the market mechanism, market failure & government intervention in markets

Question 1

What are the three functions of the price mechanism?

Answer 1

(A) Rationing. (B) Incentive. (C) Signalling.

Question 2

How do prices coordinate decisions in a market economy?

Answer 2

Prices convey information, incentivise responses, and ration scarce resources.

Question 3

What are the advantages of the price mechanism?

Answer 3

(A) Efficient allocation. (B) Consumer sovereignty. (C) Decentralised decision-
making.

Question 4

What are the disadvantages of the price mechanism?

Answer 4

(A) Can cause inequality. (B) May ignore externalities. (C) Can commodify vital
services.

Question 5

What is market failure?

Answer 5

Market failure is when markets misallocate resources.

Question 6

What is complete market failure?

Answer 6

When no market exists, leading to missing markets.

Question 7

What is partial market failure?

Answer 7

When a market exists but misallocates resources.

Question 8

What are key causes of market failure?

Answer 8

(A) Externalities. (B) Public goods. (C) Information failure. (D) Market power. (E)
Inequality.

Question 9

What are the characteristics of pure public goods?

Answer 9

(A) Non-rival. (B) Non-excludable.

Question 10

What is the difference between public and private goods?

Answer 10

Public goods are non-rival and non-excludable; private goods are rival and
excludable.

Question 11

What is a quasi-public good?

Answer 11

A good that shows some but not all characteristics of public goods.

Question 12

What is the free-rider problem?

Answer 12

People benefit without paying, leading to under-provision.

Question 13

What is the tragedy of the commons?

Answer 13

Overuse of common resources due to lack of ownership or control.

Question 14

What is an externality?

Answer 14

A third-party effect from production or consumption not reflected in market price.

Question 15

What is the difference between private and social costs?

Answer 15

Private = incurred by producer/consumer. Social = private + external costs or
benefits.

Question 16

Why do negative externalities cause over-production?

Answer 16

Market ignores external costs, leading to too much output.

Question 17

Why do positive externalities cause under-production?

Answer 17

Market ignores external benefits, leading to too little output.

Question 18

How does absence of property rights cause externalities?

Answer 18

No ownership leads to misuse or neglect of resources.

Question 19

What are merit goods?

Answer 19

Goods that are under-consumed if left to the market.

Question 20

What are demerit goods?

Answer 20

Goods that are over-consumed if left to the market.

Question 21

What causes under-provision of merit goods?

Answer 21

(A) Information failure. (B) Positive consumption externalities.

Question 22

What causes over-provision of demerit goods?

Answer 22

(A) Information failure. (B) Negative consumption externalities.

Question 23

How do externalities relate to merit/demerit goods?

Answer 23

Merit goods have positive externalities; demerit goods have negative externalities.

Question 24

How does imperfect information cause market failure?

Answer 24

Leads to irrational decisions and misallocation.

Question 25

How does monopoly cause market failure?

Answer 25

Restricts output, raises prices, causes allocative inefficiency.

Question 26

How does immobility of factors cause market failure?

Answer 26

Prevents efficient allocation of resources across sectors.

Question 27

What are the principles of UK competition policy?

Answer 27

(A) Promote competition. (B) Prevent abuse of market power. (C) Investigate mergers.

Question 28

What are the costs and benefits of competition policy?

Answer 28

(A) Pros: efficiency, lower prices. (B) Cons: enforcement costs, uncertainty for firms.

Question 29

What are arguments for public ownership?

Answer 29

(A) Essential services. (B) Equity. (C) Strategic control.

Question 30

What are arguments against public ownership?

Answer 30

(A) Inefficiency. (B) Lack of incentives.

Question 31

What are arguments for privatisation?

Answer 31

(A) Efficiency. (B) Innovation. (C) Revenue for government.

Question 32

What are arguments against privatisation?

Answer 32

(A) Monopolies. (B) Less access. (C) Job losses.

Question 33

What are arguments for regulation?

Answer 33

(A) Corrects market failure. (B) Protects consumers.

Question 34

What are arguments against regulation?

Answer 34

(A) Costs. (B) Bureaucracy. (C) Disincentives.

Question 35

What is regulatory capture?

Answer 35

When regulators act in favour of the industry they regulate.

Question 36

What is deregulation?

Answer 36

Removing regulations to encourage competition.

Question 37

What justifies government intervention in markets?

Answer 37

Market failure or equity concerns.

Question 38

What methods do governments use to influence resource allocation?

Answer 38

(A) Public spending. (B) Taxation. (C) Regulation.

Question 39

What are key intervention tools to correct market failure?

Answer 39

(A) Indirect taxes. (B) Subsidies. (C) Price controls. (D) State provision. (E) Property rights. (F) Pollution permits.

Question 40

What are the strengths of government intervention?

Answer 40

(A) Corrects market failure. (B) Redistributes income.

Question 41

What are the weaknesses of government intervention?

Answer 41

(A) Government failure. (B) Unintended effects. (C) High cost.

Question 42

What is government failure?

Answer 42

When intervention leads to worse outcomes or misallocation of resources.

Question 43

What are causes of government failure?

Answer 43

(A) Poor information. (B) Conflicting objectives. (C) Administrative costs.

Question 44

How can intervention worsen market outcomes?

Answer 44

Intervention may distort prices or create unintended consequences.