Government Failure and Market Intervention Quiz

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Questions and Answers

What is the primary difference between complete market failure and partial market failure?

In complete market failure, inefficiency is due to externalities, while in partial market failure, inefficiency is due to market power.
Complete market failure results in overproduction, while partial market failure leads to underproduction.
Complete market failure is irreversible, while partial market failure can be corrected over time.
In complete market failure, markets are absent, whereas in partial market failure, markets exist but function inefficiently. (correct)

Which of the following is not a reason for market failure according to the text?

Market power
Public goods
Externalities
Monetary policy (correct)

What term is used to describe costs or benefits that do not reflect in the market price and occur outside the market system?

Price differentials
Market failures
Market power
Externalities (correct)

How do externalities contribute to market failure?

They introduce costs or benefits that are not reflected in market prices. (A) Signup and view all the answers

Which of the following is an example of externalities as mentioned in the text?

A company polluting a river and affecting the fishing industry downstream. (C) Signup and view all the answers

Why does excessive market power lead to inefficiencies in the market according to the text?

It causes producers to produce less output than in a competitive market and charge higher prices. (A) Signup and view all the answers

What do economists presume about people in a market environment?

They will make choices in their own self-interest. (A) Signup and view all the answers

What is the general belief about a perfectly working market system?

It maximizes self-interest and efficiently allocates resources. (A) Signup and view all the answers

When does 'market failure' occur?

When the market fails to allocate resources efficiently. (A) Signup and view all the answers

What role do prices play in a well-functioning market according to the text?

Prices provide accurate signals to producers and consumers. (D) Signup and view all the answers

Why do rational individuals act to maximize self-interest in the market system?

To get the greatest personal benefit. (C) Signup and view all the answers

In what way does 'market failure' impact market outcomes?

It makes market outcomes inefficient. (C) Signup and view all the answers

What does market failure refer to?

A situation where the market is not functioning in the ideal way. (C) Signup and view all the answers

Which of the following is an example of complete market failure?

Production of pure public goods that are not supplied by the market. (B) Signup and view all the answers

In partial market failure, what is the outcome?

Wrong quantity or price of products leading to economic welfare loss. (D) Signup and view all the answers

What characterizes complete market failure?

Overproduction and underproduction of goods. (C) Signup and view all the answers

Why do markets fail to produce the ideal outcome as per economic theory?

Because markets may not allocate resources to their highest valued uses. (B) Signup and view all the answers

What is the main difference between complete and partial market failure?

Complete market failure lacks supply for certain goods, while partial market failure results in wrong quantity or price. (B) Signup and view all the answers

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