Government's Role: Public Goods, Externalities, Taxes — High School Economics practice questions

Income up to $10,000 is taxed at 10%; income above that at 20%. How much tax is owed on $30,000?

1. $5,000
2. $6,000
3. $3,000
4. $4,000

Answer: A — $5,000

A) Correct — $1,000 on the first $10,000 plus $4,000 on the next $20,000. B) Applies 20% to all income. C) Applies 10% to all income. D) Leaves out the tax on the first $10,000.

A flat tax that takes 15% of every income is:

1. progressive
2. proportional
3. regressive
4. a tariff

Answer: B — proportional

B) Correct — Everyone pays the same percentage. A) Rates would rise with income. C) Would take a larger share from low incomes. D) Is a tax on imports.

To correct a positive externality such as education, the government can:

1. tax it heavily
2. ban it
3. subsidize it
4. set a price floor

Answer: C — subsidize it

C) Correct — Subsidies raise output toward the efficient level. A) Would reduce output further. B) Would eliminate the benefits. D) Would reduce quantity demanded.

Your marginal tax rate is:

1. the rate on your last dollar of income
2. the rate on all of your income
3. total tax divided by total income
4. the sales tax rate

Answer: A — the rate on your last dollar of income

A) Correct — It applies only to income in the top bracket. B) Brackets apply to portions of income. C) Is the average tax rate. D) Is unrelated to income tax.

Payroll taxes (FICA) mainly fund:

1. national defense
2. public schools
3. highway construction
4. Social Security and Medicare

Answer: D — Social Security and Medicare

D) Correct — Workers and employers each pay a share. A) Is funded from general revenue. B) Are mostly funded by state and local taxes. C) Is largely funded by fuel taxes.

A factory pollutes a river used by a town downstream. This is:

1. a positive externality
2. a public good
3. a price ceiling
4. a negative externality

Answer: D — a negative externality

D) Correct — The cost falls on people outside the transaction. A) Would be a benefit to others. B) Pollution is not a public good. C) Is a legal maximum price.

Which is the best example of a public good?

1. National defense
2. A slice of pizza
3. A movie ticket
4. Fish in the ocean

Answer: A — National defense

A) Correct — Everyone is protected, and protecting one person doesn't reduce protection for others. B) Is excludable and rival. C) Is excludable. D) Is a common resource; fish are rival.

A gas tax used to pay for roads follows which principle?

1. Ability to pay
2. Progressive taxation
3. Benefits received
4. Free riding

Answer: C — Benefits received

C) Correct — Those who use the roads pay for them. A) Would tax based on income. B) Would rise with income. D) Is using without paying.

A progressive tax:

1. takes the same percentage from everyone
2. takes a larger percentage from higher incomes
3. takes a larger percentage from lower incomes
4. charges everyone the same dollar amount

Answer: B — takes a larger percentage from higher incomes

B) Correct — The U.S. federal income tax is progressive. A) Is a proportional tax. C) Is a regressive tax. D) Is a lump-sum tax.

Without government action, a market with a negative externality tends to:

1. underproduce the good
2. produce the efficient amount
3. produce nothing
4. overproduce the good

Answer: D — overproduce the good

D) Correct — Producers ignore the costs they impose on others. A) Happens with positive externalities. B) The external cost is ignored. C) The good is still produced.

What is income inequality?

Uneven distribution of income across the population. Measured by Gini coefficient (0 = equality, 1 = max inequality).

What is market failure?

When markets do not allocate resources efficiently. Examples: externalities, public goods, monopoly, asymmetric information.

What is moral hazard?

When one party takes more risks because someone else bears the cost (e.g., insured drivers being less careful).