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WorksheetsMarket failure - Externalities
Total questions: 13
Worksheet time: 26mins
In which of the following situations is market failure least likely to occur? A situation where;
externalities exist
many producers compete in the market
there is a sole producer in market
there is a very uneven distribution of income and wealth
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
A situation of market failure is said to exist if;
buyers and sellers pay for the true opportunity costs of their actions
there are no externalities
the government provides merit goods free
third parties in society are affected and not compensated
When social costs are greater than private costs, there is a;
positive externality
negative externality
less than socially optimal output
socially optimal output
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
In a market for a product with positive externalities;
all benefits are not internalized
there is too much production
profits are too low
profits are too high
When there is a _______ production externality, the free market _________ resources to the production of the good and too ______ of it is produced relative to the social optimum. This is shown by _______and _______ at the point of production, Qm, *
negative; misallocate; little; Qm > Qopt; MSC < MSB
positive; underallocate; much; Qm > Qopt; MSB > MSC
negative; overallocate; much; Qm > Qopt; MSC > MSB
positive; misallocate; much; Qm > Qopt; MSC > MSB
__________ goods are goods that are considered __________ for consumers but which are_________ by the market. One important reason for overprovision is that the good may have __________ consumption externalities, thus the market ________ resources in its production.
Excise; desirable; underproduced; positive; overallocates
Demerit; desirable; underproduced; positive; underallocates
Normal; needs; undervalued, elastic; frees
Demerit; undesirable; overproduced; negative; overallocates
Public goods, such as defence, are not supplied by the price system because;
the capital cost is too high
the benefits would - ceteris paribus - not be restricted to buyers but would be available to non-buyers as well
public goods are necessities and therefore cannot be left to the price system
monopolies would make supernormal profits
Which of the following is a characteristic of a merit good?
It could be provided by the free market, but not in sufficient quantities
It is always provided free to consumers
It tends to generate negative externalities, so governments restrict its consumption
Once the good has been supplied to one consumer, there is no additional cost in supplying it to others
Which of the following does not apply to merit goods and services?
They provide private and social benefits
They are limited in supply and require a system of allocation
They could be paid for by the consumer if a market system was allowed to operate
They have the characteristic of non-excludability
Governments use cost-benefits analysis to;
measure the net social benefit of a project
make consumers pay for the net social benefit they receive
minimize social costs
make producers pay for the social costs of a project
A tin-mining company is found guilty of polluting a river. Which one of the following government measures would an economist describe as an appropriate market-based solution?
Imposition of regulations and direct control on the company
A reduction of private property rights over the river
Increase tax on the tin produced
Nationalization of the tin-mining company
