Market Failures and Externalities

What is a market failure?

• A situation where markets operate perfectly.

• When the market fails to allocate resources efficiently.

• When the government controls the market.

• A situation where there is no demand for a product.

Which of the following is a positive externality?

• Pollution from a factory.

• Noise from a construction site.

• Planting trees that improve air quality.

• Traffic congestion.

What is a negative externality?

• A benefit received by someone outside of an activity.

• A cost imposed on others not involved in an activity.

• A tax imposed by the government.

• An increase in market efficiency.

Which is an example of a negative externality?

• Clean parks that increase nearby property values.

• A vaccination that protects the community.

• Secondhand smoke affecting nearby people.

• Free public education.

What is an example of a positive externality?

• Traffic congestion.

• Free education raising the skill level in society.

• Water pollution from factories.

• Noise from loud music in a neighborhood.

When a market failure occurs, who often steps in to correct it?

• Businesses

• Consumers

• The government

• Banks

Which of the following is a common method for correcting negative externalities?

• Giving rewards

• Applying taxes or regulations

• Removing property rights

• Creating more externalities

Pollution from cars is an example of what type of externality?

• Positive externality

• Negative externality

• Zero externality

• Neutral externality

A person planting flowers in their yard that beautify the neighborhood is an example of a:

• Negative externality

• Positive externality

• Public good

• Private cost

A factory that dumps waste into a river, harming wildlife, is creating a:

• Positive externality

• Negative externality

• Public good

• Private good