Question 1

Which of the following best describes allocative efficiency in a perfectly competitive market?

Accepted Answer

Price equals marginal cost for all products.

Question 2

Suppose a factory emits pollution that affects nearby residents. If the social marginal cost ($MC_s$) of production exceeds the private marginal cost ($MC_p$), what will happen in a competitive free market?

Accepted Answer

The market will produce too much of the good ($Q^C > Q^*$).

Question 3

Which of the following is an example of a public good?

Accepted Answer

National defence.

Question 4

Why do private markets usually fail to provide public goods?

Accepted Answer

Because of the free-rider problem.

Question 5

Which of the following is NOT a cause of market failure?

Accepted Answer

Perfect competition.

Question 6

In the context of income redistribution, Arthur Okun's 'leaky bucket' analogy suggests that:

Accepted Answer

Redistribution reduces the total value of economic output due to inefficiencies.

Question 7

Which of the following best describes a common-property resource?

Accepted Answer

It is rivalrous and non-excludable.

Question 8

A used-car market where sellers know more about the quality of cars than buyers is an example of:

Accepted Answer

Adverse selection due to asymmetric information.

Question 9

Which of the following is a direct cost of government intervention?

Accepted Answer

Use of real resources to implement policies.

Question 10

Suppose the government is considering a new regulation. Which method should it use to evaluate whether to implement the policy?

Accepted Answer

Cost-benefit analysis, comparing total opportunity costs with total benefits.

Question 11

Which of the following statements about free markets is FALSE?

Accepted Answer

Free markets always achieve outcomes consistent with all social goals.

Question 12

If a good is non-rivalrous and excludable, it is best classified as:

Accepted Answer

A club good.

Question 13

Which of the following is an example of government intervention through regulation?

Accepted Answer

Imposing seat belt requirements in cars.

Question 14

What is the main problem with 'dark fleets' in the context of common-property resources?

Accepted Answer

They intentionally evade international monitoring, leading to overexploitation.

Question 15

Which of the following is a plausible indirect cost of government intervention?

Accepted Answer

Compliance costs imposed on firms and households.

Question 16

Suppose society's marginal benefit curve for a public good is the vertical sum of two individuals' marginal benefit curves. If $MB_1 = 10 - Q$ and $MB_2 = 8 - 2Q$, what is the society's marginal benefit curve?

Accepted Answer

$MB_{society} = 18 - 3Q$

Question 17

Which of the following is an example of paternalism in government intervention?

Accepted Answer

Mandating seat belt use to protect individuals from their own choices.

Question 18

Public choice theory suggests that government failure can arise because:

Accepted Answer

Elected officials seek to maximize votes, civil servants maximize salaries/influence, and voters maximize their own utility.

Question 19

Which of the following statements about the tradeoff between social goals and allocative efficiency is correct?

Accepted Answer

There is often a tradeoff between achieving social goals and increasing allocative efficiency.

Question 20

A government is considering a policy that will increase compliance costs for firms but also provide a public good. Which of the following best describes the evaluation process?

Accepted Answer

The government should use cost-benefit analysis, weighing total opportunity costs (including compliance costs) against total benefits from the public good.

Market Failures and Government Intervention – Chapter 16 Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards