Free Public Finance MCQs with Answers

• A. private costs, private benefits
• B. private costs, social costs or benefits
• C. social costs, social benefit
• D. insiders, outsiders

Explanation: An externality exists when private decision-makers do not bear all the costs or receive all the benefits of an action.

• A. The government sells assets to a the private sector
• B. The government bans a product
• C. The government takes control of an industry
• D. The government taxes a product to a raise its price

Explanation: Nationalisation transfers ownership or control of a privately operated industry to the government.

• A. To protect companies form each other
• B. To protect consumers from unfair business practices
• C. To protect the interests of society
• D. To protect businesses from unfair consumer demands

Explanation: Government requires firms to bear social costs such as pollution because these costs affect society beyond the private costs shown in the…

• A. 1940s
• B. 1950s
• C. 1960s and 1970s
• D. mid-1980s

Explanation: The first modern environmental movement in the United States is generally associated with the 1960s and 1970s, when pollution…

• A. Nader's raiders
• B. The green movement
• C. Governmental regulation
• D. International competition

Explanation: Pollution Prevention Pays reflects the green movement because it addresses environmental damage while also reducing business costs.

• A. public goods should be produced up to the point where the additional benefit received by society equals the additional cost of producing the good
• B. under certain conditions, private parties can arrive at the efficient solution without government involvement
• C. the private sector will fail to produce the efficient amount of a public good because of the free-rider problem.
• D. if there are external costs in production the government must intervene in the market to assure that the efficient level of output is produced

Explanation: The Coase theorem holds that, with clearly defined property rights and negligible transaction costs, private parties can bargain to an…

• A. variable cost of producing the good
• B. average cost of producing the good
• C. marginal cost of producing the good
• D. total cost of producing the good

Explanation: Because everyone can consume a public good, society's marginal benefit is found by vertically adding individuals' willingness to pay per…

• A. Pareto goods
• B. public goods
• C. private goods
• D. free goods

Explanation: Public goods are underprovided by unregulated markets because people can benefit without paying, creating the free-rider problem.

• A. decision makers do not take them into account
• B. all firms are perfectly competitive
• C. the externalities are negative
• D. all firms are monopolistic

Explanation: An externality becomes a problem when its effects are ignored by the decision maker, causing private costs or benefits to differ from…

• A. elected officials will act selflessly for the good of society and ignore their own self interest
• B. the managers of government agencies are trying to maximize the profit of their agency and they ignore the implications that this has on other departments
• C. the optimal level of public goods may be too expensive for the society to produce
• D. the measurement of social damages and benefits is difficult and imprecise

Explanation: Government failure can arise because social costs and benefits, including external damages, are difficult to measure precisely.

• A. non-rivalry
• B. the free-rider problem
• C. the Coase theorem
• D. the fallacy of composition

Explanation: When many people benefit from an external benefit, each person may hope others will pay while still enjoying the benefit.

• A. limitless in utility
• B. non-rival in consumption
• C. congestible in consumption
• D. non-excludable

Explanation: A good is non-rival in consumption when one person's use does not reduce the amount available for others, as with national defence or a…

• A. a beautifully landscaped lawn.
• B. preservation of wetlands
• C. a public utility.
• D. a book

Explanation: Wetland preservation benefits many people and is difficult to restrict to paying users, so it has the non-excludable character of a public…

• A. Public borrowing
• B. The private sector
• C. time and motion studies
• D. foreign labour

Explanation: The Private Finance Initiative uses private-sector finance and management to deliver public infrastructure or services, usually under a…

• A. New classical economists
• B. left-wing theorists
• C. interventionist policies
• D. monetarists

Explanation: Wage subsidies, lower business taxes and capital subsidies are government measures intended to stimulate employment and investment in…

• A. Publicly held stock to private individuals
• B. corporately owned businesses to individuals
• C. government businesses to the private sector
• D. Privately owned business to the government sector

Explanation: Privatisation means transferring ownership or control of government-owned enterprises to private owners or the private sector.

• A. indirect taxes
• B. direct taxes
• C. inelastic
• D. value-added tax

Explanation: Direct taxes are imposed directly on a person's income, wealth, property, or inheritance, and the taxpayer bears the liability.

• A. incomes policy
• B. Moral hazard
• C. Wagner's law
• D. Fiscal policy

Explanation: Wagner's law states that as real income per person increases, demand for public or social goods and government services tends to rise…

• A. progressive
• B. regressive
• C. value added taxes (VAT)
• D. excise taxes

Explanation: A progressive income tax takes a larger percentage of income as income rises.

• A. Profit
• B. rent
• C. unemployment benefits
• D. government purchases
• E. wages

Explanation: Unemployment benefits are transfer payments because the government provides income without receiving a current good or service in…