In a properly functioning free market
A the price of any good reflects its marginal utility to consumers.
B price will equal marginal cost.
C the invisible hand will assure that society's resources are used efficiently.
D optimal quantities of all goods and services are produced.
E All of the above are correct.

A market transaction causes an externality if someone
A. directly involved in the transaction receives uncompensated benefits or costs from it.
B. not directly involved in the transaction receives uncompensated benefits or costs from it.
C. directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out.
D. not directly involved in the transaction interferes in it by imposing regulations or product standards.
E. conducts a market transaction outside of the main market where most transactions are occurring.

Land on both sides of the border of Brazil and Venezuela has long been occupied by the Yanomamo people. These "fierce people" are the last Stone Age tribe left in South America. Recently, following discovery of gold, approximately 45,000 garimperios (gold miners) invaded the Yanomamo territory. The mining process pollutes the rivers and scares away game, so traditional Yanomamo sources of food, are almost impossible to find now. The Yanomamo are starving. Economists call this problem
A. the cost disease.
B. an externality.
C specialization.
D. rent seeking.
E inevitable.

It is true of externalities that they
A are always detrimental.
B are always beneficial.
C arise when all costs, social and private, are included in production cost.
D cause the price system to misallocate resources.
E are included in the cost functions of business firms.

Where a firm generates beneficial externalities, society would be better off if
A the firm produced a larger output level.
B the firm reduced its output level.
C a tax were levied on the firm equal to the dollar amount of the externalities.
D price were reduced below marginal private cost.
E. the firm shuts down until corrections are made.

An appropriate government policy toward negative externalities is to
A. subsidize the activity that creates the negative externality.
B. impose a tax or fine on the activity that creates the negative externality.
C. pay money to the party that creates the negative externality.
D. impose a tax on recipients of the negative externality.
E. nationalize the assets of the entity creating the externality.

Motorcycle helmet laws have been controversial in some states. Riders prefer the feel of the wind on their faces. Others, however, point out that riders without helmets are more likely to suffer severe injury and run up hospital bills at public expense. Which of the following would most likely reduce the incidence of high bills for helmetless riders?
A raise insurance rates for helmetless riders.
B lower insurance rates for helmetless riders.
C. publish information on injury rates for helmetless riders.
D subsidize hospitals.
E. request that motorcycle riders wear a helmet.

The "free rider" problem occurs when a good is
A. not available.
B not excludable.
C. not depletable.
D sold in free markets.
E. scarce.

National defense and coastal lighthouses are examples of
A public goods.
B private goods.
C high marginal cost goods.
D depletable goods.
E. excludable goods.

The City Symphony presents three open-air concerts in the city park pavilion during the spring and summer. Many who attend make donations for symphony expenses, but the donation is not required. Some who attend make no contributions. Economists would
A classify the noncontributors as detrimental externalities.
B call the concerts excludable events.
C call the noncontributors free riders.
d call the concerts depletable goods.
E. recommend that the city discontinue the free concerts.