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WorksheetsMarket Failure
Total questions: 20
Worksheet time: 15mins
Which of the following is NOT a cause of market failure
The provision of public goods
Perfect competition
The provision of merit goods
Externalities
Monopoly
This means that consumption by one person does not reduce the consumption by another persons.
Non-Rivalrous
External cost
Non-excludable
Freeriders
This is the fact that consumption of a public good cannot be confined to those who have paid for it.
Non-Rivalrous
External cost
Non-excludable
Freeriders
Efficient allocation of resource is where:
P = VC
P < TC
P = MC
P < MC
Which of the following is an example of a public good?
A lighthouse
The public transport (bus or train)
Water to homes
A coca cola
A free good has:
An opportunity cost
No opportunity cost
Excludability
Has a price
We may minimize market failure related to a public good by:
Restricting access to only those who pay
Excluding those who want to freeride
Providing the good using taxation revenue
Depending on the private sector to supply it
TWO ANSWERS ARE CORRECT: Market failure occurs:
The free market fails to open on time
Free markets fail efficiently allocate resources
Price mechanism is NOT low enough for all consumers to afford the good
Price mechanism fails to account for all costs and benefits associated with consumption of a product
Products where social benefits to the community outweighs the private benefits to the consumer:
Merit goods
Demerit goods
Public goods
Economic goods
Products that the government feels that people will under-consume and suppliers over supply:
Merit goods
Demerit goods
Public goods
Economic goods
Products people underestimate the benefits of consuming and producing
Merit goods
Demerit goods
Public goods
Economic goods
Tend to have positive externalities
Merit goods
Demerit goods
Private goods
Economic goods
More harmful than customers realize:
Merit goods
Demerit goods
Private goods
Economic goods
Market failure arises whenever firms
make a loss
replace machines with workers
create externalities
reduce expenditure on research and development
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
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
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 is NOT a reason for market failure?
Presence of Public Goods
Presence of Positive Externalities
Perfectly competitive markets
Incomplete markets
