Market failure - Externalities

In which of the following situations is market failure least likely to occur? A situation where;

• externalities exist

• many producers compete in the market

• there is a sole producer in market

• there is a very uneven distribution of income and wealth

Which of the following statements is true about externalities?

• When externalities exist, resources are allocated efficiently

• When positive externalities exist, efficiency is improved by taxing the product

• From society's point of view, the output of goods for which a positive externality exists is too low

• The price system overproduces goods with positive externalities

A situation of market failure is said to exist if;

• buyers and sellers pay for the true opportunity costs of their actions

• there are no externalities

• the government provides merit goods free

• third parties in society are affected and not compensated

When social costs are greater than private costs, there is a;

• positive externality

• negative externality

• less than socially optimal output

• socially optimal output

The free market outcome is determined by the intersection of _____ and ____, resulting in quantity ____ and price ____. The social optimum outcome is given by the intersection of ____ with ____, which determines quantity _____ and price ____.

• MPB; MSB; Qm; Popt; MPC; MSC; Qopt; Popt

• MPC; Popt; Qm; Pm; MSC; MSQ; Oopt, Pm

• MPB; MPC; Qm; Pm; MSB; MSC; Qopt; Popt

• MSB, MSC; Qm; Pm; MPB; MPC; Qopt; Popt

In a market for a product with positive externalities;

• all benefits are not internalized

• there is too much production

• profits are too low

• profits are too high

When there is a _______ production externality, the free market _________ resources to the production of the good and too ______ of it is produced relative to the social optimum. This is shown by _______and _______ at the point of production, Qm, *

• negative; misallocate; little; Qm > Qopt; MSC < MSB

• positive; underallocate; much; Qm > Qopt; MSB > MSC

• negative; overallocate; much; Qm > Qopt; MSC > MSB

• positive; misallocate; much; Qm > Qopt; MSC > MSB

__________ goods are goods that are considered __________ for consumers but which are_________ by the market. One important reason for overprovision is that the good may have __________ consumption externalities, thus the market ________ resources in its production.

• Excise; desirable; underproduced; positive; overallocates

• Demerit; desirable; underproduced; positive; underallocates

• Normal; needs; undervalued, elastic; frees

• Demerit; undesirable; overproduced; negative; overallocates

Public goods, such as defence, are not supplied by the price system because;

• the capital cost is too high

• the benefits would - ceteris paribus - not be restricted to buyers but would be available to non-buyers as well

• public goods are necessities and therefore cannot be left to the price system

• monopolies would make supernormal profits

Which of the following is a characteristic of a merit good?

• It could be provided by the free market, but not in sufficient quantities

• It is always provided free to consumers

• It tends to generate negative externalities, so governments restrict its consumption

• Once the good has been supplied to one consumer, there is no additional cost in supplying it to others