Question 1

Complete this sentence with the most appropriate choice below. Negative externalities&#8230;&#10;A) Lead to over production in the free market.&#10;B) Lead to under production in the free market.&#10;C) Are provided free by the government.&#10;D) Are owned by the state.

Accepted Answer

Negative externalities, such as pollution from a factory, cause additional costs to society that are not reflected in the market price of the good or service being produced. This often leads to overproduction relative to the socially optimal level, as the producer does not bear the full cost of production.

Question 2

A product that is non diminishable and non excludable is known as a ______ good.

Accepted Answer

Public

Question 3

What is asymmetric information?&#10;A) It means that some individuals have more information than others.&#10;B) It means there is perfect information in the market.&#10;C) It is non-excludable and non diminishable.&#10;D) It has no opportunity cost.

Accepted Answer

Asymmetric information refers to a situation where one party in a transaction has more or better information than the other party. This can lead to an imbalance in the transaction, where the party with more information has an advantage.

Question 4

When does a potential welfare gain occur?&#10;A) The social marginal benefit equals the social marginal cost.&#10;B) The social marginal benefit is greater than the social marginal cost.&#10;C) The social marginal benefit is less than the social marginal cost.&#10;D) The price is zero.

Accepted Answer

A potential welfare gain occurs when the social marginal benefit of consuming a good or service exceeds the social marginal cost of producing it, indicating that additional consumption could improve overall welfare.

Question 5

What is true for a public good?&#10;A) It must be provided by the private sector.&#10;B) It is provided at no charge in the free market.&#10;C) It is over-provided in the free market.&#10;D) It is not provided in optimal amounts by the free market.

Accepted Answer

Public goods are not provided in optimal amounts by the free market because they are non-excludable and non-rivalrous, leading to issues like the free-rider problem. This makes it difficult for private firms to charge for their use, resulting in under-provision by the market.

Question 6

A negative externality leads to overproduction in the free market.

Accepted Answer

A negative externality occurs when the production or consumption of a good or service imposes costs on third parties not involved in the transaction, leading to a higher level of production than is socially optimal, as the market does not account for these external costs.

Question 7

A government might want to subsidise positive externalities

Accepted Answer

Governments may subsidize positive externalities because these are beneficial effects on third parties or society that are not reflected in the market price, leading to underproduction of the good or service. Subsidies can help correct this market failure by encouraging more production and consumption of the good with positive externalities.

Question 8

All products provided by the government are public goods.

Accepted Answer

Not all products provided by the government are public goods. Public goods are defined by their non-excludability and non-rivalrous consumption, whereas many government-provided products and services do not meet these criteria and can be excludable or rivalrous.

Question 9

A monopoly is likely to lead to higher prices than a competitive market.

Accepted Answer

The answer of A monopoly is likely to lead to...

Deck 7: Do Markets Work