Section 5 - Market Failure

Question 1

What is an externality?

Answer 1

An externality is a cost or benefit that affects a third party who is not directly involved in an economic transaction

Question 2

What is the difference between positive and negative externalities?

Answer 2

Positive externalities provide external benefits to others. Negative externalities impose external costs

Question 3

Give an example of a positive production externality?

Answer 3

A firm investing in Research and Development which leads to technological Advancements that benefit other businesses

Question 4

Give and example of a negative production externality

Answer 4

A factory polluting a river harming the local wildlife and residents

Question 5

Give an example of a positive consumption externality

Answer 5

Vaccination which reduces the spread of disease and benefits the whole population

Question 6

Give an example of a negative consumption externality

Answer 6

Smoking which leads to passive smoking health issues for everyone

Question 7

How do externalities cause market failure

Answer 7

Externalities cause market failure as the price mechanism doesn’t represent the true social costs/ benefits of a product

Question 8

What is the social cost of a good

Answer 8

The total cost to society including both private and external costs

Question 9

What is the social benefit of a good

Answer 9

The total benefit to society including both private and external benefits

Question 10

How does the government intervene to correct negative externalities

Answer 10

Taxes, regulation, pollution permits, or bans to reduce harmful activities

Question 11

How does the government intervene to encourage positive externalities?

Answer 11

Subsidies, public provision, or advertising to encourage beneficial activities

Question 12

What is the difference between private cost and external cost?

Answer 12

Private cost is the cost to the producers/consumers directly but external costs affect the third party

Question 13

What is the difference between private benefit and external benefit

Answer 13

Private benefit is received by the consumer/producer but external benefit impacts others

Question 14

How does a tax on negative externalities help reduce market failure?

Answer 14

Increases the

Question 15

What is an externality?

Answer 15

An externality is a cost or benefit incurred by a third party who did not choose to incur that cost or benefit.

Question 16

True or False: Externalities can only be negative.

Answer 16

False

Question 17

What is a merit good?

Answer 17

A merit good is a product or service that is deemed beneficial for individuals and society, often under-consumed if left to the market.

Question 18

Fill in the blank: A ______ good is a good that is over-consumed and may lead to negative effects on society.

Answer 18

demerit

Question 19

What is a public good?

Answer 19

A public good is a product that is non-excludable and non-rivalrous, meaning it is available for everyone to consume without reducing its availability to others.

Question 20

Which of the following is an example of a public good? A) Private school B) National defense C) A concert

Answer 20

B) National defense

Question 21

What is imperfect information?

Answer 21

Imperfect information occurs when all parties in a transaction do not have access to the same information, leading to inefficient outcomes.

Question 22

True or False: Perfect information is critical for efficient markets.

Answer 22

True

Question 23

What does inequity refer to in economic terms?

Answer 23

Inequity refers to the unequal distribution of resources and opportunities among individuals in an economy.

Question 24

Fill in the blank: Factors of production that cannot move easily between industries are referred to as ______ factors.

Answer 24

immobile

Question 25

What is a negative externality?

Answer 25

A negative externality is a harmful effect experienced by third parties not directly involved in a transaction.

Question 26

Which of the following is an example of a demerit good? A) Vaccines B) Alcohol C) Education

Answer 26

B) Alcohol

Question 27

What is the primary reason for government intervention in the case of merit goods?

Answer 27

To encourage consumption and ensure that these goods are available to everyone.

Question 28

True or False: Public goods can lead to the free-rider problem.

Answer 28

True

Question 29

What is the free-rider problem?

Answer 29

The free-rider problem occurs when individuals benefit from resources, goods, or services without paying for them, leading to under-provision of those goods.

Question 30

Name one way governments can address negative externalities.

Answer 30

By imposing taxes or regulations.

Question 31

What is a positive externality?

Answer 31

A positive externality is a beneficial effect experienced by third parties not directly involved in a transaction.

Question 32

Fill in the blank: ______ goods are often funded by the government due to their nature of being non-excludable.

Answer 32

Public

Question 33

What is an example of imperfect information in the market?

Answer 33

Consumers not knowing the true quality of a product before purchase.

Question 34

True or False: Mobility of factors of production increases market efficiency.

Answer 34

True

Question 35

What is one consequence of immobile factors in the economy?

Answer 35

It can lead to unemployment in certain sectors.

Question 36

What role do merit goods play in society?

Answer 36

They contribute to social welfare and improve overall quality of life.

Question 37

Which of the following is a characteristic of a demerit good? A) Beneficial for society B) Over-consumed C) Always subsidized

Answer 37

B) Over-consumed

Question 38

What is one way to correct positive externalities?

Answer 38

By providing subsidies to encourage consumption.

Question 39

Fill in the blank: The government may intervene in markets to correct ______ and ______.

Answer 39

externalities; inequities

Question 40

What is the impact of imperfect information on consumers?

Answer 40

It can lead to suboptimal purchasing decisions.

Question 41

True or False: All public goods are provided exclusively by the government.

Answer 41

False

Question 42

What is one challenge in providing public goods?

Answer 42

Ensuring that everyone contributes to their funding.

Question 43

What does it mean for a good to be non-rivalrous?

Answer 43

One person's use of the good does not reduce its availability for others.

Question 44

Name a common example of a negative externality.

Answer 44

Pollution from factories.

Question 45

What can lead to inequity in an economy?

Answer 45

Differences in income, wealth, and access to resources.

Question 46

Fill in the blank: ______ is a key issue when discussing the allocation of public goods.

Answer 46

Free-rider problem

Question 47

What is the effect of subsidies on merit goods?

Answer 47

They increase consumption and accessibility.

Question 48

True or False: A positive externality can exist in the education sector.

Answer 48

True

Question 49

What is an example of an immobile factor of production?

Answer 49

Skilled labor that cannot easily transition to another industry.

Question 50

What is the relationship between externalities and market failure?

Answer 50

Externalities can lead to market failure by causing a misallocation of resources.

Question 51

What is an example of a merit good?

Answer 51

Education or healthcare.

Question 52

Fill in the blank: The concept of ______ refers to the benefits that accrue to third parties from an economic transaction.

Answer 52

positive externality

Question 53

Which government action can address the free-rider problem?

Answer 53

Implementing taxes to fund public goods.

Question 54

What is the main characteristic of demerit goods?

Answer 54

They are considered harmful and are often over-consumed.

Question 55

True or False: Public goods are always provided at a profit.

Answer 55

False

Question 56

What is the significance of non-excludability in public goods?

Answer 56

It makes it difficult to charge consumers directly for the good.

Question 58

What is market failure?

Answer 58

Market failure occurs when the allocation of goods and services by a free market is not efficient.

Question 59

True or False: Market failure can occur due to externalities.

Answer 59

True

Question 60

Fill in the blank: A ________ is a cost or benefit incurred by a third party who did not choose to incur that cost or benefit.

Answer 60

externality

Question 61

What are public goods?

Answer 61

Public goods are goods that are non-excludable and non-rivalrous, meaning they can be consumed by many people without reducing availability to others.

Question 62

Which of the following is NOT a cause of market failure? A) Externalities B) Public goods C) Perfect competition

Answer 62

C) Perfect competition

Question 63

What is asymmetric information?

Answer 63

Asymmetric information occurs when one party in a transaction has more or better information than the other party.

Question 64

True or False: Market power can lead to market failure.

Answer 64

True

Question 65

What role do government interventions play in correcting market failures?

Answer 65

Government interventions aim to improve market outcomes by addressing inefficiencies, such as through regulation, taxation, or provision of public goods.

Question 66

Fill in the blank: A __________ occurs when a market fails to produce a socially optimal quantity of a good or service.

Answer 66

market failure

Question 67

What is the difference between positive and negative externalities?

Answer 67

Positive externalities benefit third parties, while negative externalities impose costs on them.