

15. Market failures are defined as A) the inability of the private market process to generate a socially optimal price and quantity

outcome.B) spillover effects from government interference in the market process.C) international externalities influencing the welfare of constituents of multiple nations.D) government sponsored remedies to negative externalities.E) allocation mechanisms for global public goods.Ans: ADif: E

16. Which of the following statements about externalities is/are correct?

I. In a negative externality the price of the affected good is set too low and quantity of output is too high because the marginal cost of production to society is greater than the producer’s marginal cost.

II. In a negative externality the price of the affected good is set too low and quantity of output is too high because the marginal revenue to society is less than the producer’s marginal revenue.

III. In a positive externality the price of the affected good is set too high and quantity of output is too low because the marginal cost of production to society is less than the producer’s marginal cost.

IV. In a positive externality the price of the affected good is set too low and quantity of output is too low because the marginal revenue to society is greater than the producer’s marginal revenue.

A) Only I is correct.B) Only I and III are correct.C) Only I and IV are correct.D) Only II and III are correct.E) Only II and IV are correct.Ans: CDif: D


17. Which of the following are negative externalities?

I. Because of a government subsidy, a firm reduces output to the point where the firm engages in the optimal level of pollution.

II. Unbeknownst to Canadians, factories in the U.S. generate acid rain that falls in Canada, degrading wetland habitat.

III. Patent protection on a new anti-AID’s drug keeps the available quantity of the drug low relative to the need, and keeps the price unaffordably high for many sufferers.

A) I onlyB) II onlyC) I and II onlyD) II and III onlyE) I, II and IIIAns: BDif: D

18. Which of the following are positive externalities?

I. A firm that offers a very popular workplace daycare to employees and their children is able to reduce to reduce its wage costs as a result.

II. Research on the human genome that could reduce medical costs, improve drug effectiveness and benefit several other industries.

III. Patent protection on a new anti-AID’s drug keeps the available quantity of the drug low relative to the need, and keeps the price unaffordably high for many sufferers.

A) I onlyB) II onlyC) I and II onlyD) II and III onlyE) I, II and IIIAns: DDif: D

19. In a negative externality the actual quantity produced is __________ and in a positive externality the actual quantity produces is __________.A) too low; too highB) too high; too lowC) too low; too lowD) too high; too highAns: BDif: E


20. In a positive externality the profit to society is __________ the producer’s profit, and in a negative externality the profit to society is __________ than the producer’s profit.A) less than; greater thanB) greater than; greater thanC) greater than; less thanD) equal to; less thanE) none of the aboveAns: EDif: M

21. A public good must which of the following criteria?

I. The good must be able to be consumed by many people at the same time.II. It must be prohibitively expensive to prohibit one person from using it and not another.III. The marginal cost of an additional person consuming the good must be zero.IV. No taxes can be charged to provide the good.

A) I and II onlyB) I, II and III onlyC) I, III and IV onlyD) II, III and IV onlyE) I, II, III and IVAns: BDif: M

22. Which one of the following is not normally considered to be a public good?A) health careB) flood controlC) police protectionD) national defenseE) forest fire suppressionAns: ADif: M

23. Which one of the following is normally considered to be a global public good?A) national parks and national forestsB) bands of the electromagnetic spectrumC) highwaysD) global satellite orbitsE) ocean pollution cleanupAns: EDif: M


24. In order to correct international negative externalities governments or multinational authorities could do which of the following remedies to correct the externality?

I. Provide a subsidy to increase production of the good generating the externality.II. Establish a quota to limit production of the good generating the externality.III. Place a tax or tariff on the production or trade in the good generating the externality.

A) I onlyB) II onlyC) II and III onlyD) I and III onlyE) I and II onlyAns: CDif: M

25. A nonexclusive resource owned by everyone and therefore owned by no single individual is calledA) a free rider.B) a merit good.C) common property.D) a positive spillover good.E) global good.Ans: CDif: E

26. Which of the following global environmental aspects most closely fits the definition of a public good?A) national coastlinesB) international heritage sitesC) rivers and creeksD) water in the oceansE) public lands in various countriesAns: DDif: M

27. Pollution abatement generally hasA) decreasing marginal benefits and increasing marginal costs.B) decreasing marginal benefits and decreasing marginal costs.C) increasing marginal benefits and increasing marginal costs.D) increasing marginal benefits and decreasing marginal costs.E) constant marginal benefits and decreasing marginal costs.Ans: ADif: M


28. Look at the following table of costs and benefits of water pollution abatement in Flatnose Lake Montana. The lake is currently at 40% cleanliness.

Degree of WaterCleanliness %

Total Cost of Pollution Abatement to Reach Given %

Water Cleanliness

Total Benefit of Pollution Abatement at Given %

Water Cleanliness50% $ 3,000,000 $11,000,00075% $ 7,000,000 $21,000,00085% $12,000,000 $30,000,00090% $20,000,000 $38,000,00095% $30,000,000 $43,000,00099% $50,000,000 $47,000,000

The optimal level of water cleanliness in the lake isA) 75%.B) 85%.C) 90%.D) 95%.E) 99%.Ans: CDif: M

29. Which one of the following statements about the typical beliefs of environmentalists and proponents of free trade is incorrect?A) Environmentalists believe that competition encourages governments to relax environmental

standards whereas trade proponents believe that competition increases efficiency and reduces pollution.

B) Environmentalists believe that trade promotes unsustainable economic growth rates whereas free trade advocates believe that trade and competition promotes innovation and technological progress that can sustain higher growth rates.

C) Environmentalists believe that trade increases the number of market failures and they believe that is bad, whereas trade proponents are not concerned about market failures.

D) Environmentalists believe that multilateral trade agreements are bad because they reduce the focus on environmental concerns and proponents of trade believe that multilateral trade agreements provide forums for protecting the environment along with encouraging trade.

Ans: CDif: M

30. The U.S. governments levies taxes on all but which one of the following?A) individual incomeB) corporate incomeC) capital investmentsD) household and business consumptionE) tariffs on some importsAns: DDif: M


31. Suppose that a nation currently has a 15% tax rate and a $100 billion tax base. If the nation increases the tax rate to 20%, the tax base will fall by 7%. If the nation decreases the tax rate to 12% the tax base will grow by 10%. At the optimal tax rate (from the government’s point of view) what is the total tax revenue the government can earn?A) $15.0 billionB) $18.6 billionC) $13.2 billionD) $19.6 billionE) $21.3 billionAns: BDif: M

32. Which one of the following fill-ins would not be correct? If there were no free riders in a society, thenA) the government would not need to make taxes compulsory.B) everyone would pay their fair share of public goods.C) total tax revenues would grow.D) no international market failures would occur.E) a given level of tax revenues could be achieved with lower average tax rates.Ans: DDif: M

33. Which one of the following statements is not correct concerning tax rates in the U.S., Japan and the EU?A) Generally speaking tax rates in Japan are lower than in the other two areas.B) Generally speaking tax rates in the EU are higher than in the other two countries.C) Of capital, consumption and labor taxes, capital taxes tend to be the lowest type of tax in the

three.D) Of capital, consumption and labor taxes, labor taxes tend to be the highest type of tax in the three. Ans: CDif: D

34. The dynamic view of total tax revenues implies thatA) the tax base and the tax rate vary directly.B) the tax base and the tax rate vary inversely.C) the tax base and the tax rate are unrelated.D) total tax revenues are maximized at high tax rates.E) total tax revenues are maximized at low tax rates.Ans: BDif: M

35. According to the dynamic view of taxation if an economy undergoes a recession and total tax revenues fall, which of the following statements is correct?A) An increase in the tax rate will result in an increase in tax revenue (∆T) equal to ∆t * ∆B.B) A decrease in the tax rate will result in an increase in tax revenue (∆T) equal to ∆t * ∆B.C) An increase in the tax rate will result in an increase in tax revenue (∆T) less than ∆t * ∆B.D) An increase in the tax rate will result in an increase in tax revenue (∆T) greater than ∆t * ∆BAns: CDif: M


36. Reducing tax rates below those of other countries can result in all but which one of the following?A) Trade or tax related sanctions from other affected countries.B) An increase in the domestic tax base.C) An increase in foreign direct investment in the country.D) There may be a net increase in total tax revenue.E) All of the above are possible effects.Ans: EDif: E

37. Taxes that are applied to each stage of production are calledA) tariffs.B) value added taxes.C) capital taxes.D) consumption taxes.E) income taxes.Ans: BDif: E

38. Multilateral tax treaties that limit international tax competition may be counterproductive for global efficiency because tax competition

I. encourages governments to operate more efficiently to keep their costs down.II. causes governments to set lower tax rates that help stimulate faster economic growth.III. causes free riders to have to pay more for the goods and services they consume.

A) I onlyB) II onlyC) II and III onlyD) I and III onlyE) I and II onlyAns: EDif: E

39. According to Gorter and Parikh, in Europe a one percentage point reduction in the marginal tax rate on capital below the EU average results in about aA) 4% increase in foreign direct investment.B) 3% increase in the tax base.C) 2% drop in total tax revenue.D) 5% increase in total tax revenue.E) 1% drop in value added taxes.Ans: ADif: M

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