Market Failure and Government Intervention
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Questions and Answers

What is the primary reason why a government would impose a Pigouvian tax on a firm?

  • To encourage the firm to produce more goods
  • To internalize the cost of negative externalities (correct)
  • To subsidize the firm's research and development
  • To reduce the firm's profit margin
  • Which of the following is a characteristic of a public good?

  • Non-rivalrous and excludable
  • Rivalrous and non-excludable
  • Non-rivalrous and non-excludable (correct)
  • Rivalrous and excludable
  • What is the primary goal of government intervention in the case of a negative externality?

  • To internalize the cost of the externality (correct)
  • To reduce the production of the good
  • To increase the firm's profit margin
  • To increase the price of the good
  • Which of the following is an example of a positive externality?

    <p>A beekeeper's bees pollinating nearby crops</p> Signup and view all the answers

    What is the definition of a monopoly?

    <p>A market structure in which a single firm supplies the entire market</p> Signup and view all the answers

    What is the purpose of government provision of public goods?

    <p>To provide a good or service that is non-rivalrous and non-excludable</p> Signup and view all the answers

    Study Notes

    Market Failure and Government Intervention

    Externality

    • Definition: An externality occurs when an economic activity affects third parties who are not directly involved in the transaction.
    • Types:
      • Positive externality: A beneficial effect on third parties (e.g., a beekeeper's bees pollinate nearby crops).
      • Negative externality: A harmful effect on third parties (e.g., a factory polluting a nearby river).
    • Examples:
      • Air and water pollution
      • Noise pollution
      • Positive externalities: education, research, and development
    • Government intervention:
      • Pigouvian taxes: Taxing firms that generate negative externalities to internalize the cost.
      • Subsidies: Providing incentives to firms that generate positive externalities.

    Public Goods

    • Definition: A public good is a good or service that is non-rivalrous and non-excludable.
    • Characteristics:
      • Non-rivalrous: Consumption by one person does not reduce the availability for others.
      • Non-excludable: It is difficult or impossible to exclude people from consuming the good.
    • Examples:
      • National defense
      • Public parks
      • Clean air and water
    • Government intervention:
      • Provision: The government provides public goods directly.
      • Regulation: The government sets rules and standards for public goods.

    Monopoly Power

    • Definition: A market structure in which a single firm supplies the entire market with a particular good or service.
    • Characteristics:
      • Single seller
      • Barriers to entry
      • Price maker
    • Negative effects:
      • Higher prices
      • Reduced output
      • Inefficiency
    • Government intervention:
      • Antitrust laws: Regulating and breaking up monopolies to promote competition.
      • Regulation: Setting prices and output levels to prevent abuse of monopoly power.
      • Public ownership: The government takes ownership of the monopoly to ensure public interest.

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    Description

    This quiz covers the concepts of externalities, public goods, and monopoly power, including their definitions, characteristics, and examples, as well as government interventions to address market failures.

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