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Some important topics are missing from the CLEP exam, such as the invisible hand, free market, charity, transaction costs, the time value of money, interest rates, the Coase theorem and Gresham's Law.  The reason is exam bias.  For example, once a student realizes how inefficient transaction costs are, he or she will probably not like government regulations much!  Instead of these concepts, the CLEP exam adds lots of questions about government regulation to try to make regulation look good.

Some important topics are missing from the CLEP exam, such as the invisible hand, free market, charity, transaction costs, the time value of money, interest rates, the Coase theorem and Gresham's Law.  The reason is exam bias.  For example, once a student realizes how inefficient transaction costs are, he or she will probably not like government regulations much!  Instead of these concepts, the CLEP exam adds lots of questions about government regulation to try to make regulation look good. But other than bias in the '''''selection''''' of question, bias is rare in answers.   

 

But other than bias in the selection of question, the CLEP exam does not have bias in its answers.  The rare exceptions are one or two questions about government regulation.  For these few questions, the CLEP exam may pretend that government regulation can make a market ''more'' efficient.  That is untrue, as proven by the Coase theorem, but the CLEP exam writers want people to think that government can somehow improve on the free market.

 

 

 

While most of us support a cleaner environment, efficiency is usually associated with ''greater'' output, not ''less'' output.  Government regulations almost never ''improve'' efficiency; the free market does that best without government interference.  That said, you can pick up one or two easy points on the CLEP exam '''''by assuming that environmental regulation increases efficiency by protecting the "resource" of the environment for its better uses'''''.

 

When companies are allowed to pollute without paying for it, their marginal cost (MC) is artificially lower than it should be.  These companies are avoiding the cost of their own pollution.  A lower MC means they will produce more goods than if their MC were higher.  The term “marginal social cost” is used by economists to represent the true cost of their activities, including the cost of their pollution.  Because companies produce ''more'' than they would if they had to pay for the cost of their pollution, some consider this to be '''''inefficient'''''.  On the CLEP exam, it takes regulation to make it efficient by preventing the companies from putting out the pollution.

 

'''''Outside the topic of government regulation, there are no biased answers.  Do not choose one answer instead of another for reasons of bias except in one or two rare cases.'''''

 

 

 

 

Now, how about a price support?  That occurs when the government buys large quantities of good, such food, at prices higher than the competitive equilibrium.  The government does this to “support” a higher price, instead of passing a law to require a higher price.  A price support is designed to help the firms producing the goods, such as farmers.  The rationale is that farmers are politically important and that pure competition is too brutal on their business and their lives, and also that foreign countries engage in the same practices.  The effect of a “price support” is similar to a price floor: it creates a surplus of the good when the support is above the equilibrium price

 

=== Test-taking Tips ===

=== Test-taking Tips ===

There can be general questions about these markets.  A perfectly competitive market uses resources in a perfectly efficient way.  At the other end of the spectrum, a monopoly uses resources the least efficiently of all.  Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus.  The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level.  This is bad for everyone, except the owner of the monopoly, who enriches himself.  This is how Bill Gates became the wealthiest person in the world.

There can be general questions about these markets.  A perfectly competitive market uses resources in a perfectly efficient way.  At the other end of the spectrum, a monopoly uses resources the least efficiently of all.  Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus.  The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level.  This is bad for everyone, except the owner of the monopoly, who enriches himself.  This is how Bill Gates became the wealthiest person in the world.

Here is a puzzle to leave you with.  What is the impact on quantity of a price ceiling in a competitive industry compared to a price ceiling in a monopoly?  In which one (competitive v. monopoly) might a clever price ceiling actually increase quantity?  Think about it, and learn to ask yourself questions like this in order to master economics.  The answer is in this footnote.<ref>A price ceiling is a maximum price limitation, just as a real ceiling limits the height.  A perfectly competitive industry is already selling at its maximum output, so a price ceiling can't help there.  But a monopoly increases its price by reducing its output.  If a price ceiling is imposed against a monopoly, then it must reduce its price and increase its output, for the benefit of the public.</ref>

Here is a puzzle to leave you with.  What is the impact on quantity of a price ceiling in a competitive industry compared to a price ceiling in a monopoly?  In which one (competitive v. monopoly) might a clever price ceiling actually increase quantity?  Think about it, and learn to ask yourself questions like this in order to master economics.  The answer is in this footnote.<ref>A price ceiling is a maximum price limitation, just as a real ceiling in house limits the height.  A perfectly competitive industry is already selling at its maximum output, so a price ceiling can't help there.  But a monopoly increases its price by reducing its output.  If a price ceiling is imposed against a monopoly, then it must reduce its price and increase its output, which benefits the public.</ref>

Be sure to spend time on the review sections in the prior lectures for more information about this and other topics on the exams.

Be sure to spend time on the review sections in the prior lectures for more information about this and other topics on the exams.

The key to good test-taking, particularly on economics exams, is to make sure you fully understand each question before trying to answer it.

The key to good test-taking, particularly on economics exams, is to make sure you fully understand each question before trying to answer it.

== Final Comments ==

== Final Comments ==