Question 1

Externalities are&#10;A)side effects passed on to a party other than the buyers and sellers in the market.&#10;B)side effects of government intervention in markets.&#10;C)external forces that cause the price of a good to be higher than it otherwise would be.&#10;D)external forces that help establish equilibrium price.

Accepted Answer

Externalities are costs or benefits that are not reflected in the market price and are passed on to parties other than the buyers and sellers in the market. They can be positive (benefits) or negative (costs) and can affect individuals or society as a whole.

Question 2

The decisions of buyers and sellers that affect people who are not participants in the market create&#10;A)market power.&#10;B)externalities.&#10;C)profiteering.&#10;D)market equilibrium.

Accepted Answer

Externalities refer to the impact of market transactions on parties that are not directly involved in the transaction. This can be positive, such as when a farmer's use of pesticides benefits neighboring farms, or negative, such as when a factory's pollution harms the health of nearby residents. These external effects can result in social costs or benefits that are not accounted for in the price of the transaction, leading to market inefficiencies.

Question 3

Which of the following statements is not correct?&#10;A)An invisible hand leads buyers and sellers to an equilibrium that maximizes total surplus.&#10;B)Market power can cause markets to be inefficient.&#10;C)Externalities can cause markets to be inefficient.&#10;D)The invisible hand can remedy all types of market failures.

Accepted Answer

While the invisible hand can lead to efficient outcomes in competitive markets, it may not be able to remedy all types of market failures, such as natural monopolies or public goods. These market failures require government intervention to achieve an efficient outcome.

Question 4

Which of the following is not correct?&#10;A)Market power can cause markets to be inefficient.&#10;B)When the decisions of buyers and sellers affect nonparticipants,markets may be inefficient.&#10;C)The tools of welfare economics cannot help economists when markets are inefficient.&#10;D)Externalities can cause markets to be inefficient.

Accepted Answer

The tools of welfare economics, such as analyzing marginal costs and benefits, can help economists identify and alleviate market inefficiencies, such as externalities, asymmetric information, and market power. Therefore, choice C is not correct.

Question 5

Market power and externalities are examples of&#10;A)laissez-faire economics.&#10;B)public policy.&#10;C)market failure.&#10;D)welfare economics.

Accepted Answer

Market power and externalities are both examples of market failure, in which the free market fails to allocate resources efficiently. In the case of market power, a monopolist or oligopolist may restrict output and charge higher prices than a competitive market would. In the case of externalities, the actions of one party affect the well-being of others, but the cost or benefit is not reflected in market prices, leading to inefficient outcomes. Laissez-faire economics refers to a hands-off approach to government intervention in markets, while public policy and welfare economics relate to government interventions aimed at correcting market failures.

Question 6

Market power refers to the&#10;A)side effects that may occur in a market.&#10;B)government regulations imposed on the sellers in a market.&#10;C)ability of market participants to influence price.&#10;D)forces of supply and demand in determining equilibrium price.

Accepted Answer

Market power refers to the ability of market participants, either buyers or sellers, to influence the market price. This is usually associated with a lack of competition in the market, which allows firms to set prices higher than they would in a competitive market. Government regulations (B) and the forces of supply and demand (D) are not necessarily related to market power, and side effects (A) are not a definition of market power.

Question 7

Inefficiency can be caused in a market by the presence of&#10;A)market power.&#10;B)externalities.&#10;C)imperfectly competitive markets.&#10;D)All of the above are correct.

Accepted Answer

All of the above can cause inefficiency in a market. Market power can lead to higher prices and lower output, externalities can result in costs or benefits that are not reflected in market prices, and imperfectly competitive markets can lead to higher prices and lower output as well. All three factors can result in a misallocation of resources and an inefficient market outcome.

Deck 7: 4: Sec 74 Mc Conclusion Market Efficiency and Market Failure