Choose the correct answer for each question.

1. Distortions in the market which may require government intervention may be caused by

   1.   ?    Volatility in the macroeconomic business cycle
   2.   ?    The existence of externalities
   3.   ?    Imperfect information among consumers and businesses
   4.   ?    All of the above

2. When a good generates an externality in the market

   1.   ?    Society's scarce resources are allocated efficiently
   2.   ?    Someone is affected who is not involved in the buying or selling of the good
   3.   ?    The good's price reflects the externality
   4.   ?    Government intervention can never improve the market's performance

3. A pure public good

   1.   ?    is not available for my consumption if you consume it.
   2.   ?    is usually provided only by the private sector of the economy
   3.   ?    is available for my consumption even if you and your friends consume it
   4.   ?    is not normally provided by private sector firms

4. Which one of the following would most likely be classified as a public good?

   1.   ?    An aircraft flight from London to Cape Town
   2.   ?    Buying and consuming a beefburger and a beer at a student union bar
   3.   ?    Purchasing a new DVD player
   4.   ?    Radio waves broadcasting a Premier League soccer game

5. The "free-rider problem" arises because

   1.   ?    private goods are not correctly priced in the market place
   2.   ?    the cost of producing public goods is too high
   3.   ?    it is possible for an individual to consume a public good without him or her paying for it
   4.   ?    private goods may also be public goods
   5.   ?    None of the above!

6. True or False, the Government is willing to make transfer payments to certain households through the benefits system even though nothing is expected from those households in return.

   1.   ?    True
   2.   ?    False

7. True or False; Air and noise pollution from a paper mill is an example of an externality in the consumption of paper

   1.   ?    True
   2.   ?    False

8. Health care is a merit good because

   1.   ?    it is non excludable and non rival
   2.   ?    markets cannot provide it
   3.   ?    it yields positive externalities when consumed
   4.   ?    it incurs private costs of consumption that are less than the social costs of consumption

9. In a market economy which is free of government intervention, the market mechanism can achieve all the following except

   1.   ?    causing supply to respond to changes in demand
   2.   ?    signalling changes in consumer tastes
   3.   ?    ensuring a fair distribution of all types of good
   4.   ?    eliminating excess supply and demand

10. When a minimum price which is above the free-market equilibrium price is imposed on a good by the government

    1.   ?    excess supply will result
    2.   ?    trading will continue at the equilibrium price
    3.   ?    excess demand will result
    4.   ?    firms will seel the quantity they wish at this price

11. Without government intervention, which one of the following is most likely to be under-produced in a free market economy?

    1.   ?    Normal goods
    2.   ?    Merit goods
    3.   ?    Luxury goods
    4.   ?    Inferior goods

12. Government intervention in a market economy can lead to an increase in economic welfare if

    1.   ?    the market machenism has failed to allow for externalities
    2.   ?    it leads to an increase in production and consumption of de-merit goods
    3.   ?    the price elasticity of supply of private goods is high
    4.   ?    the demand for inferior goods rises as incomes increase

13. A positive externality exists when

    1.   ?    the social cost of consumption exceeds the private cost of consumption
    2.   ?    the consumption of the product provides external benefits to third parties
    3.   ?    the private benefit of production exceeds the social benefit of production
    4.   ?    the production of the product imposes costs of third parties

14. Government intervention in the market

    1.   ?    does not necessarily result in an improvement in economic welfare
    2.   ?    is always undertaken when there are externalities present in the market
    3.   ?    is always best achieved through the use of taxes and subsidies
    4.   ?    is only undertaken when the risk of government failure is minimal

15. If an effective minimum price is imposed by the government, what would be expected to occur?

    1.   ?    Nothing; the price is not an equilibrium price
    2.   ?    There will be a surplus (excess supply)
    3.   ?    There will be a shortage (excess demand)
    4.   ?    The market will now be efficient in allocating scarce resources

16. All of the following are appropriate government policies in solving pollution problems EXCEPT

    1.   ?    Regulations and Laws
    2.   ?    Pollution Taxes
    3.   ?    Marketable - Pollution Permits
    4.   ?    Minimum Price Guarantees for Producers

17. In 2001 the government of Majorca and Ibiza proposed a tax of p to £1.25 per tourist for every night spent in hotel accommodation. The government would be most likely to justify this in terms of

    1.   ?    the external benefits of tourism
    2.   ?    the external costs of tourism
    3.   ?    the private costs of tourism
    4.   ?    the private benefits of tourism

18. Which of the following is an example of government intervention to correct a market failure?

    1.   ?    An increase in nurses' salaries
    2.   ?    An increase in the rate of VAT on all goods and services
    3.   ?    The taxation of goods with negative externalities
    4.   ?    The taxation of pure public goods

19. The Bank of England can reduce inflationary pressure in the economy if an increase in interest rates leads to a decrease in

    1.   ?    savings
    2.   ?    the exchange rate
    3.   ?    consumer borrowing
    4.   ?    unemployment