Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a negative externality.
What will be an ideal response?
A negative externality arises when the production or consumption of a good imposes negative marginal benefits on non-market participants -- and market participant have no incentive to take these into account. Put differently, a negative externality can the thought of as the unauthorized use of an input -- clean air, clean water, time of others on the road, etc. -- that is not priced because of the non-existence of a market. If that input could be defined, property rights in it established and trade opened, the input would be priced competitively just as labor and capital are priced competitively.
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Advocates of active stabilization policies, in defense of their views, argue that
A. stabilization is less necessary than is commonly advocated by monetarists. B. discretionary policy in not necessary because automatic stabilizers are sufficient. C. perfect stabilization is not possible, but moderate improvements in economic performance are possible, such as the response to the events of September 11, 2001. D. All of these responses are correct.
An assumption of the neoclassical theory of growth is that
A) people receive only subsistence real GDP per person. B) all technological advances are the result of chance. C) the marginal product of all types of capital increases as more capital is accumulated. D) knowledge has diminishing returns.
The use of the same cost of capital (risk adjusted discount rate) for all capital projects in a corporation
A) is usually the correct procedure. B) is incorrect since different divisions of the corporation may be faced with different levels of risk. C) is incorrect since different capital projects, even in the same division, may be faced with different levels of risk. D) Both B and C
A contractionary monetary policy causes
A. higher interest rates, which increases the foreign demand for U.S. financial instruments, which causes interest rates to decrease. There is no effect on net exports. B. lower interest rates, which decreases the foreign demand for U.S. financial instruments, raising the international price of the dollar and increasing net exports. C. higher interest rates, which increases the international price of the dollar and decreases net exports. D. higher interest rates, which decreases the foreign demand for U.S. financial instruments, raising the international price of the dollar and increasing net exports.