Practice Questions
Click any question to see detailed solutions
What is a major consequence of perfect competition in a market?
In perfect competition, many sellers offer similar products. Other options are incorrect because Some might think perfect competition wastes resources...
Which of the following is an example of market failure that demonstrates the concept of externalities in the real world?
When a factory pollutes a river, it harms fish and the environment. Other options are incorrect because This option shows a positive change, not a fai...
How do externalities influence market power in an economy?
Externalities can change how much power a company has in the market. Other options are incorrect because Some might think externalities create a fair ...
Which of the following is a real-world example of market failure due to the characteristics of public goods?
National defense is a public good. Other options are incorrect because Some might think private education is a public good, but it is not free for eve...
How do barriers to entry impact social welfare in a market characterized by monopolistic competition, and what are the broader economic implications?
Barriers to entry make it hard for new businesses to start. Other options are incorrect because Some might think barriers help by encouraging new idea...
What is a common example of market failure that occurs when a market does not allocate resources efficiently?
Monopoly power happens when one company controls the whole market. Other options are incorrect because Some might think perfect competition is a failu...
Which of the following is a characteristic of public goods that leads to market failures?
Public goods are non-excludable, meaning no one can be stopped from using them. Other options are incorrect because Some might think perfect competiti...
What is an externality in the context of market failures?
An externality is a cost or benefit that affects someone who didn't choose it. Other options are incorrect because This option confuses externalities ...
If the government intervenes to correct a market failure caused by negative externalities, what is the likely effect on socially optimal output compared to the competitive output?
When the government steps in, it helps reduce the harm caused by negative externalities. Other options are incorrect because This answer suggests that...
Marginal private cost : Marginal social cost :: Market failure : ?
Market failure happens when resources are not used well. Other options are incorrect because Some might think market failure means everything is worki...
A local factory emits pollution that affects the health of nearby residents. The factory's production cost, which does not include the health impacts on residents, is lower than the social cost of production when accounting for these health issues. What is the most appropriate action for the government to take in this situation to correct the market failure?
The government should impose a tax on the factory. Other options are incorrect because Some might think giving money to the factory will help it produ...
Arrange the following steps in the process of identifying and addressing a market failure due to externalities:
The first step is to find the externality. Other options are incorrect because Some might think we should assess costs first; Proposing a solution too...
A government is considering implementing a tax on a company that produces pollution as a byproduct of its manufacturing process. Which of the following best explains the underlying market failure this tax aims to address?
The tax helps make the company pay for the pollution it creates. Other options are incorrect because Some might think the tax makes companies act like...
In the context of market failures, the difference between the marginal private cost and the marginal social cost is referred to as _____, which often leads to inefficient allocation of resources.
Externalities happen when a person's actions affect others. Other options are incorrect because Some might think deadweight loss is about costs; Consu...
Which of the following factors contribute to market failures? Select all that apply.
Market failures happen when resources are not used efficiently. Other options are incorrect because Some might think that externalities, like pollutio...
How do externalities affect market efficiency and what is a possible policy solution to address them?
Externalities can cause deadweight loss, which means resources are not used efficiently. Other options are incorrect because This option suggests that...
A factory pollutes a river, affecting local fishing. What type of market failure does this represent?
This is a negative externality. Other options are incorrect because This term means one company has a lot of control over the market; Perfect competit...
Master Analyzing Market Failures
Ready to take your understanding to the next level? Access personalized practice sessions, progress tracking, and advanced learning tools.