AS Economics: Market Failure and Government Failure

The table below shows the costs and benefits of building a new factory
Private costs £90,000
External costs £30,000
Private benefits £75,000
External benefit £25,000

From the data it can be concluded that
1. Social costs exceed social benefits
2. Social benefits exceed social costs
3. The factory should be built
4. The social costs equal £30,000
Which one of the following is a characteristic of a merit good?
1. Once the good has been supplied to one consumer, there is no extra cost in supplying it to others
2. It is always provided free to consumers
3. It may not be provided by the market in sufficient quantities
4. It tends to be provided by the government because of the problem of non-excludability
An argument for the government providing merit goods such as state education and the National Health Service free of charge to consumers is that
1. they are unlikely to be provided by the private sector
2. the consumption of merit goods results in negative externalities
3. merit goods are noth non-excludable and non-rival
4. it is considered unacceptable that people on low incomes may be unable to afford them
Market failure always arises when
1. firms are unable to earn high profits
2. imports take a rising share of total market demand
3. positive externalities exist in consumption of goods and services
4. costs increase as a firm expands production
Positive externalities exist when
1. production and consumption creates pollution
2. social costs exceed private costs
3. private benefits are less than social benefits
4. private benefits are greater than private costs
Market failure results in a misallocation of scarce resources. This may be corrected by the government
1. providing public goods
2. subsidising all loss-making firms
3. placing a tax on the consumption of merit goods
4. placing a tax on all imported goods and services
Consumers can create externalities when they consume different goods and services. Examples include noise and air pollution from cars and motorbikes and the externalities created by smoking and alcohol abuse.

Negative consumption externalities lead to a situation where the
1. social benefit of production is less than private benefit
2. social benefit of consumption is less than private benefit
3. social cost of consumption is less than private benefit
4. social cost of consumption is greater than private benefit
Positive externalities create external benefits beyond the people directly consuming a good or service. This means that the
1. private benefit is less than the private cost
2. social cost = social benefit
3. external costs are zero
4. social benefits will exceed private benefits
"Well designed environmental taxes and other economic instruments can play an important role in ensuring that prices reflect environmental cost and discouraging behaviour that damages the environment" (Source: Environmental taxation in the UK, Treasury paper, November 2002)

The use of taxation to correct for market failure is an example of the
1. principle of equi-marginal returns
2. "polluter pays" principle
3. principles of horizontal equity
4. "who gambles wins" principle
Which one of the following would be treated as an external cost arising from the growing volume of cars on Britain's roads and increasing levels of car congestion?
1. The cost of car purchase and replacement
2. Depreciation of car values due to car mileage
3. Higher prices for goods and services due to increased costs of transportation
4. The costs of purchasing fuel
A private good's characteristic of excludability means that
1. consumption by one person reduces the amount available for others
2. consumption by one person does not reduce the amount available for other
3. the benefits of the good are restricted to those who pay for them
4. the benefits of the good are available to all
The chart below shows the levels of indirect taxation on a packet of twenty cigarettes in the UK for each year since 1990

If the demand for cigarettes among consumers is relatively price inelastic, then we can presume that
1. The producer is unable to pass on any of the tax to the consumer in the form of a higher price
2. The consumer will pay all of the tax levied on cigarettes
3. Most of the burden of cigarette taxation can be passed on from the producer to the consumer
4. The demand for cigarettes will not change at all as the duty is increased
The chart below shows the level of duty applied per litre of fuel when bought in the UK

The main economic justification for the rise in duty applied during the last ten years is
1. To increase the demand for second hand cars
2. To increase the private costs of motoring so as to reduce road congestion
3. To raise revenue for the government
4. To reduce the operating subsidy paid to train operating companies
Which of the following necessarily represent a market failure?
1. Rising costs of production due to higher wages
2. Rising prices because of an increase in market demand
3. Firms closing down production because of the effects of cheaper imports
4. Producers being unable to charge a price for the external benefits they create
Which one of the following statements referring to a free market economy is correct?
1. Monopolists have no need to take account of consumer preferences
2. Market prices do not always reflect externalities
3. Firms that make high profits are always efficient
4. Larger firms are always more efficient than smaller firm
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 sell the quantity they wish at this price
Government failure always arises when
1. consumers have to pay higher prices for a good following a shortage of supply
2. a government finds it necessary to supplement the private sector provision of a good
3. a government finds its necessary to provide a range of public goods
4. a government's financial support for an industry leads to over-supply and a loss of efficiency
Government intervention in the market to improve economic welfare may fail because
1. the opportunity cost of government intervention is zero
2. the administrative costs of government action are excessive
3. the government seeks to maximise profit
4. subsidies have to be paid for out of taxation
The government wishes to increase economic welfare by introducing policies that create external benefits as well as internal ones. It should:
1. raise the excise duty on cigarettes
2. increase the rate of national insurance contributions
3. reduce the retirement age
4. invest extra funds in training schemes for the long term unemployed
Which one of the following arguments provides support for a government policy of offering grants to students in higher education?
1. Higher education cannot be supplied through the private sector market
2. Higher education is a private consumption good as well as being a path to higher career earnings
3. The social benefit of a better qualified workforce exceeds the private benefits to the students concerned
4. Student grants will increase the funds available for research and teaching at the UK's major universities
Government intervention in the economy to correct a market distortion may fail because
1. governments can only supply public goods
2. the opportunity cost of government intervention is zero
3. the laws of supply and demand do not apply to governments
4. of incomplete information relating to all the costs of intervention
Which of the following can be efficiently allocated between competing uses by the price mechanism?
1. Private goods
2. Public goods
3. Free goods
4. Negative and positive externalities
Which of the following is LEAST likely to be a feature of monopoly?
1. In the long run, no profits will be earned
2. Choice for the consumer will be restricted
3. It will be protected by barriers to entry
4. Price may be higher than in a more competitive market

AS Economics: Market Failure and Government Failure

Economics Multiple-choice Quiz