Deck 7: Market Failures and Government Policy

Question 1

Imperfect information on the part of buyers and sellers:

A) remains a barrier to achieving efficiency, in many industries
B) will not stop the economy from achieving efficiency, assuming the other conditions for efficiency hold
C) cannot persist in a market economy
D) is no longer a problem due to the effective enforcement of advertising standards

Answer 1

A

Question 2

Which of the following would be an example of an external benefit?

A) The government spends a million dollars on improving national parks.
B) A firm has just obtained permission to open a landfill site on property that is adjacent to your home.
C) More people start to ride the bus and as a result air pollution is reduced.
D) Firms are able to reduce their costs of production by using a more efficient technology.

Answer 2

C

Question 3

Market failure is used to describe:

A) the failure of the market economy to provide an equal distribution of income to all citizens
B) firms which go bankrupt
C) an economic crisis
D) the failure of the market to provide an efficient quantity of a good and service

Answer 3

D

Question 4

Relative to a competitively organised industry, a monopoly:

A) produces less output, charges lower prices and earns only a normal profit
B) produces more output, charges higher prices and earns economic profit
C) produces less output, charges higher prices and earns economic profit
D) produces less output, charges lower prices and earns economic profit

Question 5

As fees for higher education in Australia continue to rise, and the sector is increasingly privatised, it is likely that the quantity of education produced and consumed will:

A) be equal to the socially optimal level
B) more closely reflect the socially optimal level
C) exceed the socially optimal level
D) be less than the socially optimal level

Question 6

Which of the following would be classified as an external cost (negative externality)?

A) You are not able to study at night because there is so much noise coming from the room next to yours.
B) A private firm will not provide national defence since it is impossible to confine the benefits to only those individuals who have paid for it.
C) When you purchase a product, the cost is higher than you originally anticipated.
D) As more firms began hiring computer programmers, the salaries of computer programmers increased and therefore the firm's cost of production increased.

Question 7

Governments often subsidise goods and services that society appears to value more highly than the individual consumer does. These goods and services are called:

A) private goods
B) merit goods
C) charities
D) public goods

Question 8

Assume that the marginal cost of producing steel does not include the cost of the damage to the environment as a result of producing steel. By producing where P=MC, the firm will be producing:

A) the efficient amount of steel
B) a zero quantity of steel
C) more than the efficient amount of steel
D) less than the efficient amount of steel

Question 9

Which of the following is not a reason for governments to provide merit goods?

A) providing greater equality of opportunity
B) protecting firms from poor investment decisions
C) protecting consumers from poorly informed decisions
D) protecting children from the decisions made by poorly informed parents

Question 10

The free market fails to provide public goods because:

A) private firms cannot prevent people from using the good or service
B) the goods and services are not demanded by consumers
C) the private costs of production are greater than the social costs of production
D) the costs of production are zero, therefore private firms cannot determine what output level to produce to maximise profits

Question 11

Which of the following is NOT a source of 'failure' of the free market?

A) imperfectly competitive markets
B) external costs and benefits
C) fast market adjustment to disequilibrium
D) lack of knowledge by consumers

Question 12

Which of the following defines an environmental charge?

A) a tax on output designed to charge for the adverse effects of production on the environment
B) charges for using natural resources or for using the environment as a dump for waste
C) the use of law to charge companies for failure to comply
D) a pollution control that requires firms' emissions to reflect the levels that could be achieved from using the best available pollution control technology

Question 13

Three of the following are advantages of electronic road pricing. Which one is not?

A) The charge can be varied according to the level of congestion.
B) The charge can be varied according to the time of day.
C) The socially efficient rate to charge can easily be ascertained.
D) The revenues can be used to subsidise public transport.

Question 14

Imperfect information on the part of buyers of hybrid cars:

A) contributes to market failure
B) can be corrected by information provided by used car salesmen
C) can be corrected by the use of advertising
D) can be corrected by information provided on the websites of the car producers

Question 15

To correct for an external benefit, the government should:

A) set a tax equal to the amount by which marginal private cost exceeds the marginal social cost
B) set a tax equal to the amount by which marginal social cost exceeds the marginal private cost
C) provide firms with a subsidy for the amount by which marginal private benefit exceeds the marginal social benefit
D) provide firms with a subsidy for the amount by which marginal social benefit exceeds the marginal private benefit

Question 16

In a perfectly competitive market where there are no externalities:

A) marginal social cost will be greater than price
B) marginal social benefit will equal marginal social cost
C) marginal social benefit will be greater than price
D) price will be greater than marginal social benefit

Question 17

When the marginal social cost of the production of a good is than the marginal social benefit, should be produced.

A) less than; more
B) less than; less
C) more than; more
D) more than; the same amount

Question 18

The deadweight loss associated with monopoly compared to perfect competition is comprised of:

A) a loss of consumer surplus only
B) a loss of consumer surplus and a loss of producer surplus
C) a loss of private surplus
D) a loss of producer surplus only

Question 19

Externalities are a problem only if:

A) decision makers do not take them into account
B) the externalities impose a cost
C) all firms are monopolistic
D) all firms are perfectly competitive

Question 20

A situation where all individual markets are in equilibrium is called:

A) total equilibrium
B) dynamic equilibrium
C) general equilibrium
D) global equilibrium

Question 21

Your next- door neighbour has a beautiful flower garden. However, you are allergic to flowers and cannot use your patio because of the flower pollen that drifts into it. In this case, the flower garden is an example of:

A) a good that provides an external benefit
B) market power
C) a good that imposes an external cost
D) a public good

Question 22

If non- payers cannot be excluded from consuming a good this gives rise to the:

A) pubic good problem
B) free rider problem
C) private good problem
D) fallacy of composition problem

Question 23

Public goods are characterised by being non- rival in consumption, therefore:

A) they are illegal
B) they are very expensive, thus the private sector cannot provide them
C) the private sector may not provide them because they cannot exclude those who do not pay
D) the government cannot produce them

Question 24

An external cost of production will occur when:

A) common property resources exist
B) public goods are not provided by the free market
C) a firm does not consider the total social cost of production when choosing what level of output to produce
D) a firm does not consider the total social benefit of production when choosing what level of output to produce

Question 25

If an external cost arises in the production of paint:

A) the free market will not produce enough paint
B) too much paint will be produced
C) painting competitions should be organised in local schools to use up the excess paint
D) the government should subsidise the production of paint

Question 26

Environmentally harmful effects often tend to be long term, even though the benefits of using the environment are almost immediate. This is an example of what type of market failure?

A) inter- generational problems
B) externalities
C) a common resource
D) ignorance

Question 27

Social efficiency occurs when:

A) unemployment is low and prices are stable
B) marginal social benefits of an activity are equal to the marginal social costs
C) all markets are in equilibrium
D) the marginal social cost of an activity is greater than the marginal social benefit

Question 28

From the list below, the best example of a good that is non- excludable but is rival in consumption would be:

A) transmission of television programs
B) national defence
C) fishing waters
D) street lighting

Question 29

Producer surplus:

A) is equal to total cost minus total revenue
B) is the difference between the price producers would have been willing to accept for a good and the price they actually receive
C) is the difference between the price producers would have been willing to pay for a good and the price they actually do pay
D) is represented by the area above the price line and below the demand curve

Question 30

Bill sells Mary a worthless coin that Bill incorrectly told Mary 'belonged to an ancient Persian king and is of enormous value to coin collectors'. Economists would call this an:

A) efficient exchange, assuming Bill was not intentionally trying to trick Mary
B) inefficient exchange because there were externalities involved
C) efficient exchange since any type of voluntary exchange promotes efficiency
D) inefficient exchange since at least one party used false market information

Question 31

Because public goods are characterised by being collectively consumed:

A) the government cannot produce them
B) they are very expensive, thus the private sector cannot provide them
C) the private sector may not provide them because they cannot exclude those who do not pay
D) they are illegal

Question 32

Assume that price underestimates the value that society places on flu vaccine. If firms produce where P=MC, firms will be producing:

A) the output where consumer surplus is zero
B) more than the efficient amount of flu vaccine
C) the efficient amount of flu vaccine
D) less than the efficient amount of flu vaccine

Question 33

Which of the following is NOT an example of an externality?

A) exhaust fumes from cars
B) a lack of competition in the market
C) your enjoyment of your neighbour's beautiful garden
D) individuals paying for child immunisation

Question 34

General equilibrium occurs when in all markets.

A) prices are fair
B) consumers are satisfied
C) firms make profits
D) demand equals supply

Question 35

One role of the Australian Competition and Consumer Commission (ACCC) is to:

A) prevent mergers between companies
B) regulate the use of public goods
C) recommend cuts in tariff protection to industries
D) evaluate potential mergers between companies

Question 36

In order to induce a more socially optimal level of output governments can goods associated with negative externalities and goods associated with positive externalities.

A) tax; subsidise
B) subsidise; tax
C) subsidise; subsidise
D) tax; tax

Question 37

Suppose a company moves its most polluting production to a factory in a developing country where it knows environmental regulation is less strict than in its home location. In the new location the firm's output is likely to:

A) not relevant as the company is producing outside its home country
B) be less than the efficient level of output
C) be greater than the efficient level of output
D) be less than the efficient level of output as an infinite increase in output would benefit a developing economy

Question 38

An economist has estimated that the maintenance of a public park costs $25 000 a year and that the public park generates $30 000 a year in revenue for merchants near the park. From society's point of view, the maintenance of this park is:

A) inefficient because the park has no competition
B) potentially efficient because the value of the gains exceeds the value of the losses
C) inefficient because the additional revenues generated by the park are so low
D) inefficient, because everyone in the community pays taxes to support the park, but only the merchants near the park benefit

Question 39

Which of the following is not a characteristic of a tradable permit system of pollution control?

A) Firms are not permitted to sell their pollution permits to other firms.
B) Firms can emit pollution above their permitted level if they are able to buy a permit from another firm.
C) It combines both regulations and market- based systems.
D) The permit allows firms to emit pollution up to a pre- determined level.

Question 40

Common resources are characterised by:

A) provision by the government
B) non- excludability
C) non- rivalry
D) both B and C

Question 41

Correctly complete the sentences below from the options which follow.
Statement
a() Private efficiency in consumption is where:
b() Efficiency in production for the producer is where:
c() Social efficiency in the market is where:
Answer

Question 42

What steps can the government take to help alleviate pollution using market forces?

Question 43

If an industry changes from being highly competitive to a monopoly, this change can be represented by the:

A) loss in consumer surplus plus the loss in producer surplus
B) loss in producer surplus minus the gain in consumer surplus
C) gain in producer surplus plus the gain in consumer surplus
D) loss in consumer surplus plus the gain in producer surplus plus the deadweight loss

Question 44

Explain what economists mean when they refer to 'negative externalities'.

Question 45

Non- rivalry means that one extra person using the good will not deplete it.

Question 46

Explain why an external benefit is likely to be associated with the purchase of smoke detectors. How may this externality be internalised?

Question 47

Which of the following is NOT an advantage of taxing negative externalities?

A) It is often difficult to accurately measure external costs such as pollution costs.
B) The tax provides a financial incentive for a firm to decrease the level of the negative externality.
C) Taxes force the producer of the externality to pay for the cost of the externality.
D) The tax internalises the externality.

Question 48

Residents in the Hunter Valley of New South Wales claim that open cut coal mining is linked to high rates of asthma amongst children in the area. This health problem is:

A) an external benefit of the local coal mining
B) estimated to be less than the economic benefits of the coal mining
C) an external cost of the local coal mining
D) a private cost of coal production

Question 49

Explain the factors that can make it difficult for governments to set optimal levels of taxes and regulations to correct for pollution.

Question 50

If the production of a product is associated with an external benefit, and the firm does not consider the external benefit when deciding how much to produce, then the firm will produce:

A) the efficient level of output, as long as P = MC
B) the efficient level of output, as long as the firm is perfectly competitive
C) an output level that is greater than the efficient one
D) an output level that is less than the efficient one

Question 51

Use a diagram to illustrate the concepts of consumer and producer surplus.

Question 52

When the social benefit of production exceeds the private benefit of production:

A) there is not enough of the good being produced
B) the government should regulate the use of the common property resource
C) there is too much of the good being produced
D) there will be incidental costs from production

Question 53

A firm produces an output level at which price is greater than marginal cost. Explain why this is inefficient.

Question 54

Correctly complete the sentences below from the options which follow.
Statement
a() If the MSC > the MSB then:
b() If the MSB > the MSC, then:
c() If the MSC = MC, then:
Answer

Question 55

Street signs are an example of a good characterised by and _.

A) non- rivalry; non- excludability
B) rivalry; non- excludability
C) excludability: rivalry
D) non- rivalry; excludability

Question 56

Using examples, explain the difference between a public good and a merit good.

Question 57

What is the free rider problem and how does government action help to overcome it?

Question 58

Provide some arguments for government intervention in the working of the economic system.

Question 59

Under what circumstances will electronic road pricing be most effective in reducing the level of traffic congestion?

Question 60

Use a diagram to illustrate and explain how monopoly market power impacts the distribution of consumer and producer surplus compared to a perfectly competitive outcome?

Question 61

The goal of equity is realised when income is equally distributed amongst the citizens of a nation.

Question 62

Until quite recently the Australian government provided higher education free of charge to Australian students. Explain the economic argument for free higher education.

Question 63

The deadweight loss of monopoly refers to the loss of consumer surplus caused by the monopolist's pricing and output decisions.

Question 64

Tradable permits are a mix of regulation and market- based systems.

Question 65

A profit- maximising monopolist will normally produce a socially efficient level of output.

Question 66

Resale price maintenance involves a supplier specifying a minimum price at which a product can be sold, therefore it is beneficial for consumers.

Question 67

Cost- benefit analysis looks at the social costs and benefits of proposed actions.

Question 68

Government market intervention can reduce market efficiency.

Question 69

Sporting facilities are considered by the Australian government to be merit goods.

Question 70

The free- rider problem arises because of the non- rivalry characteristic of public goods.

Question 71

Taxing externalities such as pollution provides a financial incentive for firms to decrease pollution.

Question 72

The difference between the maximum amount a person is willing to pay for a good and its current market price is the consumer surplus.

Question 73

A free rider is someone who cannot be made to pay for consuming something that other people have paid for.

Question 74

Higher education facilities are considered by the Australian government to be merit goods.

Question 75

If the marginal social cost of producing a good is less than the marginal social benefit, then more of the good should be produced.

Question 76

Social efficiency occurs in the market where marginal private benefit equals marginal social cost.

Question 77

The results of a decision which affect people other than the decision- taker are called externalities.

Question 78

Public goods are non- rival in consumption and non- excludable.

Question 79

A common resource is a resource that without government intervention would have no access restrictions.

Question 80

A tax set equal to the marginal social cost of production can correct for an external cost from a production process.