Question 1

Which of the following best describes allocative efficiency in the context of free markets?

Accepted Answer

When total surplus to society is maximized and price equals marginal cost for all products.

Question 2

Suppose a factory emits pollution that affects nearby residents. The cost of pollution is not reflected in the factory's production costs. Which concept does this scenario illustrate?

Accepted Answer

Negative externality

Question 3

According to the Coase Theorem, under what conditions will private bargaining lead to an allocatively efficient outcome in the presence of externalities?

Accepted Answer

When property rights are clearly assigned and transaction costs are low.

Question 4

A public good is characterized by which two properties?

Accepted Answer

Non-rivalry and non-excludability

Question 5

If the marginal external cost of producing electricity is $0.25 per kWh, what is the formula for the marginal social cost (MSC) curve?

Accepted Answer

$MSC = MC_P + 0.25$

Question 6

Which of the following is an example of a common-property resource?

Accepted Answer

A fishery in the open ocean

Question 7

Why do free markets tend to underprovide goods with positive externalities, such as vaccinations?

Accepted Answer

Because the private marginal benefit is less than the social marginal benefit.

Question 8

Which of the following best explains the free-rider problem?

Accepted Answer

People who do not pay for a good cannot be excluded from its benefits.

Question 9

A government imposes a tax on a polluting firm equal to the marginal external cost of pollution. What is the expected outcome?

Accepted Answer

The firm will produce the allocatively efficient quantity where $MSC = MB$.

Question 10

Which of the following is an example of adverse selection in insurance markets?

Accepted Answer

People with higher health risks are more likely to buy health insurance.

Question 11

Suppose a town builds a public park and charges a $50 annual pass for entry. What is a likely efficiency problem with this approach?

Accepted Answer

The price may exclude some users even though the marginal cost of additional users is zero.

Question 12

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

Accepted Answer

Perfect competition

Question 13

Which of the following best describes moral hazard?

Accepted Answer

When one party to a transaction has both the incentive and ability to shift costs onto another after the contract is signed.

Question 14

Why might governments choose to provide club goods, such as roads and bridges, rather than leaving them to the private market?

Accepted Answer

To avoid inefficient exclusion when the marginal cost of additional users is zero.

Question 15

Which of the following is a policy tool governments can use to address positive externalities?

Accepted Answer

Subsidies

Question 16

If a good is non-excludable and rivalrous, what type of good is it?

Accepted Answer

Common-property resource

Question 17

Which of the following statements about government intervention and social goals is correct?

Accepted Answer

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

Question 18

Which of the following is an example of a government policy designed to address income distribution?

Accepted Answer

Tax-and-transfer system

Question 19

Why might the private market underprovide public goods such as national defense?

Accepted Answer

Because it is difficult or impossible to exclude non-payers from benefiting.

Question 20

Which of the following is a real-world example of moral hazard?

Accepted Answer

A homeowner neglects to shovel snow after buying insurance, knowing damages will be covered.

Chapter 16 - Market Failures and Government Intervention: Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards