CH 2: Market Failures
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Questions and Answers

What is the primary consequence of market failures?

  • Reduced prices for consumers
  • Net social welfare loss (correct)
  • Efficient allocation of resources
  • Increased competition among firms
  • What is an example of a negative externality?

  • Pollution (correct)
  • Education
  • Health care
  • Public transportation
  • What characteristic defines public goods?

  • Rivalrous and excludable
  • Rivalrous and non-excludable
  • Non-rivalrous and non-excludable (correct)
  • Non-rivalrous and excludable
  • What is an example of a merit good?

    <p>Health care</p> Signup and view all the answers

    What is a consequence of imperfect competition?

    <p>Higher prices and reduced output</p> Signup and view all the answers

    What is an example of asymmetric information?

    <p>Used cars</p> Signup and view all the answers

    What can lead to inefficiencies in the production of goods and services?

    <p>Immobility of factors of production</p> Signup and view all the answers

    What is a consequence of externalities?

    <p>Social costs or benefits exceed private costs or benefits</p> Signup and view all the answers

    What is a characteristic of demerit goods?

    <p>Overprovided by the market</p> Signup and view all the answers

    What is a consequence of market failures?

    <p>Reduced social welfare</p> Signup and view all the answers

    What can prevent market economies from being efficient?

    <p>Imperfect distribution of income and wealth</p> Signup and view all the answers

    What is productive inefficiency?

    <p>Not using resources to their full potential</p> Signup and view all the answers

    What is the purpose of imposing taxes on negative externalities?

    <p>To correct market failures</p> Signup and view all the answers

    What is the result of allocative inefficiency?

    <p>Overproduction of some goods and underproduction of others</p> Signup and view all the answers

    What is the primary goal of cost-benefit analysis?

    <p>To determine whether the benefits of a project exceed its costs</p> Signup and view all the answers

    What is the outcome of negative externalities?

    <p>Environmental degradation</p> Signup and view all the answers

    Why do market failures often disproportionately affect the less wealthy?

    <p>Because they have less resources</p> Signup and view all the answers

    What is the purpose of providing subsidies for positive externalities?

    <p>To provide incentives for the production of positive externalities</p> Signup and view all the answers

    What is the result of economic inequities?

    <p>Broader social issues</p> Signup and view all the answers

    What is the role of cost-benefit analysis in public policy?

    <p>To ensure resources are used efficiently and enhance social welfare</p> Signup and view all the answers

    What is the primary reason why firms in private markets cannot easily charge users for public goods?

    <p>Because the goods are non-excludable</p> Signup and view all the answers

    What is the term for goods that are underprovided by the market due to their benefits being underestimated?

    <p>Merit goods</p> Signup and view all the answers

    Which of the following is a consequence of imperfect competition in a market?

    <p>Higher prices and reduced output</p> Signup and view all the answers

    What is the result of asymmetric information in a market?

    <p>Choices that do not maximize welfare</p> Signup and view all the answers

    What is the primary cause of market failures related to the movement of factors of production?

    <p>Immobility of factors of production</p> Signup and view all the answers

    What is the term for the costs or benefits of goods and services that are not reflected in market prices?

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

    What is the primary reason why market failures can lead to a net social welfare loss?

    <p>Because the price mechanism fails to allocate resources efficiently</p> Signup and view all the answers

    What is the term for goods that are overprovided by the market due to their costs being underestimated?

    <p>Demerit goods</p> Signup and view all the answers

    What is the primary characteristic of markets that are dominated by a small number of firms?

    <p>Imperfect competition</p> Signup and view all the answers

    What is the primary consequence of the immobility of factors of production?

    <p>Inefficiencies in the production of goods and services</p> Signup and view all the answers

    What is a potential consequence of imperfect distribution of income and wealth in a market economy?

    <p>It results in a decrease in the overall efficiency of the economy</p> Signup and view all the answers

    Which type of inefficiency arises when resources are not allocated according to consumer preferences?

    <p>Allocative Inefficiency</p> Signup and view all the answers

    What is the primary goal of government intervention in the market to correct market failures?

    <p>To ensure efficient allocation of resources</p> Signup and view all the answers

    What is the result of negative externalities in a market economy?

    <p>Environmental degradation</p> Signup and view all the answers

    What is the purpose of cost-benefit analysis in public policy?

    <p>To determine whether the benefits of a project exceed its costs</p> Signup and view all the answers

    What is a consequence of economic inequities in a market economy?

    <p>Broader social issues</p> Signup and view all the answers

    What is the purpose of providing public goods directly by the government?

    <p>To correct market failures</p> Signup and view all the answers

    What is an example of a positive externality?

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

    What is the result of productive inefficiency in a market economy?

    <p>Less output is achieved with the same inputs</p> Signup and view all the answers

    What is the primary role of government in correcting market failures?

    <p>To correct externalities and provide public goods</p> Signup and view all the answers

    Which of the following is NOT a type of market failure?

    <p>Free entry and exit of firms</p> Signup and view all the answers

    What is the primary cause of underproduction of public goods in private markets?

    <p>Difficulty in charging users</p> Signup and view all the answers

    Which of the following is an example of a demerit good?

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

    What is the primary consequence of imperfect competition in markets?

    <p>Allocative inefficiency</p> Signup and view all the answers

    Which of the following is a characteristic of merit goods?

    <p>Underprovision by the market</p> Signup and view all the answers

    What is the primary cause of market failures related to the movement of factors of production?

    <p>Immobility of factors of production</p> Signup and view all the answers

    Which of the following is NOT a characteristic of public goods?

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

    What is the primary reason why asymmetric information can lead to market failures?

    <p>Buyers and sellers do not have equal knowledge</p> Signup and view all the answers

    Which of the following is a consequence of externalities?

    <p>Net social welfare loss</p> Signup and view all the answers

    What is the primary goal of government intervention in the market to correct market failures?

    <p>To increase economic efficiency</p> Signup and view all the answers

    What is the primary reason why market failures often lead to overproduction of some goods and underproduction of others?

    <p>Allocative inefficiency</p> Signup and view all the answers

    Which of the following is a consequence of imperfect distribution of income and wealth in a market economy?

    <p>Social and economic divides</p> Signup and view all the answers

    What is the primary goal of government intervention in the market to correct market failures?

    <p>To ensure efficient and equitable resource distribution</p> Signup and view all the answers

    What is the primary role of cost-benefit analysis in public policy?

    <p>To evaluate the social costs and benefits of interventions</p> Signup and view all the answers

    What is the primary consequence of economic inequities in a market economy?

    <p>Social and economic divides</p> Signup and view all the answers

    What is the primary reason why governments impose taxes on negative externalities?

    <p>To correct market failures</p> Signup and view all the answers

    What is the primary goal of providing subsidies for positive externalities?

    <p>To correct market failures</p> Signup and view all the answers

    What is the primary consequence of imperfect distribution of income and wealth on the production of goods and services?

    <p>Overproduction of high-end goods</p> Signup and view all the answers

    What is the primary role of government intervention in correcting market failures related to public goods?

    <p>To provide public goods directly</p> Signup and view all the answers

    What is the primary consequence of negative externalities in a market economy?

    <p>Environmental degradation</p> Signup and view all the answers

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