MICRO CH 4: Market Failures

Market failures occur when

• the accumulation of wealth in the free market is shared between a large group of people

• a command economy increases production

• the economy has a strong GDP and low interest rates

• the combination of goods and services in the free market is not efficient and optimal

From an economic standpoint, government intervention is justified

• When the private sector is larger than public sector.

• Because the government will encourage the production of private goods.

• Because the government can increase the level of market power of private businesses.

• When the market mechanism fails to achieve the optimal mix of output.

Consumer surplus arises in a market because:

• At the market price, quantity supplied is greater than quantity demanded

• At the current market price, quantity demanded is greater than quantity supplied

• Some consumers are willing to pay more than the equilibrium price but pay a lower market price

• Some consumers are willing to pay less than the equilibrium price but pay a higher market price

Allocative efficiency occurs only at that output where

• marginal benefit exceeds marginal cost by the greatest amount.

• consumer surplus exceeds producer surplus by the greatest amount.

• the combined amounts of consumer surplus and producer surplus are maximized.

• the areas of consumer and producer surplus are equal.

Externalities

• Occur because of government failure.

• Occur because of selfish consumers.

• Are the costs or benefits of market activities that "spill over" onto third parties.

• Occur because demand is hidden.

If the production of a product or service involves external benefits, then the government can improve efficiency in the market by

• providing a subsidy to correct for an overallocation of resources.

• providing a subsidy to correct for an underallocation of resources.

• imposing a corrective tax to correct for an overallocation of resources.

• imposing a corrective tax to correct for an underallocation of resources.

Pigovian taxes

• are used to correct negative externalities.

• are used to correct positive externalities.

• are primarily designed to fund public goods.

• are a form of income tax.

Asymmetric information in a market transaction occurs when there is unequal knowledge possessed by the

• buyer and the government.

• seller and the government.

• taxpayer and the government.

• buyer and the seller.

 

1.      Rivalry and excludability are the main characteristics of:

• capital goods.

• private goods.

• public goods.

• consumption goods.

1.      The market system does not produce public goods because:

• there is no need or demand for such goods.

•   public enterprises can produce such goods at lower cost than can private enterprises.

• their production seriously distorts the distribution of income.

• private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.