H2 Market Failure

What are the assumptions made in order for free market equilibrium you learnt in topic 2 to exist? (Select all correct options)

• All goods are private goods

• Free market considered all benefits & costs and has no externalities

• There is perfect information

• There is perfect competition

• Factors of productions are perfectly mobile

What is a characteristic of public goods that makes them different from private goods?

• Excludability in consumption

• Rivalry in consumption

• Non-rivalry in consumption

• Rejectability in consumption

What is the main reason for market failure in the case of non-provision of public goods?

• Negative externalities

• Perfect competition

• Positive externalities

• Free-ridership

What is the term used to describe uncompensated spillover effects from the consumption or production of a good?

• Deadweight loss

• Market failure

• Opportunity cost

• Externalities

In the case of positive externalities in consumption, which statement(s) are correct?

• There is under-consumption of the good/service.

• Marginal Social Benefit (MSB) > Marginal Social Cost (MSC)

• There is presence of negative externalities.

• Government should implement Tax, Regulation and/or directly provide the good/service

What is the monetary measure of welfare loss represented by the shaded area on the diagram in the case of under-consumption due to positive externalities?

• Area CAD

• Area BCA

• Area BADC

• Between QpQs

Which quantity gives the socially optimal level of output?

• marginal private benefit equals marginal social cost (MPB = MSC)

• marginal private benefit equals marginal private cost (MPB = MPC)

• marginal social benefit equals marginal social cost (MSB = MSC)

• marginal social benefit is more than marginal social cost (MSB > MSC)

What causes divergence between marginal private cost and marginal social cost in the case of negative externalities?

• Factor immobility

• Market dominance

• Imperfect competition

• marginal external cost(s)

• marginal external benefit(s)

What is/are some example(s) used to explain market that generates negative externalities?

• Production of paper using slash-and-burn method

• Consumption of private cars

• Development of green-manufacturing processes

• Buying of insurance

What is the use of imposing a per-unit tax equal to the marginal external cost?

• Raises the MPC to equate to MSC so as to reach socially optimum level (MSB=MSC)

• Government needs more tax revenue

• Raises the MPC to equate to MPB so as to reach socially optimum level (MPB=MPC)

• Legislation / Rules and Regulation doesn't work