Question 1

Which of the following best describes a public good?

Accepted Answer

A good that is both non-rivalrous and non-excludable.

Question 2

According to the concept of allocative efficiency in perfectly competitive markets, which equation must hold for all products?

Accepted Answer

$$P = MC$$

Question 3

Which of the following is an example of a negative externality?

Accepted Answer

Air pollution from a factory affecting nearby residents.

Question 4

Why do free markets typically fail to provide public goods?

Accepted Answer

Because of the free-rider problem.

Question 5

Suppose a competitive market produces $$Q_C$$ units of a good with a negative externality, but the allocatively efficient quantity is $$Q^* \u003c Q_C. $$What policy could correct this inefficiency?

Accepted Answer

Imposing a tax equal to the external cost per unit.

Question 6

Which of the following best illustrates the concept of asymmetric information?

Accepted Answer

A seller knows a used car is a 'lemon,' but the buyer cannot tell.

Question 7

What is the main rationale for government intervention in the case of common-property resources?

Accepted Answer

To prevent overexploitation due to lack of well-defined property rights.

Question 8

Which of the following is NOT a direct cost of government intervention?

Accepted Answer

A reduction in allocative efficiency due to income redistribution.

Question 9

Arthur Okun’s 'leaky bucket' analogy is used to illustrate which economic concept?

Accepted Answer

The inefficiency associated with income redistribution.

Question 10

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

Accepted Answer

A cable TV signal.

Question 11

If a government wants to correct a positive externality, which policy is most appropriate?

Accepted Answer

Providing a subsidy to consumers or producers.

Question 12

Which of the following statements about government failure is correct?

Accepted Answer

Government failure can occur when the objectives of officials, civil servants, and voters do not align with social welfare.

Question 13

Which of the following is a characteristic of a common-property resource?

Accepted Answer

It is rivalrous but non-excludable.

Question 14

In the context of public goods, what does the 'vertical sum' of individual marginal benefit curves represent?

Accepted Answer

Society’s marginal benefit curve for the public good.

Question 15

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

Accepted Answer

Banning the sale of alcohol to minors.

Question 16

Which of the following best describes the 'free-rider problem'?

Accepted Answer

Individuals benefit from a good without paying for it.

Question 17

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

Accepted Answer

Rent seeking by firms to influence policy.

Question 18

Which of the following is NOT a reason for market failure?

Accepted Answer

Perfect competition in all markets.

Question 19

What is the main purpose of cost-benefit analysis in government intervention?

Accepted Answer

To compare the total (opportunity) costs with total benefits of a policy.

Question 20

Which of the following is an example of a regulation as a tool of government intervention?

Accepted Answer

Requiring seat belts in cars.

Market Failures and Government Intervention – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards