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WorksheetsMarket Failure SSK
Total questions: 63
Worksheet time: 36mins
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
Under what condition is allocative efficiency achieved?
Marginal private benefits = marginal social costs
Marginal social benefits = marginal social costs
Marginal private benefits > marginal social costs
Marginal social benefits > marginal social costs
Most sales taxes are regressive because
taxable purchases are capped at $50,000 a year.
wealthier people pay less tax on a purchase than poorer people would pay on the same item.
most people cannot afford to buy such luxury goods as yachts, furs, and diamonds
poorer taxpayers spend a larger proportion of their income on taxable goods and services than do wealthier taxpayers.
From an economic standpoint, government intervention is justified
When the private sector is larger than public sector.
Because the government will encourage the production of private goods.
Because the government can increase the level of market power of private businesses.
When the market mechanism fails to achieve the optimal mix of output.
The federal government's role in providing aid to the poor and the aged is justified because of concerns about
Market power.
Macro failure.
Inequity.
Restricted supply.
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
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
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
The ups and downs of the economy, which the government must sometimes step in to stabilize due is known as the
Regulatory cycle
Business cycle
Fiscal Policy
Monetary Policy
Which is not an example of a publicly owned industry intended to provide goods and services more efficiently to the public?
Postal service
Public transportation
Airline industry
Utilities such as gas, water, electric
Which of the following is NOT a reason for market failure?
Presence of Public Goods
Presence of Positive Externalities
Perfectly competitive markets
Incomplete markets
Which of the following conditions lead to emergence of natural monopoly?
Low fixed cost
High fixed cost
Low variable cost
High variable cost
When is competition likely to be limited?
No transportation cost
Perfect information to all the participants
Presence of large number of firms
Presence of patents
In the presence of natural monopoly, it is profitable to produce output at a point at which Price is equal to Long run marginal cost.
True
False
In Public goods, what is meant by the property of non-rivalry?
Marginal cost of an additional user is high
Marginal cost of an additional user is zero
Marginal cost is high
Marginal cost is zero
Provision of Street-light by markets could lead to :
Undersupply of streetlights
Oversupply of streetlights
Optimal supply of streetlights
No supply of streetlights
Will the firm generating externality depicted by the above diagram, overproduce or underproduce the good?
Overproduce
Underproduce
Which of the following are reasons for markets to be incomplete?
Undersupply of Innovation
Presence of Asymmetric information
Both of them
None of them
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 that the government feels that people will under-consume and suppliers over supply:
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
Negative externalities can be best described as
When the consumption/production of a good or service has a negative impact on a third party
When the consumption/production of a good or service has any impact on a third party
When the consumption/production of a good or service has a positive impact on a third party
When the consumption/production of a good or service depletes the access for a third party
A large number of cars polluting the air could be an example of
Consumption of common access resources
Asymmetric information
Negative externalities
Public goods
Which is not an example of a public good?
Street lights
Local GP superclinic
Bottled water
Defence force
An externality is a consequence of the failure or inability to establish__.
social norms
rules
ownership rights
social rights
Which of the following is NOT a Characteristic of Externalities?
Externalities are reciprocal in nature.
Externalities can be both positive and negative.
Public goods can be viewed as a special kind of an externality.
Externalities can be produced by only firms, not consumers.
When one party to an economic transaction possesses greater material knowledge than the other party, the type of market failure is known as caused by____________.
Monopoly power
Inequality
Asymmetric information
Demerit goods
