tutor2u | AS Micro Multiple Choice: Statements about Market Failure

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AS Micro Multiple Choice: Statements about Market Failure

Level:
AS
Board:
AQA, Edexcel, IB

Last updated 22 Mar 2021

Here is an example of a multiple choice question covering four statements about market failure

Which one of the following statements about market failure is correct?

  • A Small firms are less efficient than large firms due to diseconomies of scale.
  • B The existence of free riders will result in the over-production of public goods.
  • C The social benefits of some private goods exceed the private benefits.
  • D Markets do not supply merit goods.

Market failure

Market failure occurs when a market economy fails to achieve an economically efficient and equitable allocation of scarce resources

There are many different types of market failure, each of which is a core topic at AS micro level

  1. Externalities in production and consumption
  2. Merit and de-merit goods
  3. Public goods
  4. Monopoly power in markets
  5. Information failures
  6. Factor immobility
  7. Inequalities of income and wealth

The exam question provides four statements

  • A Small firms are less efficient than large firms due to diseconomies of scale.
  • B The existence of free riders will result in the over-production of public goods.
  • C The social benefits of some private goods exceed the private benefits.
  • D Markets do not supply merit goods.

The right answer is C

  • A Small firms are less efficient than large firms due to diseconomies of scale - incorrect - small firms are likely to be less efficient because of economies of scale
  • B The existence of free riders will result in the over-production of public goods - incorrect - the free rider problem is likely to cause an under-production or non-production of public goods because free riders can consume and benefit without paying
  • C The social benefits of some private goods exceed the private benefits - correct! - this statement refers to positive externalities from consumption, for example merit goods such as health care, education and the cultural arts
  • D Markets do not supply merit goods - incorrect - markets do provide merit goods (think about private health care!) but they tend to be under-consumed in a market economy

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