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Chapter 7 Unit 2

The document discusses externalities, defining them as costs or benefits affecting parties who did not choose to incur them. It explores examples of negative and positive externalities, the role of government intervention in internalizing these externalities, and the challenges associated with public goods and merit goods. Additionally, it addresses issues of market failure, moral hazard, and adverse selection in various market contexts.

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5 views

Chapter 7 Unit 2

The document discusses externalities, defining them as costs or benefits affecting parties who did not choose to incur them. It explores examples of negative and positive externalities, the role of government intervention in internalizing these externalities, and the challenges associated with public goods and merit goods. Additionally, it addresses issues of market failure, moral hazard, and adverse selection in various market contexts.

Uploaded by

kaflejiwan841
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Unit 2

1. What is an externality?
a) A situation where a company produces goods more efficiently
than its competitors.
b) A cost or benefit that affects a party who didn’t choose to incur
that cost or benefit.
c) A condition in which the price of a product exceeds its production
cost.
d) An agreement between two firms to fix prices in the market.
2. Which of the following is an example of a negative
externality?
a) A company providing free health check-ups to its employees.
b) Planting trees in a neighbourhood park.
c) A factory releasing pollutants into a nearby river.
d) Offering discounts on products to attract more customers.
3. Which statement best describes a positive externality?
a) An increase in the price of a good leads to a decrease in its
demand.
b) Subsidizing the production of solar panels to promote renewable
energy.
c) The consumption of cigarettes leading to adverse effects for
smokers.
d) A decrease in consumer income leads to a decrease in the
consumption of luxury goods.
4. What is the most effective way to internalize externalities?
a) Government intervention through regulations and taxes.
b) Imposing price ceilings on goods and services.
c) Encouraging monopolies to dominate the market.
d) Allowing markets to reach equilibrium naturally.
5. Which market structure is most likely to neglect
externalities?
a) Perfect competition c)
Monopoly
b) Oligopoly d) Monopolistic
competition
6. Which of the following is an example of a negative
externality?
a) A new technology leading to increased productivity in an industry.
b) Government subsidies encouraging the production of a specific
good.
c) A decrease in consumer spending affecting local businesses
negatively.
d) None of the above.
7. Which of the following statements is true about public
goods?
a) Public goods can be easily provided by private firms for a profit.
b) The free-rider problem is not a concern for public goods.
c) Public goods have a competitive market price.
d) Public goods are typically provided by the government or public
sector.
8. The free-rider problem associated with public goods refer
to:
a) Individuals who benefit from public goods but refuse to pay for
them.
b) The lack of competition among providers of public goods.
c) The government’s inability to regulate public goods effectively.
d) The high costs of production associated with public goods.
9. Which of the following is an example of a public goods?
a) Private luxury goods like designer handbags.
b) Cable television service
c) National defense and military protection.
d) Exclusive membership at a country club.
10. Moral hazard is an example of incomplete information
in:
a) Insurance markets.
b) Perfectly competitive markets
c) Monopoly markets
d) Labor markets
11. Adverse selection is a situation where:
a) Buyers and sellers have equal knowledge about a product.
b) High-quality goods dominate the market.
c) Low quality goods are more likely to be traded.
d) The market is characterized by perfect competition.
12. Moral hazards in the context of insurance refers to:
a) Insurance companies increasing premiums for risky individuals.
b) Policy holders taking less risk due to insurance coverage.
c) Policyholders misrepresenting information to obtain lower
premiums.
d) Insurance companies denying coverage to high-risk individuals.
13. Which of the following is an example of adverse
selection in the used car market?
a) Sellers providing detailed information about the car’s condition.
b) Buyers selecting cars based on their preferences.
c) Sellers selling high-quality cars at premium prices.
d) Buyers being unsure about the true condition of the car.
14. The purpose of government intervention in the case of
merit goods is to:
a) Increase consumer choices in the market.
b) Maximize government revenue from taxes.
c) Correct market failures and ensure social welfare.
d) Encourage competition among producers.

15. Merit goods are goods that:


a) Are produced by the government owned firms.
b) Are provided by private firms but subsidized by the government.
c) Have positive externalities and are under-provided in the free
market.
d) Have negative externalities and are overproduced in the free
market.
16. Which of the following is an example of a merit good?
a) Cigarettes and alcoholic beverages.
b) Fast food and sugary beverages.
c) Education and vaccinations.
d) Luxury cars and high-end fashions.
17. Which of the following is a key challenge in the
provision of public goods?
a) Free-rider problem
b) Price fluctuation in the market.
c) Excessive competition among producers.
d) Lack of demand from consumers.
18. How can the government promote transparency and
reduce information failure?
a) By granting exclusive rights to firms for certain products.
b) By restricting the flow of information to protect businesses.
c) By enforcing regulations that require firms to disclose relevant
information.
d) By reducing competition among market participants.
19. Which of the following is a potential consequence of
inequitable distribution of resources?
a) Increased competition and economic growth.
b) Higher levels of poverty and social unrest.
c) Greater incentives for innovation and entrepreneurship.
d) Improved living standards for all individuals.
20. Which of the following is an example of government
intervention for equitable distribution?
a) Imposing higher taxes on high-income individuals.
b) Deregulating industries to encourage competition.
c) Allowing market forces to determine resource allocation.
d) Implementing subsidies to support profitable businesses.

21.Market failure occurs when:

A. The government intervenes in the market to regulate prices.

B. Demand for a product exceeds its supply in the market

C. The market fails to allocate resources efficiently.

D. The government imposes taxes on goods and services.

22. Which of the following is an example of market failure?

(a) The production of a public good like street lighting.

(b) The availability of luxury goods in the market.

c) The price increase of a product due to high demand.

(d) The availability of goods and services through competition.

23. Externalities refer to:

(a) The costs and benefits that affect only the producers in the market.
(b) The costs and benefits that affect both producers and consumers in the
market.

(c) The costs and benefits that affect only the consumers in the market.

(d) The costs and benefits that have no impact on the market.

24. When a company pollutes the environment while producing


goods, it is an example of:

(a) Positive externality.

(b) Negative externality

(c) Public good.

(d) Market equilibrium,

25.Government intervention to correct market failure may involve

(a) Reducing taxes to encourage investment.

(b) Providing subsidies to producers to lower costs.

(c) Imposing price controls to regulate market prices.

(d) Correcting externalities through taxes or subsidies.

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