1) Which of the following statements best describes market failure?

A) The free market fails to allocate resources efficiently.

B) An inefficient distribution of goods and services in the free market.

C) The price mechanism fails to account for all costs and benefits to provide and consume a good.

D) All of the above

2) What is allocative efficiency?

A) The free market fails to allocate resources efficiently,

B) An inefficient distribution of goods and services in the free market.

C) When the marginal social benefit (MSB) equals the marginal social cost (MSC).

D) None of the above.

3) How do externalities impact resource allocation and societal welfare?

A) Externalities have no impact on resource allocation and societal welfare.

B) Externalities lead to allocative efficiency.

C) Externalities lead to market failure.

D) Externalities have no impact on the free market.

4) How do governments respond to market failure?

A) Through legislation B) By imposing taxes C) By providing direct provision of goods and services D)
All

5) Which of the following is an example of a pure public good?

A. Food items B, Household furniture C. National park D. Clothing

6) What are the two major features of public goods?

A. Rivalry in consumption and excludability C. Rivalry in consumption and non-excludability

B. Non-rivalry in consumption and excludability D. Non-rivalry in consumption and non-excludability

7) What is the term used to describe a person who enjoys the benefits of public goods without
contributing to their financing?

A. Free rider B. Consumer C. Contributor D. Producer

8) Why do markets fail to provide public goods?

A. Because public goods have high costs C. Because public goods are non-excludable
B. Because people are unwilling to contribute to public goods D. Because the government monopolizes
the provision of public goods

9) Which mechanism involves private individuals raising contributions to fund public goods?

A. Private provision of excludable public good

B. Public provision of excludable public goods through entrance fees

C. Public provision of non-excludable public goods through tax revenues

D. Religious beliefs

10) What is an externality?

A. The cost of producing a good

B, The benefit of consuming a good

C. The positive or negative effects of consumption or production on other people's utility

D. The total utility derived from consuming a good.

11) Which of the following is an example of a negative externality?

A. Subsidizing education through scholarships C. Building a public park

B. Imposing taxes on tobacco consumption D. Investing in renewable energy

12) How do firms contribute to negative externalities?

A. By producing goods that increase other people's utility C. By investing in social welfare programs

B. By polluting the environment without incurring costs D. By promoting sustainable business practices

13) What is the purpose of imposing taxes on activities that create negative externalities?

A. To increase government revenue

B. To discourage the consumption or production of goods with negative externalities

C. To promote market competition

D. To subsidize positive externalities

14) What is the term used to describe the situation where downstream farmers suffer from the effects
of sewage discharge into rivers without compensation?

A, Free riding B. Negative externality C. Positive externality D. Market fails

15) Which of the following is NOT a type of mechanism for providing public goods?

A. Private provision of excludable public goods

B, Public provision of excludable public goods through entrance fees

C. Public provision of non-excludable public goods through tax revenues

D. Privatization of public goods

16) What is the main reason for the inefficiency of markets in providing public goods?

A. Lack of demand for public goods C. Non-excludability of public goods

B, High cost of producing public goods D. Lack of government intervention

17) Which of the following is an example of a positive externality?

A. Pollution from a factory B. Vaccination programs C. Secondhand smoke D, Traffic congestion

18) Which of the following is an example of a negative externality?

A. Education C. Research and development

B, Noise pollution from construction D. Public transportation

19) Who generates externalities?

A. Only consumers B. Both consumers and producers C. Only producers D. Government agencies

20) What is the main goal of addressing externalities?

A. Maximizing pro C. Promoting fairness

B. Minimizing government intervention D. Enhancing economic efficiency

21) What is the Cease Theorem?

A. The ability of government to solve externalities

B. The market participants can negotiate & solve externalities without gov’t intervention

C. The concept of negative externalities being completely unavoidable

D. The theory that externalities only affect producers, not consumers

25) What is moral hazard?

A. The tendency of individuals to take more risk when they are insured against losses

B. The concept of information asymmetry in financial markets

C. The practice of charging different prices for the same product in different markets

D. The idea that individuals have perfect information in market transactions

26) Which of the following is a solution to address moral hazard?

A. Government regulations B. Signaling C. Market competition D. Price discrimination

27) Which of the following is an example of a market failure?

A. Competitive markets with no externalities

B. Government intervention to correct externalities

C. Perfectly functioning markets with no government interference

D. Monopoly power in a specific industry

28) What does consumer protection aim to safeguard?

A. Business interests C. Government regulations

B, Consumer rights and interests D. Non-government organizations

29) Which of the following is an example of a business malpractice? 7

A. Providing quality goods at fair prices C. Selling adulterated goods

B. Offering discounts to loyal customers D. Conducting market research

30) Which of the following is NOT a business malpractice leading to consumer exploitation?

A. Sale of duplicate goods C. Use of accurate weights and measures

B, Supply of defective goods D. Misleading advertisement

31) What is the role of false advertising in consumer protection?

A. To inform consumers about product quality

B. To mislead consumers about product attribute

C. To promote fair competition among businesses

D. To ensure government control over advertising

32) Why is consumer protection necessary?

A. Consumers lack awareness of their rights C. Non-government organizations demand it

B. Businesses should prioritize their own interests D. Government control over the market is essential

33) Who is responsible for protecting consumer’s rights and interests?

A. Consumers themselves C. Businesses and corporations

B. Government and NGO D. Media and advertising agencies

34) What is the significance of consumer satisfaction for businesses?

A, It ensures fair prices for consumers C. It maximizes business profits

B. It promotes healthy competition D. It contributes to business success

35) What principle suggests that businesses should refrain from malpractices and consider consumers’
interests?

A. Principle of social justice C. Principle of government regulation

B. Principle of business profitability D. Principle of consumer choice

36) What is a key characteristic of information asymmetry in a market transaction?

A. Balance of power between buyers and sellers

B, Equal knowledge and information for all parties involved

C. More information held by one party than the other

D. Transparent and complete market information

38) Which of the following is a potential solution for externalities caused by pollution?

A. Increasing subsidies for polluting industries -

B. Implementing tort lawsuits to increase opportunity costs for polluters

C. Removing regulations on pollution control

D. Encouraging individuals to take personal responsibility for pollution

39) How can subsidies be used as a solution to market failures caused by positive externalities?

A. By reducing subsidies to discourage positive behavior

B. By providing financial incentives to encourage positive behavior

C. By removing regulations to allow the market to self-correct

D. By encouraging individuals to voluntarily engage in positive behavior

40) In the presence of a negative externality, what is the relationship between marginal social cost
(MSC) and marginal private cost (MPC)?

A.MSC = MPC _ B. MSC > MPC Cc. MSC < MPC D. MSC = MPB

41) What is the condition for efficiency in the presence of a negative externality?

A. MSC = MPC B. MSC > MPC C.MPC=P D.MSB=MPB

42) In the presence of a positive externality, what is the relationship between marginal social benefit
(MSB) and marginal private benefit (MPB)?

A.MSB = MPB B. MSB > MPB C.MSB<MPB —_D. MSB = MPC

43) What is the term used to describe the gap between the profit-maximizing level of output and the
socially optimal level of output?
A. Deadweight loss B. Producer surplus C. Consumer surplus D. External benefit

44) What is the cause of inefficiency in the presence of externality? 00:00

A. Underproduction C. Overproduction

B. In equilibrium between MPB and MSC D, Absence of external costs or benefits

45) Which solution for addressing externalities involves imposing a per unit tax equivalent to the
difference between the socially optimal output and the equilibrium output?

A) Private bargaining between affected parties C) Pigouvian tax and subsidy

B) Defining and enforcing property rights D) Market-based regulation

46) Which economist proposed the solution of private bargaining between affected parties to address
externalities?

A. AC. Pigou B. Cease C. Adam Smith D. John Maynard Keynes

47) Which solution is commonly used to combat adverse selection in the context of lending money?

A. Signaling B, Imposing regulations C. Screening D. Implementing private bargaining

48) Which of the following is an example of a private provision of excludable public goods?

A) Street lighting C) Movies and music concerts

B) National parks with entrance fees D) Flower farming

50) In the presence of positive externalities, the market tends to:

A) Overproduce the good C) Under produce the good

B) Produce the socially optimal quantity of the good D) none of the above

51) Which of the following is an example of a negative externality?

A) Increased safety due to street lights C) Pollution from textile/leather emissions

B) Higher productivity due to education D) Increased honey production from flower farming

52) Which of the following is a mechanism for providing the efficient level of public goods?

A) Private provision of excludable public goods B) Private bargaining C) Per unit tax D) All

53) What is the main problem associated with asymmetric information known as?

A) Moral hazard B) Public goods problem C) Adverse selection D) Market failure

54) What happens to resource allocation in the presence of externalities?

A) Resources are allocated efficiently C) Resources are over allocated

B) Resources are under allocated D) Inefficient allocation of resources,

55) Which of the following is a characteristic of externalities?

A) They can be positive or negative C) They can be eliminated through private bargaining

B) They only occur in market transactions D) They have no impact on resource allocation

56) What is the main objective of Pigouvian taxation?

A) To eliminate externalities completely C) To increase government revenue

B) To reduce the negative effects of externalities D) To encourage the production of private goods

57) What is the purpose of increasing consumer awareness?

A) To promote unfair business practices C) to ensure swift resolution of business grievances

B) To safeguard the interests of businesses D) to make consumers more informed about their rights

58) Which of the following is NOT a potential solution for market failures?

A. Private market solutions C. Government-imposed solutions

B. Voluntary collective action solutions D. Market deregulation

Work out
59) Suppose that a producer of commodity Y is located on the upstream of river Z. The

MC of producing Y is given by the function MC = 10 + 0.5Y. In addition to this, MC however, an external

cost is incurred. Each unit of product Y produces a pollutant that flows to the river, which causes
damage valued at Birr 10. Suppose that this external cost is borne by the wider community rather than
by the polluting firm. The MR obtained from each unit of Y is given by: R = 30 — 0.5Y

A) Derive the profit maximizing level of output for Y.

B. Derive the social optimal for Y

60) Suppose that a manufacturer of product X emits pollution into the air. The marginal cost (MC) of
producing X is given by MC = 20 + 0.8X. The external cost of the pollution is estimated to be $15 per unit
of X. The marginal revenue (MR) obtained from each unit of X is given by MR = 40 - 0.6X.

Show how the market equilibrium quantity, Q*, differs from the socially optimal quantity, Qs, and
calculate the welfare loss

61) Suppose a factory generates noise pollution that imposes an external cost on the surrounding
community. The marginal cost (MC) of the factory's production is given by MC = 10 + 0.5Q, where Q
represents the quantity produced. The external cost of the noise pollution is estimated to be $8 per unit
of output. The demand for the factory's product is given by P= 50 - Q, where P represents the price.
A) Calculate the market equilibrium quantity, Q*,

b) The socially optimal quantity, Qs. And

C) Welfare loss?