ECONOMIC EFFICIENCY, MARKET FAILURES AND GOVERNMENT INTERVEN

Government intervention to correct market failure may make the situation worse because

• the information needed to make sound economic decisions is widely dispersed amongst individuals and firms

• the government is unable to provide private goods since they are both rival and excludable

• positive externalities resulting form the consumption of merit goods means that they will be under provided by the state

• competition amongst firms in the private sector will inevitably result in an optimum allocation of resources

Government provision of a merit good can be justified because

• without government intervention there would be a missing market

• merit goods are non-rival and non-excludable

• without government intervention partial market failure would result

• the provision of merit goods has an opportunity cost

Market failure arises whenever firms

• make a loss

• replace machines with workers

• create externalities

• reduce expenditure on research and development

One reason why UK governments provide education is because

• the private benefit from education is less than the social benefit

• education cannot be provided by the free market

• all education is both a merit good and a public good

• this ensures that the provision of education is maximised

The diagrams show the marginal social cost and marginal private cost (MSC and MPC) curves and marginal social benefit and marginal private benefit (MSB and MPB) curves for different goods. Which diagram, A, B, C or D, is most likely to illustrate a demerit good?

• A

• B

• C

• D

Which one of the following statements about market failure is correct?

• Small firms are less efficient than large firms due to diseconomies of scale.

• The existence of free riders will result in the over-production of public goods.

• The social benefits of some private goods exceed the private benefits.

• Markets do not supply merit goods.

Which one of the following is most likely to be an example of the immobility of a factor of production? Workers’ unwillingness to

• change jobs.

• accept lower wages.

• improve productivity.

• attend training courses.

Market failure arises when

• prices rise in response to excess demand.

• no account is taken of positive externalities in consumption.

• firms are unprofitable and go out of business.

• costs increase as firms expand their production.

Government intervention in a market economy is most likely to lead to an increase in economic welfare if

• the market mechanism fails to take account of externalities.

• it leads to an increase in the consumption of demerit goods.

• the price elasticity of supply of private goods is high.

• the demand for inferior goods rises as income increases.

Which one of the following is most likely to reduce market failure?

• Increased economies of scale in production

• The existence of merit goods

• A decrease in the mobility of labour

• Improving the information available to consumers