Market Failure

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

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

__________ 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

Which of the following does not apply to merit goods and services?

• They provide private and social benefits

• They are limited in supply and require a system of allocation

• They could be paid for by the consumer if a market system was allowed to operate

• They have the characteristic of non-excludability

Governments use cost-benefits analysis to;

• measure the net social benefit of a project

• make consumers pay for the net social benefit they receive

• minimize social costs

• make producers pay for the social costs of a project