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Questions and Answers
What is the primary reason why a government would impose a Pigouvian tax on a firm?
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?
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?
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?
Which of the following is an example of a positive externality?
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What is the definition of a monopoly?
What is the definition of a monopoly?
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What is the purpose of government provision of public goods?
What is the purpose of government provision of public goods?
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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.
