IB Economics Market failure

Market failure results in a misallocation of resources. In some cases, this can be corrected by the government

• restricting the manufacture of goods that generate positive externalities

• Providing public goods

• subsidising all loss-making firms

• placing a tax on merit goods

A government might tax a good that creates negative externalities in order to try to:

• Increase price and consumption of the good to provide firms with extra revenue
•  Make the information avaliable more asymmetric
• Decrease demand for the good and thus increase the consumer surplus
• Decrease consumption of the good and thus reduce the triangle of welfare loss

The role of government in a market system

• does not exist
• is restricted to establishing property rights
• includes improving situations that would otherwise result in a market failure
• includes improving on situations that would otherwise result in a government failure?

Government regulation may negatively affect businesses in the following ways by

• Increasing input costs
• Increasing profits
• Lowering consumer prices
• All of the above

What does it mean to internalise an externality?

• Trade permits between firms until the externailty decreases to zero through an shift upwards of the MSC curve to intersect at the new optimal level of production
• The costs that were previously imposed on society are made internal because they are now paid for by the two parties to the transaction; the producers and the consumers
• The costs that were previously imposed on society are made internal because they are now paid for by the producers entirely
• The costs that were previously imposed on society are made internal because they are now paid for by the consumers entirely

Under what condition is allocative efficiency achieved?

• Marginal private benefits = marginal social costs

• Marginal social benefits = marginal social costs

• Marginal private benefits > marginal social costs

• Marginal social benefits > marginal social costs

Most sales taxes are regressive because

• taxable purchases are capped at $50,000 a year.

• wealthier people pay less tax on a purchase than poorer people would pay on the same item.

• most people cannot afford to buy such luxury goods as yachts, furs, and diamonds

• poorer taxpayers spend a larger proportion of their income on taxable goods and services than do wealthier taxpayers.

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.

Which of the following statements is true about externalities?

• When externalities exist, resources are allocated efficiently

• When positive externalities exist, efficiency is improved by taxing the product

• From society's point of view, the output of goods for which a positive externality exists is too low

• The price system overproduces goods with positive externalities

The free market outcome is determined by the intersection of _____ and ____, resulting in quantity ____ and price ____. The social optimum outcome is given by the intersection of ____ with ____, which determines quantity _____ and price ____.

• MPB; MSB; Qm; Popt; MPC; MSC; Qopt; Popt

• MPC; Popt; Qm; Pm; MSC; MSQ; Oopt, Pm

• MPB; MPC; Qm; Pm; MSB; MSC; Qopt; Popt

• MSB, MSC; Qm; Pm; MPB; MPC; Qopt; Popt