AS Economics: Market Failure and Government Failure
Economics Multiple-choice Quiz
Choose the correct answer for each question.
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
Social costs exceed social benefits
Social benefits exceed social costs
The factory should be built
The social costs equal £30,000
Which one of the following is a characteristic of a merit good?
Once the good has been supplied to one consumer, there is no extra cost in supplying it to others
It is always provided free to consumers
It may not be provided by the market in sufficient quantities
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
they are unlikely to be provided by the private sector
the consumption of merit goods results in negative externalities
merit goods are noth non-excludable and non-rival
it is considered unacceptable that people on low incomes may be unable to afford them
Market failure always arises when
firms are unable to earn high profits
imports take a rising share of total market demand
positive externalities exist in consumption of goods and services
costs increase as a firm expands production
Positive externalities exist when
production and consumption creates pollution
social costs exceed private costs
private benefits are less than social benefits
private benefits are greater than private costs
Market failure results in a misallocation of scarce resources. This may be corrected by the government
providing public goods
subsidising all loss-making firms
placing a tax on the consumption of merit goods
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
social benefit of production is less than private benefit
social benefit of consumption is less than private benefit
social cost of consumption is less than private benefit
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
private benefit is less than the private cost
social cost = social benefit
external costs are zero
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
principle of equi-marginal returns
"polluter pays" principle
principles of horizontal equity
"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?
The cost of car purchase and replacement
Depreciation of car values due to car mileage
Higher prices for goods and services due to increased costs of transportation
The costs of purchasing fuel
A private good's characteristic of excludability means that
consumption by one person reduces the amount available for others
consumption by one person does not reduce the amount available for other
the benefits of the good are restricted to those who pay for them
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
The producer is unable to pass on any of the tax to the consumer in the form of a higher price
The consumer will pay all of the tax levied on cigarettes
Most of the burden of cigarette taxation can be passed on from the producer to the consumer
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
To increase the demand for second hand cars
To increase the private costs of motoring so as to reduce road congestion
To raise revenue for the government
To reduce the operating subsidy paid to train operating companies
Which of the following necessarily represent a market failure?
Rising costs of production due to higher wages
Rising prices because of an increase in market demand
Firms closing down production because of the effects of cheaper imports
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?
Monopolists have no need to take account of consumer preferences
Market prices do not always reflect externalities
Firms that make high profits are always efficient
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
excess supply will result
trading will continue at the equilibrium price
excess demand will result
firms will sell the quantity they wish at this price
Government failure always arises when
consumers have to pay higher prices for a good following a shortage of supply
a government finds it necessary to supplement the private sector provision of a good
a government finds its necessary to provide a range of public goods
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
the opportunity cost of government intervention is zero
the administrative costs of government action are excessive
the government seeks to maximise profit
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:
raise the excise duty on cigarettes
increase the rate of national insurance contributions
reduce the retirement age
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?
Higher education cannot be supplied through the private sector market
Higher education is a private consumption good as well as being a path to higher career earnings
The social benefit of a better qualified workforce exceeds the private benefits to the students concerned
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
governments can only supply public goods
the opportunity cost of government intervention is zero
the laws of supply and demand do not apply to governments
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?
Private goods
Public goods
Free goods
Negative and positive externalities
Which of the following is LEAST likely to be a feature of monopoly?
In the long run, no profits will be earned
Choice for the consumer will be restricted
It will be protected by barriers to entry
Price may be higher than in a more competitive market