Deck 20: Reasons for Government Intervention in the Market

Question 1

When firms stopped producing video tapes and started producing DVDs because people no longer wanted video tapes, it

A) made the economy more stable.
B) improved efficiency.
C) made the economy less stable.
D) made the distribution of income more equitable.
E) reduced efficiency.

Answer 1

improved efficiency.

Question 2

In a perfect market, social efficiency in any activity will be maximised where the activity's

A) MSB = MSC
B) MC > MB
C) P = MB
D) MB = MC
E) MSB > MSC

Answer 2

MSB = MSC

Question 3

If someone spends their income to achieve maximum benefit, in economic terms this is an example of

A) productive efficiency.
B) allocative efficiency.
C) distributional equity.
D) hedonism.
E) good housekeeping.

Answer 3

allocative efficiency.

Question 4

Suppose a policy change will generate £100,000 of benefits for low income families and £120,000 of costs for high income families. This change would be described by economists as

A) inefficient.
B) a potential Pareto improvement.
C) Pareto efficient.
D) equitable.

Question 5

The condition that ensures that the right things are produced is P = MC. This is true

A) only if price is set so that there is no consumer surplus and marginal cost is such that the firm's normal profit is zero.
B) only if price is set in a competitive market and marginal cost is a good measure of the actual costs paid by the firm.
C) only if price is a good measure of the value of the things that might otherwise be produced with the same resources and marginal cost is a good measure of the costs incurred by the firm in producing the good.
D) only if price is a good measure of the value that society places on a good, and only if marginal cost is a good measure of the value of the things that might otherwise be produced with the same resources.

Question 6

Which of the following is not a possible source of market failure as economists use the term?

A) Externalities
B) Firms that are price- takers in the output market
C) Involuntary unemployment
D) Public goods

Question 7

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

A) External costs and benefits
B) Voluntary unemployment
C) Imperfectly competitive markets
D) Public goods

Question 8

When you consume good Q, not only do you benefit from consuming the good but other people benefit from your consumption as well. If firms produce good Q where P = MC, firms will be producing

A) so that consumer surplus is zero.
B) more than the efficient level of output.
C) the efficient level of output.
D) so that consumer surplus is maximised.
E) less than the efficient level of output.

Question 9

The following diagram shows the presence of external costs for a price- taking firm.
The socially optimum output is the private optimum output.

A) greater than
B) less than
C) equal to
D) preferred to

Question 10

Under perfect competition in all markets and with an absence of externalities, which of the following is false?

A) As long as all firms have access to the same factor markets and the same factor prices, the last unit of a factor hired will produce the same value in each firm.
B) Households will buy a good as long as the good generates utility that is greater than the good's market price.
C) What is produced is distributed efficiently, but the market may not produce the things that people want.
D) Resources are allocated efficiently among firms.

Question 11

Which of the following denotes an external benefit of production?

A) MSB < MB
B) MSC < MC
C) P = MC
D) MSB > MB
E) MSC > MC

Question 12

If the production of a product entails a positive externality, and the firm is not forced to consider the positive externality when deciding how much to produce, then the firm will produce

A) the efficient level of output, as long as P = MC.
B) an output level that is less than the efficient one.
C) the efficient level of output, as long as the firm is perfectly competitive.
D) an output level that is greater than the efficient one.

Question 13

Which of the following explains the concept of non- rivalry?

A) Where the private benefit from consuming a good or service exceeds the social benefit
B) Where the consumption of a good or service by one person will not prevent others from enjoying it.
C) When resources commonly available at no charge means that people are likely to overexploit them
D) Where there is no competition in the market between firms
E) Where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy

Question 14

Public goods are distinguished from other types of goods because

A) they have large external costs relative to private costs.
B) they are relatively demand- inelastic.
C) they are provided by the public sector.
D) the government feels it knows better than consumers what people ought to consume.
E) it is impossible to exclude free- riders.

Question 15

Which of the following is not an example of a public good (or service)?

A) Museums
B) Health care
C) Primary education
D) Secondary education
E) All of the above

Question 16

If it is very difficult to exclude people from consuming its benefits, a good is

A) a Pareto good.
B) a public good.
C) a merit good.
D) a free good.
E) a private good.

Question 17

The difficulty of getting people to pay for public goods other than by taxation is called

A) the Coase theorem.
B) the free- rider problem.
C) Arrow's impossibility theorem.
D) the fallacy of composition.

Question 18

Firms with market power cause market failure because

A) marginal social benefits and marginal social costs are not equated.
B) they generate a deadweight loss.
C) the sum of producer and consumer surplus would be greater under conditions of perfect competition.
D) all of the above

Question 19

Only one firm produces chocolate- covered ants. This is an example of

A) a social good.
B) an imperfect market.
C) an inequitable outcome.
D) an external cost in consumption.
E) an external benefit in production.

Question 20

Economists often compare perfect competition and monopoly. They criticise monopolies for producing _________and charging ________.

A) less; less
B) more; less
C) more; more
D) less; more

Question 21

The output of a monopolist is likely to be .

A) less than the social optimum
B) greater than the social optimum
C) where MSC = MSB
D) where price = MC

Question 22

The following diagram shows the deadweight welfare loss for an industry under monopoly as compared with perfect competition.
The deadweight welfare loss represents

A) the loss in consumer surplus plus the loss in producer surplus.
B) the gain in producer surplus plus the gain in consumer surplus.
C) the loss in consumer surplus minus the gain in producer surplus.
D) the loss in producer surplus minus the gain in consumer surplus.

Question 23

Which one of the following is a definition of deadweight welfare loss under monopoly?

A) The loss in output compared with perfect competition
B) The increase in total profit compared with perfect competition
C) The loss of total consumer- plus- producer surplus compared with perfect competition
D) The loss of total consumer surplus compared with perfect competition

Question 24

Which formula can be used to calculate total surplus?

A) TCS + TPS
B) TU - TVC
C) (TU - TR) + (TR - TVC)
D) All of the above

Question 25

Jason sells Amy a worthless coin. He incorrectly told Amy it 'belonged to an ancient Persian king and is of enormous value to coin collectors'. Economists would call this an

A) efficient exchange, assuming Jason was not intentionally trying to trick Amy.
B) inefficient exchange because externalities were involved.
C) efficient exchange since any type of voluntary exchange promotes efficiency.
D) inefficient exchange since at least one party used false market information.

Question 26

The principal- agent problem can result in the ________ not acting in the best interests of the_______
.

A) agent; principal
B) market; economy
C) buyer; seller
D) price system; market

Question 27

If the provision of health care were left to the free market, there would be many reasons why the market would not provide an optimum allocation of health care resources. One such reason would be that uncaring parents may not buy adequate treatment for their children or children may not buy adequate treatment for their elderly parents. Which of the following categories of market failure best match this example?

A) Market power
B) Dependants
C) Inequality
D) Externalities
E) Poor economic decision- making by people on their own behalf

Question 28

What is a merit good?

A) A good that is commonly available because it is a vital good for survival, but which consumers will therefore overexploit
B) A good whose MC = P
C) A good that the government feels people will underconsume and which, therefore, ought to be subsidised or provided free
D) A good whose MSC > MC
E) A good that is non- excludable and non- rival

Question 29

Which of the following is the problem created by time lags?

A) Problems of inefficiency will be created as there will be a delay between workers leaving one job and commencing another.
B) It means certain goods will not be provided quickly enough.
C) It leaves decisions to those who are imperfectly informed.
D) It causes problems of instability and an inability of the economy to achieve social efficiency.

Question 30

Which of the following are reasons why things are provided free or well below cost?
(i) Large positive externalities
(ii) Social justice
(iii) Ignorance
(iv) Dependants

A) (i), (ii), (iii) and (iv)
B) (i), (iii) and (iv)
C) (i) and (ii)
D) (ii) and (iv)
E) (i) and (iii)

Question 31

What types of interventions are available to governments?

A) Laws, regulation and price control
B) Taxes and subsidies
C) Changes in property right
D) All of the above

Question 32

A negative externality could be corrected with

A) a tax on the externality itself.
B) a subsidy on the product.
C) banning the product.
D) a tax on the product.

Question 33

A subsidy to correct for an externality should be set equal to the

A) MSC.
B) MSB.
C) MEB.
D) MEC.
E) AC.

Question 34

The following diagram shows a price- taking firm that creates pollution when it produces. As a result, the firm's marginal social cost (MSC) is above its marginal private cost (MC).
What is the optimum tax?

A) cd
B) ca
C) ab
D) da

Question 35

Which of the following is not an advantage of using taxes and subsidies to correct market imperfections?

A) Firms are encouraged to find ways of increasing external benefits.
B) Rates need to be frequently adjusted as external costs and benefits change.
C) Rates can be adjusted according to the magnitude of the problem, thus enabling MSB to equal MSC.
D) Firms are encouraged to find ways of reducing external costs.
E) Taxes and subsidies internalise externalities.

Question 36

What effect will a lump sum tax have on a firm that has monopoly power?

A) It will shift the firm's marginal cost and average cost curves downwards.
B) It will shift the firm's average cost curve upwards, but will have no effect on the firm's marginal cost curve.
C) It will shift the firm's marginal cost and average cost curves upwards.
D) It will not affect the firm because it has monopoly power.
E) It will shift the firm's marginal cost curve upwards, but will have no effect on the firm's average cost curve.

Question 37

The idea that, when externalities are present, private parties can arrive at the efficient solution without government intervention under certain circumstances is known as

A) the Coase theorem.
B) the free- rider problem.
C) Arrow's impossibility theorem.
D) the drop- in- the- bucket problem.

Question 38

Which of the following is a disadvantage of legal restrictions?

A) For some dangerous activities they can be very difficult to administer.
B) They are simple and clear to understand.
C) They are a rather blunt instrument.
D) They cannot be imposed very quickly if emergency action is required.

Question 39

A negative externality could be corrected with

A) providing producers with more information on the externality.
B) banning the product.
C) a tax on the externality itself.
D) a minimum price on the product.

Question 40

Which of the following is not an example of an abuse of market power?

A) Making firms who sign contracts accept unfavourable obligations in unrelated areas
B) Limiting production to the detriment of consumers
C) Charging a price below marginal cost
D) Limiting innovation to the detriment of consumers

Question 41

Setting up a government job centre would be an example of what type of intervention?

A) Direct provision of goods and services
B) Regulatory bodies
C) Extending property rights
D) Provision of information
E) Price controls

Question 42

Driving tests would be an example of what type of intervention?

A) Price controls
B) Regulatory bodies
C) Extending property rights
D) Direct provision of goods and services
E) Legal controls

Question 43

Markets fail to produce an efficient allocation of resources, but governments also fail because

A) measurement of social costs and benefits is difficult and imprecise.
B) the optimal level of public goods may be too expensive to produce.
C) elected officials will act only in the public interest.
D) managers of government agencies are trying to maximise the size of their agency.

Question 44

Which of the following is a reason why the government may fail to ensure an optimum allocation of resources?

A) Shortages and surpluses
B) Lack of market incentives
C) Bureaucracy and government inefficiency
D) Poor information
E) All of the above

Question 45

The 'virtue matrix' generating corporate social responsibility refers to activities that

A) society expects firms to commit to.
B) are promoted by the government.
C) are not directly in the interest of shareholders.
D) A and C

Question 46

In which of the following countries would you expect the boundary to be lower between the civil foundation and the frontier?

A) USA
B) UK
C) China
D) Spain

Question 47

Corporate social responsibility involves firms

A) minimising environmental emissions.
B) taking into account the interests and concerns of a community rather than just its shareholders.
C) introducing health and safety regulations.
D) all of the above

Question 48

The pressure for companies to become more socially responsible relates to

A) social, ethical and institutional demands by the public.
B) primary stakeholder concerns (owners, employees, consumers, other firms).
C) secondary stakeholder concerns (government and regulators, communities, trade unions).
D) all of the above

Question 49

Which of the following is not a likely outcome from a firm adopting a socially responsible approach?

A) Higher short- run revenue
B) Higher long- run revenue
C) Lower short- run costs
D) Lower long- run costs

Question 50

Which of the following is true?

A) The Cooperative Bank Ethical Consumerism Report showed that the proportion of people who purchased a product at least once a year for ethical reasons fell over the past decade.
B) The 2011 Cooperative Bank Ethical Consumerism Report shows that the value of funds invested by households in ethical financial products had risen from £6.5 billion in 2000 to
£21)1 billion in 2011, an increase of 225%.
C) Firms that engage in CSR find it harder to employ and retain a workforce.
D) Firms find that profitability typically declines in the long run with engagement in CSR.

Question 51

Instability and an inability of the economy to achieve social efficiency are not affected by time lags of implementing economic policy actions.

Question 52

Private efficiency occurs when marginal revenue exceeds marginal cost.

Question 53

If everyone is achieving allocative efficiency, then this must mean social efficiency exists.

Question 54

Pollution is an externality because polluting firms create deadweight losses.

Question 55

In the absence of externalities, a monopoly will charge a price above the level where MSC = MSB and produce an output below the level where MSC = MSB.

Question 56

The social benefit of a decision is the benefit to people other than the decision- maker.

Question 57

Public goods are non- rival in consumption and non- excludable.

Question 58

Health care is a pure public good.

Question 59

A free- rider is someone who cannot be made to pay for consuming something that other people have paid for.

Question 60

The equilibrium price for a pure public good is always greater than zero.

Question 61

Total producer surplus is equal to total revenue minus total costs.

Question 62

In the absence of externalities, total social surplus equals total private surplus.

Question 63

Total private surplus is equal to total consumer surplus plus total producer surplus.

Question 64

Often, when people buy a second- hand car, asymmetric information ensures that the seller is more likely to have more information.

Question 65

Cost- Benefit Analysis looks at the social costs and benefits of proposed actions.

Question 66

Minimum and maximum price legislation is less likely to create shortages and surpluses than when using taxation and subsidies to correct an externality problem.

Question 67

The Coase theorem states that some problems involving externalities can be solved by private bargaining and without government intervention.

Question 68

Second- best solutions recognise that the economy is not in general equilibrium and seek to solve a problem without creating more problems elsewhere in the economy.

Question 69

In the first- best world, where there are no other market distortions, the problem of externalities can be corrected by imposing a tax equal to MSC and a subsidy equal to MSB.

Question 70

A lump sum tax is an effective method to reduce monopoly profits.

Question 71

An optimum tax is one that raises MC to the value of MSC.

Question 72

Extending property rights is not a sensible solution if many people are highly inconvenienced and there are only a few culprits imposing the costs.

Question 73

Extending private property rights will be impractical if there are many polluters and many victims.

Question 74

Legal controls are an effective policy to prevent road users from driving too quickly.

Question 75

A lack of information may create government failure.

Question 76

Government intervention to solve market failure is costless.

Question 77

Ethical considerations and the adoption of corporate responsibility are not related to a firm's performance.

Question 78

The performance of a company adopting a more socially responsible outlook could rise because improved brand perception makes demand more inelastic.

Question 79

Firms adopting corporate social responsibility not only enhance their value and performance in strengthening their brand, as well as attracting and retaining employees, but also improve their access to capital.

Question 80

Why do the assumptions of perfect competition (given an absence of externalities) achieve a socially efficient outcome?