Government Interventions in Market Failures Quiz
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Questions and Answers

What is the primary reason for government intervention in markets?

  • To regulate supply and prevent hoarding of resources
  • To control prices and ensure affordability
  • To address market failures and inefficient distribution (correct)
  • To increase competition and promote free market principles
  • Which of the following is NOT a characteristic of price instability?

  • Imperfect information
  • Inelastic demand or supply
  • Missing markets (correct)
  • Artificial scarcity and hoarding
  • What is the purpose of a maximum price policy?

  • To stabilize prices by buying and selling excess supply
  • To prevent supply hoarding and ensure affordability (correct)
  • To address the free-rider problem in public goods
  • To ensure income for producers
  • Which policy is used to address the issue of missing markets for public goods?

    <p>Direct provision policy</p> Signup and view all the answers

    What is the primary reason for the free-rider problem in the provision of public goods?

    <p>Individuals waiting for others to pay for public goods</p> Signup and view all the answers

    Which policy involves the government buying excess supply when supply is high and selling when supply is low?

    <p>Buffer stock scheme</p> Signup and view all the answers

    What is the main purpose of contracting out policy according to the text?

    <p>To provide poor services with no competition</p> Signup and view all the answers

    Which of the following is NOT considered a demerit good according to the text?

    <p>Museums</p> Signup and view all the answers

    What is the main purpose of policies to lower the consumption of demerit goods according to the text?

    <p>To increase the price and lower the demand for demerit goods</p> Signup and view all the answers

    What is the purpose of a minimum price according to the text?

    <p>To set the lowest legal price for a good or service</p> Signup and view all the answers

    What is the main disadvantage of minimum price support according to the text?

    <p>It can lead to market distortion</p> Signup and view all the answers

    What is the purpose of a guaranteed minimum price?

    <p>To guarantee a minimum income for producers</p> Signup and view all the answers

    Study Notes

    Government Intervention in Markets

    • Governments intervene to correct market failures and promote economic efficiency.
    • Intervention aims to ensure equitable resource distribution, especially in cases where the market does not allocate resources effectively.

    Characteristics of Price Instability

    • Characteristics of price instability include frequent fluctuations, unpredictable changes, and volatility.
    • Attributes such as steady price levels and predictability do not signify price instability.

    Maximum Price Policy

    • A maximum price policy is implemented to prevent prices from rising above a certain level, ensuring affordability for consumers.
    • Commonly applied in essential goods markets to protect low-income individuals from price surges.

    Missing Markets for Public Goods

    • Government provision or funding is the policy used to address the lack of markets for public goods, ensuring their availability to all.
    • Public goods, like street lighting and national defense, are typically underprovided by the private sector due to non-excludability.

    Free-Rider Problem

    • The free-rider problem arises when individuals benefit from resources they do not pay for, especially prevalent in public goods provision.
    • This issue leads to underfunding and insufficient production of essential public services.

    Government Buying and Selling Policy

    • The policy involves governmental intervention in agricultural markets by purchasing surplus produce during high supply to stabilize prices.
    • Government then sells this excess during low supply to manage market fluctuations and ensure food security.

    Contracting Out Policy

    • Contracting out involves the government outsourcing services to private entities to enhance efficiency and reduce costs.
    • This policy aims to leverage private sector expertise for public service delivery.

    Demerit Goods

    • Demerit goods are items deemed socially undesirable, often linked to negative externalities (e.g., tobacco, alcohol).
    • Categories that generally do not qualify might include basic necessities or positive externality goods.

    Lowering Consumption of Demerit Goods

    • Policies to reduce the consumption of demerit goods focus on mitigating health and social problems caused by their use.
    • These may include taxes, regulations, and public awareness campaigns.

    Minimum Price Purpose

    • A minimum price policy sets a price floor to ensure producers receive a fair income, particularly in volatile markets like agriculture.
    • This aims to protect producers from market price drops.

    Disadvantage of Minimum Price Support

    • A main disadvantage includes the potential overproduction, leading to excess supply that the government may struggle to manage.
    • It can create inefficiencies and drain government resources.

    Guaranteed Minimum Price Purpose

    • The purpose of a guaranteed minimum price is to provide price stability and income security for producers.
    • This strategy helps to encourage consistent production levels in agriculture and other sectors.

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    Description

    This quiz covers the concept of government interventions in response to market failures, such as inefficient distribution, price instability, missing markets, and imperfect information. Learn about policies like maximum price controls to prevent supply hoarding and ensure affordability.

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