Question 1

All of the following are considered sources of market failure except:
A) public goods.
B) imperfect information.
C) profit-maximizing behavior.
D) externalities.

Accepted Answer

Profit-maximizing behavior is a fundamental aspect of market economies and is not considered a source of market failure. Market failures occur when the allocation of goods and services is not efficient, which can happen due to public goods, imperfect information, and externalities.

Question 2

Moral hazard problems can occur when insured individuals change their behavior to the detriment of the insurer.

Accepted Answer

Moral hazard occurs when individuals take more risks because they do not bear the full consequences, often due to insurance coverage.

Question 3

Some economists believe that the market will not solve all problems. They are referring to:
A) market failure.
B) market incentive plans.
C) optional policy.
D) the need to balance the good of the individual with the good of society as a whole.

Accepted Answer

Market failure refers to situations where the market does not allocate resources efficiently on its own, leading to a need for intervention to address issues such as externalities, public goods, or information asymmetries.

Question 4

Adverse selection problems can occur when buyers and sellers have different amounts of information about a good for sale.

Accepted Answer

Adverse selection occurs when one party in a transaction has more or better information than the other, often leading to an imbalance and potential market inefficiencies.

Question 5

Government provides secondary education because of its private good aspects.

Accepted Answer

Secondary education is typically provided by the government due to its public good aspects, such as promoting social cohesion and economic development, rather than its private good aspects.

Question 6

Direct regulation means that government sets specific limits on the use of scarce resources.

Accepted Answer

Direct regulation involves the government imposing specific rules or limits on how resources can be used, often to manage scarcity or protect the environment.

Question 7

If a market has no externalities, marginal private costs:
A) exceed marginal social costs.
B) equal marginal social costs.
C) are below marginal social costs.
D) intersect marginal social costs.

Accepted Answer

The answer of If a market has no externalities, marginal...

Question 8

If a program requires people to pay a price that reflects the cost of an externality associated with their actions that they previously did not pay, it will be in their best interest to change their behavior.

Accepted Answer

When people are required to pay for the external costs of their actions, they have a financial incentive to change their behavior to avoid or reduce these costs, aligning their private costs with social costs.

Question 9

An optimal policy is one in which the marginal cost of undertaking a policy is less than the marginal benefit of that policy.

Accepted Answer

An optimal policy is one where the marginal cost equals the marginal benefit, not where the marginal cost is less than the marginal benefit.

Question 10

Government attempts to offset market failures can prevent the market from dealing with a problem more effectively.

Accepted Answer

Government interventions can sometimes lead to inefficiencies or unintended consequences, potentially hindering the market's ability to self-correct.

Question 11

If government action is likely to do some good, it is always best for government to intervene in the marketplace.

Accepted Answer

Government intervention is not always the best solution as it can lead to inefficiencies, unintended consequences, or stifle innovation and competition. Each situation requires careful consideration of potential benefits and drawbacks.

Question 12

Economists tend to believe that market incentive plans are generally more efficient than direct regulation.

Accepted Answer

Economists often argue that market incentive plans, such as taxes or tradable permits, align economic incentives with environmental goals, leading to more cost-effective and flexible solutions compared to direct regulation.

Question 13

Economists generally prefer direct regulation to incentive-based programs because explicit regulation tends to be more efficient.

Accepted Answer

Economists typically prefer incentive-based programs because they are often more efficient and flexible, allowing market forces to find the most cost-effective solutions.

Question 14

Economists generally call the effect of an agreement on others that is not taken into account by the parties making the agreement:
A) excess burden.
B) welfare loss.
C) Pareto optimality.
D) an externality.

Accepted Answer

An externality is an effect of a transaction that impacts third parties who are not involved in the agreement, and it is not accounted for by the parties involved.

Question 15

Alex is playing his music at full volume in his dorm room. The other people living on his floor find this to be nuisance, but Alex does not care. Alex's music playing is an example of a:
A) negative externality.
B) positive externality.
C) normative externality.
D) Pareto externality.

Accepted Answer

Alex's music playing at full volume is a negative externality because it imposes a cost (nuisance) on others without compensating them.

Question 16

Externalities can be either positive or negative.

Accepted Answer

Externalities refer to the unintended side effects of an economic activity that affect third parties, and they can be beneficial (positive) or harmful (negative).

Question 17

Economists are likely to oppose direct regulation because they do not believe there is any need for government to take action when negative externalities exist.

Accepted Answer

Economists typically oppose direct regulation because they believe market-based solutions, like taxes or tradable permits, are more efficient, not because they think government action is unnecessary.

Question 18

What do economists mean when they say there is "market failure"?
A) Business has introduced a product that consumers do not want.
B) Free markets have led to excessive profits.
C) Markets have surpluses or shortages so that government rationing is necessary.
D) Free markets yield results that economists do not consider socially optimal.

Accepted Answer

Market failure occurs when free markets fail to allocate resources efficiently or equitably, leading to outcomes that are not socially optimal, such as externalities or public goods issues.

Question 19

Economists believe that free riders often can undermine the social commitment of many in the society, causing voluntary policies to fail.

Accepted Answer

Free riders benefit from resources or services without paying for them, which can lead to under-provision of those goods or services and cause voluntary policies to fail due to lack of sufficient participation or funding.

Question 20

The best example of a positive externality is:
A) roller coaster rides.
B) pollution.
C) alcoholic beverages.
D) education.

Accepted Answer

Education is a positive externality because it benefits not only the individual receiving the education but also society as a whole through increased productivity, innovation, and civic engagement.

Quiz 8: Market Failure Versus Government Failure

All of the following are considered sources of market failure except:

Moral hazard problems can occur when insured individuals change their behavior to the detriment of the insurer.

Some economists believe that the market will not solve all problems. They are referring to: