Fundamentals of Economic Policy Quiz
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Questions and Answers

What characterizes positive economics?

  • It assesses how policies should be implemented.
  • It involves making value judgments about economic policies.
  • It is primarily concerned with ethical implications of economic actions.
  • It focuses on the way the economy actually works. (correct)

    • What is required for a situation to be considered a Pareto improvement?

  • All individuals must be better off.
  • No changes in resource allocation can be made.
  • At least one individual must be worse off and no one better off.
  • At least one individual must be better off and no individual worse off. (correct)

    • Which statement is true regarding Pareto optimum?

  • It implies that all individuals gain from a change.
  • It involves trading off gains and losses between individuals.
  • It can always be ranked against other Pareto optimal distributions.
  • It is a state from which any change will lead to at least one individual being worse off. (correct)

    • What does the Kaldor-Hicks Compensation Criterion allow in terms of economic improvement?

    <p>Winners could compensate losers if the gains exceed the losses.</p> Signup and view all the answers

    Which principle is depicted by the Timbergen rule?

    <p>The optimal policy should correspond to the number of economic goals.</p> Signup and view all the answers

    Why is the Pareto optimum considered insufficient for economic policy implementation?

    <p>It does not provide a clear guideline for moving towards social improvements.</p> Signup and view all the answers

    What is the main focus of the Kaldor-Hicks Compensation Criterion?

    <p>Determining whether total social gains from a policy outweigh the losses.</p> Signup and view all the answers

    Which is a characteristic of positive economics?

    <p>It aims to describe and analyze economic phenomena.</p> Signup and view all the answers

    What do Buchanan and Tullock argue about unanimity in decision-making?

    <p>It increases time costs associated with decisions.</p> Signup and view all the answers

    According to Downs' paradox of voting, which reason explains why individuals may choose to vote despite low chances of influencing the outcome?

    <p>Taste for voting and sense of obligation.</p> Signup and view all the answers

    What is a key limitation of the Median Voter Theorem?

    <p>It applies to multidimensional voting issues.</p> Signup and view all the answers

    What does the Condorcet Paradox illustrate regarding majority voting?

    <p>There can be cycles in pairwise voting outcomes.</p> Signup and view all the answers

    What is the main outcome when majority rule is applied under the Median Voter Theorem?

    <p>The median position cannot lose.</p> Signup and view all the answers

    Which statement best describes expressive voting as outlined by Brennan and Buchanan?

    <p>It seeks short-term satisfaction rather than real change.</p> Signup and view all the answers

    What happens when there is less than a 50% majority in a decision-making process according to the concepts discussed?

    <p>Reversal proposals have a chance to succeed.</p> Signup and view all the answers

    What is one implication of the Guttman’s observations on majorities over 50%?

    <p>It's more efficient as reversal proposals cannot win.</p> Signup and view all the answers

    What is the primary purpose of implementing sin taxes?

    <p>To reduce consumption of harmful goods</p> Signup and view all the answers

    Which method is primarily used to influence individuals' judgments and choices in nudging?

    <p>Manipulating social norms and routines</p> Signup and view all the answers

    What is the function of the 'Merit Order' in energy pricing?

    <p>To arrange electricity generation units by marginal cost</p> Signup and view all the answers

    How can tax moral be effectively increased among individuals?

    <p>Through threats and information about penalties</p> Signup and view all the answers

    What type of nudging specifically affects intellectual considerations?

    <p>Type 2 nudges</p> Signup and view all the answers

    What potential drawback is associated with nudging?

    <p>It can backfire in sensitive areas</p> Signup and view all the answers

    Which statement best describes the concept of intrinsic motivation in tax moral?

    <p>A feeling of obligation to comply with taxes</p> Signup and view all the answers

    Which type of tax is NOT typically associated with addressing harmful consumption behaviors?

    <p>Income tax</p> Signup and view all the answers

    What determines the market price of electricity when demand rises?

    <p>The highest marginal cost among the plants generating electricity</p> Signup and view all the answers

    Which mechanism helps to ensure that the market price of electricity remains stable during high demand?

    <p>Clawback Mechanism</p> Signup and view all the answers

    What is a potential disadvantage of implementing subsidies for high marginal cost production?

    <p>It distorts the market price and increases demand for subsidized resources</p> Signup and view all the answers

    What does the Lorenz Curve represent in the context of income distribution?

    <p>The probability of individuals being at or below a specific income level</p> Signup and view all the answers

    What is one major drawback of implementing a price limit for electricity?

    <p>It can eliminate incentives for energy conservation</p> Signup and view all the answers

    Which type of subsidy encourages energy consumers to save on consumption?

    <p>Subsidies for Energy Consumers</p> Signup and view all the answers

    What adjustment is made to income when using equivalized income as a measure of inequality?

    <p>Income per capita is adjusted based on household size and age of members</p> Signup and view all the answers

    Which statement about the subsidies for high marginal cost production is TRUE?

    <p>They can lead to a decrease in resource use efficiency.</p> Signup and view all the answers

    What is the primary purpose of the state as described in the social contract?

    <p>To ensure protection, legal certainty, and common goods</p> Signup and view all the answers

    According to Kenneth Arrow's Impossibility Theorem, which outcome is often unavoidable when plausible postulates are imposed?

    <p>Dictatorship</p> Signup and view all the answers

    What does the concept of single-peaked preferences ensure in social choice theory?

    <p>That a Condorcet winner can be found</p> Signup and view all the answers

    What is one potential issue with individual intensity of preferences in voting according to the content?

    <p>It may incentivize individuals to misrepresent their true preference intensity</p> Signup and view all the answers

    Which principle focuses on the least well-off individuals in the context of justice?

    <p>Rawls' principle of justice</p> Signup and view all the answers

    Which strategy is suggested to improve social ordering despite Arrow's postulates?

    <p>Impose single-peaked preferences</p> Signup and view all the answers

    What is an implication of the uncertainty noted by Buchanan and Tullock in their work on the calculus of consent?

    <p>It can bolster constitutional provisions beneficial to all</p> Signup and view all the answers

    When discussing social preferences, what does the term 'transitivity' refer to?

    <p>The ability to rank options consistently across all comparisons</p> Signup and view all the answers

    What is the main drawback of strict liability if the liable capital is smaller than the damage caused?

    <p>It may lead to inadequate compensation for damages.</p> Signup and view all the answers

    How does compulsory insurance act as a solution for external costs?

    <p>It internalizes external costs if the insurer has sufficient equity.</p> Signup and view all the answers

    What is a characteristic of fault-based liability?

    <p>It necessitates demonstrating negligence against a common standard.</p> Signup and view all the answers

    Which scenario exemplifies a situation where victims' actions affect the size of damage in an accident?

    <p>A victim driving an expensive car versus a victim driving a cheap car.</p> Signup and view all the answers

    What is a possible impact of consumers being poorly informed about risks, as suggested in the content?

    <p>They may incur higher health care costs for society in the future.</p> Signup and view all the answers

    Which of the following illustrates a negative externality associated with smoking?

    <p>Increased health care costs for treating smoking-related illnesses.</p> Signup and view all the answers

    Why might government intervention be justified in cases of internalities and externalities?

    <p>Governments can often provide better information and regulation.</p> Signup and view all the answers

    What is the expected profit of a firm with revenues of $100 and damage costs of $1,000,000 at a 1% likelihood of occurrence, without any form of liability protection?

    <p>-$9,990</p> Signup and view all the answers

    Study Notes

    Fundamentals of Economic Policy

    • Evaluating Government Policy:

      • Pareto criterion: A policy is an improvement if at least one person is better off and no one is worse off.
      • Kaldor-Hicks Compensation Criterion (KHCC): A policy is an improvement if the winners could (theoretically) compensate the losers.
      • Social Welfare Functions (SWF): Used to aggregate individual utilities into a social utility. Requires measurement and comparability of individual utility. Different SWF's have varying requirements.
      • Expected Utility and Veil of Ignorance: Concepts for evaluating potential policies considering risk aversion and social justice.
      • Justice and the Idea of a Social Contract: Theories related to the purpose and legitimacy of government, including how it arises.
      • (Im)possibility of a Social Ordering: The feasibility of achieving a stable social ordering, considering individual preferences.
      • Political Decision Making: Discussion on efficiency and fairness of decision-making processes, including majority rule and potential problems (such as the Condorcet paradox, Downs paradox of voting (1957)) within elections.

    • Public Goods:

      • Classification of Goods: Categorization of goods based on rivalry and excludability (public goods, private goods, common goods, club goods).
      • Public Goods Provision: Explaining how public goods are provided in the private sector versus public provision, and the reasons for the difference
      • Externalities: Unintended effects on third parties not directly participating in a transaction. Discussion on positive and negative externalities
      • Tragedy of the commons: A situation wherein a shared resource is overexploited due to lack of incentives to conserve.
      • Internalization Strategies: Methods to address externalities (taxing negative externalities or subsidizing positive ones), including tradable permits and Coase Theorem.

    • Other Important Topics:

      • Measurement of Individual Utility: Discussing ordinal and cardinal utility, their differences, limitations, and applications.
      • Comparability of Individual Utility: Exploring the challenges of comparing individual utilities and the implications for social welfare functions.
      • Different types of SWF's: Rawlsian SWF prioritizes the least well-off, additive/utilitarian SWF sums individual utilities, and mixed SWFs combine the approaches
      • Median Voter Theorem: Explaining under what conditions majority rule in a society with many voters will tend toward the median voter(s).

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    Economic Policy Fundamentals - Weichenrieder (Past Paper PDF)

    Description

    Test your understanding of key concepts in economic policy evaluation. This quiz covers essential criteria such as the Pareto criterion, Kaldor-Hicks compensation, and social welfare functions. It also explores the implications of justice within political decision-making and the challenges of social ordering.

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