Unit 6: Market Failures Quiz 6.1-6.2

What is a market failure?

• A market failure is when the allocation of goods and services by a free market is perfectly balanced.

• A market failure is when the allocation of goods and services by a free market is too efficient.

• A market failure is when the allocation of goods and services by a free market is always fair.

• A market failure is when the allocation of goods and services by a free market is not efficient.

A perfectly competitive market produces the socially efficient level of output when the marginal social benefit of the last unit of output produced is

• equal to the marginal social cost

• less than the marginal social cost

• zero

• greater than the total producer surplus

• equal to the total producer surplus

What are the main types of market failures?

• Inflation, recession, deflation

• Public goods, externalities, market power, and inequality

• Labor unions, government regulations, consumer preferences

• Supply and demand, perfect competition, monopoly

• pollution, high prices, unemployment, inflation

Explain the concept of externalities and how they contribute to market failures.

• Externalities are costs or benefits that affect a third party not directly involved in the economic transaction, leading to inefficient allocation of resources.

• Externalities have no impact on market efficiency

• Externalities only affect the buyer and seller directly

• Externalities are only positive and never negative

If the monopolist produces the allocatively efficient level of output rather than the profit-maximizing level of output, consumer surplus will

• decrease by the area P₅JMP₂

• increase by the area P₅JGP₁

• increase by the area P₅JKP₄

• decrease by the area P₅JKP₄

• increase by the area P₅JMP₂

To correct for positive externalities, the government should

• do nothing, since no harm is done by positive externalities

• levy a tax on the output of the good or service

• pay a subsidy equal to the marginal external benefit

• impose a price ceiling on the good to discourage its production

• impose a price floor on the good at which the marginal private benefit equals the marginal social cost

Which of the following describes the type of externality generated by the unregulated private market and the resulting deadweight loss?

• Positive / egh

• Positive / ehf

• Negative / ehf

• Negative / egh

• Negative / P4ghP2

A chemical plant pollutes a river that serves as the water supply for a nearby town. From an economist's point of view, pollution from the plant should be reduced until the

• marginal benefit from the cleaner water is equal to the marginal cost of making the water cleaner

• marginal benefit from cleaner water is maximized

• total benefit from cleaner water is zero

• total benefit from cleaner water is equal to the total cost of making the water cleaner

• total benefit from cleaner water is maximized

Which of the following is true based on the graph above?

• Quantity of education in the private market is more than the socially optimal quantity.

• Consumers of education could be subsidized in order to achieve the socially optimal quantity.

• Producers of education could be taxed in order to achieve the socially optimal quantity.

• Consumers of education could be taxed in order to achieve the socially optimal quantity.

• Consumption of education has a negative externality.

Explain the concept of the tragedy of the commons and its relevance to market failures.

• The tragedy of the commons occurs when individuals exploit a shared resource for their own gain, leading to market failures.

• The tragedy of the commons is a concept that only applies to individual consumers, not to market failures.

• The tragedy of the commons is a situation where government intervention prevents market failures.

• The tragedy of the commons is when individuals work together to conserve resources, leading to market failures.