Question 1

Negative externalities exist in a market for a good giving rise to a misallocation of resources. This misallocation is most likely to have resulted from

Accepted Answer

over-production of the product

Answer

too few resources devoted to producing the product

Answer

the product being over-priced

Answer

too little consumption of the product

Question 2

At current levels of output, the marginal social benefit of a good is greater than its marginal private benefit. As a result, there are likely to be

Accepted Answer

positive externalities in consumption

Answer

negative externalities in production

Answer

positive externalities in production

Answer

negative externalities in consumption

Question 3

The diagram shows the market for a merit good. In the absence of government intervention in this market, a misallocation of resources is likely to occur because

Accepted Answer

there will be under-consumption of the good of HJ.

Answer

the free market price will be too high.

Answer

the free market output will be too high.

Answer

there will be over-production of the good of HJ.

Question 4

Positive externalities exist when

Accepted Answer

private benefits are less than social benefits

Answer

production creates private benefits

Answer

social costs exceed private costs

Answer

private benefits are greater than private costs

Question 5

If the firm is producing OE, there is likely to be

Accepted Answer

a misallocation of resources

Answer

a negative externality in consumption

Answer

a positive externality in production

Answer

excess demand for the good

Question 6

Market failure arises when

Accepted Answer

positive externalities exist in consumption

Answer

firms make zero profits

Answer

costs increase as firms expand production

Answer

prices rise in response to excess demand

Question 7

Merit goods are likely to be under-provided in a free market economy because their

Accepted Answer

social benefits exceed their private benefits

Answer

social benefits exceed their social costs

Answer

private costs exceed their private benefits

Answer

private benefits exceed their social benefits

Question 8

Government intervention in a free market economy is most likely to improve the allocation of resources if

Accepted Answer

the market is under-supplying a product that produces a positive externality

Answer

a shortage has led to a rise in the price of a product

Answer

firms cut back on production in response to a fall in demand.

Answer

the price of a product has been increased as a result of an increase in production costs

Question 9

In the absence of government intervention in this market, a misallocation of resources is likely to occur because

Accepted Answer

there will be overproduction of the good equivalent to the distance UV

Answer

there is a missing market for the good

Answer

the market price will be too high

Answer

there will be underproduction of the good equivalent to the distance OU

Question 10

Which of the policies should be adopted to maximise economic welfare of the community?

Accepted Answer

New schools

Answer

New hospitals

Answer

New airport

Answer

New roads

Question 11

Which one of the following statements about a merit good is true?

Accepted Answer

It may be provided by the free market but not in sufficient quantities.

Answer

It is always provided free to consumers

Answer

It tends to be provided by the government because it is non-excludable

Answer

Once the good has been supplied to one consumer, there is no extra cost in supplying it to others

Question 12

At current levels of output, the MSC>MPC. Also, MSB>MPB. As a result, there will probably be

Accepted Answer

a misallocation of resources.

Answer

negative externalities in consumption.

Answer

economies of scale.

Answer

positive externalities in production.

Question 13

What is the optimum number of visitors per year that should use this attraction?

Accepted Answer

OT

Answer

OR

Answer

OV

Answer

OS

Question 14

One reason for market failure is

Accepted Answer

there is underproduction of goods with positive externalities

Answer

individuals’ incomes and wealth are not identical

Answer

public goods are provided free of charge to users

Answer

positive externalities lead to overproduction of a good

Question 15

The social cost minus the social benefit equals

Accepted Answer

£40m

Answer

£120m

Answer

£10m

Answer

£30m

Question 16

Which one of the following is a reason for government intervention to correct a market failure?

Accepted Answer

externalities in consumption and production

Answer

diseconomies of scale

Answer

inferior goods

Answer

goods in composite demand

Question 17

At outputs above Q, there will be a misallocation of resources because

Accepted Answer

MSB<MPB

Answer

MPC<MPB

Answer

MPC>MSB

Answer

MSC>MSB

Question 18

Government provision of a merit good can be justified because

Accepted Answer

without government intervention partial market failure would result

Answer

merit goods are non-rival and non-excludable

Answer

the provision of merit goods has an opportunity cost

Answer

without government intervention there would be a missing market

Question 19

Which one of the following combinations will improve the allocation of resources compared with the market outcome at QE?

Accepted Answer

higher price, lower output

Answer

lower price, lower output

Answer

higher price, higher output

Answer

lower price, higher ouput

Question 20

Positive externalities exist when

Accepted Answer

private benefits are less than social benefits

Answer

private benefits are greater than private costs

Answer

production creates private benefits

Answer

social costs exceed private costs

Question 21

Market failure arises whenever firms

Accepted Answer

create externalities

Answer

reduce expenditure on research and development

Answer

make a loss

Answer

replace machines with workers

Question 22

One reason why UK governments provide education is because

Accepted Answer

the private benefit from education is less than the social benefit

Answer

all education is both a merit good and a public good

Answer

education cannot be provided by the free market

Answer

this ensures that the provision of education is maximised

Question 23

Where there is partial market failure

Accepted Answer

a market exists but there is a misallocation of resources

Answer

there is excess demand in the market at the current market price

Answer

the market can only be competitive with government support

Answer

the product is both non-excludable and non-rival in consumption

Question 24

Without government intervention, a misallocation of resources is likely to occur because

Accepted Answer

there is under-consumption of the good, of HJ

Answer

the free market price is too low

Answer

there is over-production of the good, of HJ.

Answer

the free market output is too high.

Question 25

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

Accepted Answer

The social benefits of some private goods exceed the private benefits.

Answer

The existence of free riders will result in the over-production of public goods.

Answer

Small firms are less efficient than large firms due to diseconomies of scale

Answer

Markets do not supply merit goods

Question 26

The product is most likely to be

Accepted Answer

a public good

Answer

an inferior good

Answer

a demerit good

Answer

a merit good

Question 27

A merit good, such as healthcare is

Accepted Answer

excludable with positive externalities in consumption

Answer

rival with positive externalities of production only

Answer

non-rival with positive externalities of consumption

Answer

non-excludable with positive externalities in production

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