Economics Class on Market Failure and Government

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Questions and Answers

What is a primary characteristic of a market economy?

It has a central authority determining prices.

It relies solely on government intervention.

It restricts competition among firms.

It allocates resources through decentralized decisions. (correct)

Which of the following best describes an externality?

The ability of a firm to dominate a market.

A situation where prices are controlled by the government.

The effect of one person’s actions on the well-being of bystanders. (correct)

An agreement among firms to fix prices.

What does market power refer to?

The influence of many buyers on price levels.

The capacity of a small group to affect market prices. (correct)

The ability of consumers to choose among options.

The competitive nature of the marketplace.

What is one potential outcome of market failure?

Sizable disparities in economic well-being. Signup and view all the answers

What role do prices play in a market economy?

They serve as a method of communication between buyers and sellers. Signup and view all the answers

What is primarily attributed to differences in living standards among countries?

Productivity Signup and view all the answers

Which role does the government play in the economy concerning the invisible hand?

Maintains rules and institutions vital for market economies Signup and view all the answers

What must policymakers focus on to improve living standards?

Raising productivity by equipping workers effectively Signup and view all the answers

What happens when a government prints too much money?

The value of money decreases, leading to inflation Signup and view all the answers

Which statement is a reason for government intervention in the market?

To alter the allocation of resources when necessary Signup and view all the answers

How does trade affect economic interactions?

It can potentially make everyone better off Signup and view all the answers

What do prices generally reflect in a market economy?

Consumer preferences and demand Signup and view all the answers

What challenge does society face in the short run concerning inflation?

Managing a trade-off between inflation and unemployment Signup and view all the answers

What would lead to an increase in quantity supplied, quantity demanded, and a decrease in price?

The repeal of a tax levied on producers Signup and view all the answers

When does the burden of a tax fall primarily on consumers?

When supply is inelastic and demand is elastic Signup and view all the answers

In a situation where a consumer can only buy pizza and Pepsi, which statement is correct regarding their budget constraint?

The consumer can buy 100 pizzas but cannot purchase any Pepsi. Signup and view all the answers

Which scenario likely indicates that demand is price elastic?

A significant quantity change occurs with a slight price change. Signup and view all the answers

What could result from a passage of a tax levied on producers?

An immediate decrease in the quantity supplied by producers. Signup and view all the answers

What is the maximum price set by the government called?

Price Ceiling Signup and view all the answers

If the income elasticity of demand is greater than one, what does it indicate about consumer behavior?

Consumers are likely to purchase more as their income increases. Signup and view all the answers

What happens when a binding price ceiling is imposed in a competitive market?

A shortage of the good arises. Signup and view all the answers

When the government sets a price floor, what is its primary goal?

To ensure producers receive a minimum income. Signup and view all the answers

What is a potential outcome of implementing rent control?

Reduced availability of rental units. Signup and view all the answers

If the price elasticity of demand is greater than one, what does it mean?

Demand is elastic, and consumers are very responsive to price changes. Signup and view all the answers

Which scenario describes inelastic supply and elastic demand?

Tax burden falls more on consumers. Signup and view all the answers

What effect do wage subsidies have on workers?

They raise the living standards of low-income workers. Signup and view all the answers

What is an externality?

The uncompensated impact of one person's actions on the well-being of a bystander Signup and view all the answers

How does a positive externality impact society?

It provides benefits to others without compensation to the provider Signup and view all the answers

Which of the following is an example of a negative externality?

Automobile exhaust Signup and view all the answers

What is the goal of remedies that address externalities?

To move resource allocation closer to the social optimum Signup and view all the answers

If a university raises the price it pays tutors, what happens to producer surplus?

It rises by less than $100 Signup and view all the answers

Study Notes

Market Failure and Market Economies

Market failure occurs when a market fails to efficiently allocate resources.
Externalities, such as pollution, and market power, where a single entity influences prices, are causes of market failure.
Even with efficient outcomes, market economies can lead to unequal economic well-being.

Government Intervention in Markets

Governments can improve market outcomes by enforcing rules and maintaining institutions.
Government intervention is justified to address market failures and resource allocation issues.
Examples include enforcing property rights and providing public goods.

Economic Growth and Productivity

A country’s standard of living depends on its ability to produce goods and services.
Differences in living standards stem from variations in countries' productivity (output per unit of labor).
To improve living standards, policymakers should increase productivity through education, tools, and technology.

Inflation and Monetary Policy

Printing excessive money leads to inflation (a general increase in price levels).

Supply, Demand, and Government Policies

Demand: Quantity of a good consumers are willing and able to buy at various prices; follows the law of demand (price increase, quantity demanded decrease).
Supply: Quantity of a good producers are willing and able to sell at various prices.
Price Controls: Binding price ceilings create shortages; price floors lead to surpluses.
Rent control, limiting rental prices, may cause housing shortages. Rent subsidies are often suggested as a better alternative.
Minimum wage laws set a minimum wage for workers; wage subsidies are another way to potentially aid low-wage earners.
Taxes on goods affect consumers or producers depending on supply and demand elasticity. Taxes fall more on consumers with elastic supply and inelastic demand and fall more on sellers with inelastic supply and elastic demand.

Theory of Consumer Choice & Budget Constraint

Consumer choice theory examines how consumers make decisions with limited resources.
Budget constraints show the combinations of goods a consumer can afford with a given income. An example uses a budget of $1000 for pizza ($10/pizza) and Pepsi ($2/liter).

Externalities: Positive and Negative

Externalities are uncompensated impacts of one person's actions on others.
Positive externalities: Benefit bystanders (e.g., historic building restoration, research).
Negative externalities: Harm bystanders (e.g., pollution, smoking).
Internalizing externalities involves altering incentives to account for external effects. This is done to move resource allocation closer to the social optimum.

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Description

This quiz explores key concepts of market failure, government intervention, and economic growth. It covers how externalities, market power, and productivity affect resource allocation and living standards. Test your understanding of these fundamental economic principles.