Question 1

What are externalities in the context of market failure?

Accepted Answer

Costs or benefits of a transaction or activity that are borne or enjoyed by parties not directly involved

Answer

Total costs incurred by society

Answer

Goods and services produced at the right price

Answer

Benefits accrued to producers and consumers

Answer

Social benefits outstrip private benefits

Question 2

What are negative externalities and why do they contribute to market failure?

Accepted Answer

Costs to third parties not included in the market price, such as pollution

Answer

Positive benefits to third parties not involved

Answer

Private benefits accruing to producers

Answer

Total costs incurred by society

Answer

Community goods and collective goods

Question 3

What is a positive externality and how does it impact market production?

Accepted Answer

A benefit to a third party from the action or decision of another party, such as education

Answer

Social costs exceeding private benefits

Answer

Harmful goods over-produced in the economy

Answer

Costs borne by society as a whole

Answer

Goods withheld from non-payment

Question 4

Why are public goods not provided for by the market mechanism?

Accepted Answer

Producers cannot withhold the goods for non-payment and consumption cannot be confined to those who pay for it

Answer

Free-riders can use without restriction

Answer

Total cost incurred by society

Answer

Consumption by one person reduces consumption by another

Answer

Producers have market power

Question 5

What are demerit goods and how are they addressed in a free market economy?

Accepted Answer

Items like cigarettes, alcohol, and non-prescriptive drugs that are over-consumed in a free market

Answer

Consumption by one person reduces others' consumption

Answer

Goods withheld for non-payment

Answer

Goods with positive externalities

Answer

Highly desirable goods for the general welfare

Question 6

What is imperfect competition and how does it affect market outcomes?

Accepted Answer

Conditions where firms have the ability to influence prices, leading to output restrictions and higher prices

Answer

Consumers have more power than producers

Answer

Goods are under-produced in the economy

Answer

Price negotiations between buyers and sellers

Answer

Perfect competition with no market power

Question 7

What is the role of lack of information in market failure?

Accepted Answer

Consumers, workers, and entrepreneurs may lack necessary information to make rational decisions in their best interest

Answer

Entrepreneurs operate based on correct information

Answer

Consumers are well-informed about products

Answer

Producers have perfect information for decision-making

Answer

Workers have access to better job opportunities

Question 8

How does immobility of factors of production contribute to market failure?

Accepted Answer

Factors like labor and physical capital cannot adjust rapidly to changes in supply and demand, impacting market responsiveness

Answer

Technological applications change production methods

Answer

Factors of production move freely to meet demand

Answer

Industries adapt quickly to technological changes

Answer

Workers are flexible and easily upskilled

Question 9

What is imperfect distribution of income and wealth in the context of market failure?

Accepted Answer

Market systems are neutral in income distribution, leading to unequal outcomes based on initial disparities

Answer

Discrimination benefits certain groups

Answer

Equal distribution of goods and services for all

Answer

Income based on educational opportunities

Answer

Market produces goods for all who can afford them

Question 10

What is market failure?

Accepted Answer

Market forces of demand and supply do not ensure the correct quantity of goods and services are produced to meet demand at the right price.

Answer

Producing goods and services without considering demand

Answer

Overproducing goods to meet demand

Answer

A situation where all goods and services are produced efficiently

Question 11

What are externalities?

Accepted Answer

Costs or benefits of a transaction or activity that are borne or enjoyed by parties not directly involved in the transaction or activity.

Answer

Costs and benefits only for the producer

Answer

Internal costs and benefits of production

Answer

Prices of goods and services in the market

Question 12

What is a negative externality?

Accepted Answer

Costs to third parties that are not included in the market price, e.g. pollution.

Answer

Situations where market prices are lower than costs

Answer

Costs only experienced by the producer

Answer

Benefits to third parties not included in the pricing

Question 13

What is a positive externality?

Accepted Answer

A benefit to a third party from the action or decision of another party, e.g. education.

Answer

A benefit that only affects the producer

Answer

A cost to a third party from the action of another

Answer

A situation where prices are higher than costs

Question 14

Why do public goods struggle to exist in markets?

Accepted Answer

Producers cannot withhold the goods for non-payment, and consumption cannot be confined only to those who pay.

Answer

Producers lack the resources to produce public goods

Answer

Consumers do not want public goods

Answer

Public goods have negative externalities

Question 15

What are demerit goods?

Accepted Answer

Items such as cigarettes, alcohol, and non-prescriptive drugs that are over-consumed in a free market economy.

Answer

Goods not provided by the market

Answer

Highly desirable goods for general welfare

Answer

Goods with positive externalities

Question 16

What is imperfect competition?

Accepted Answer

A situation where firms have the ability to influence prices due to market power, leading to restrictions on output and price increases.

Answer

Perfect market competition

Answer

A situation where prices are determined by demand alone

Answer

A scenario with only one producer in the market

Question 17

Why is lack of information a cause of market failure?

Accepted Answer

Consumers, workers, and entrepreneurs may lack necessary information to make informed decisions that are in their best interest.

Answer

Entrepreneurs have all the information needed for production

Answer

Workers are always aware of better job opportunities

Answer

Consumers have access to perfect information

Question 18

What is the immobility of factors of production?

Accepted Answer

Factors of production, such as labor and physical capital, are not easily or quickly moved to meet changes in supply and demand.

Answer

Technological advances allow for rapid changes in production methods

Answer

Factors of production can be easily relocated

Answer

Labor can adapt quickly to changing demand

Question 19

Why does imperfect distribution of income and wealth contribute to market failure?

Accepted Answer

The market tends to produce goods and services only for those who can afford them, leading to unequal distribution of resources.

Answer

Discrimination has no impact on income distribution

Answer

Wealth is distributed evenly in a market system

Answer

Income distribution is equal in all markets

Question 20

What are public goods?

Accepted Answer

Goods not provided for by the market mechanism due to non-excludability

Answer

Goods that are restricted to a specific group

Answer

Goods that are highly priced in the market

Answer

Goods that are freely available to everyone

Question 21

What are merit goods?

Accepted Answer

Goods that are highly desirable but not highly rated by the market

Answer

Goods that are harmful for health

Answer

Goods that are over-consumed in the market

Answer

Goods that are banned by the government

Question 22

What is a consequence of lack of information in the market?

Accepted Answer

Consumers, workers, and entrepreneurs may not make informed decisions

Answer

Increased competition

Answer

Higher market efficiency

Answer

Lower prices for goods and services

Question 23

How do merit goods differ from demerit goods?

Accepted Answer

Merit goods are beneficial for general welfare, while demerit goods have harmful effects

Answer

Merit goods are over-consumed, while demerit goods are under-consumed

Answer

Merit goods are always expensive, while demerit goods are cheap

Answer

Merit goods are produced by the government, while demerit goods are produced privately

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