Chapter 16 - Market Failures and Government Intervention

Question 1

What is allocative efficiency?

Answer 1

Resources are used to maximize total surplus to society

Question 2

What is market failure?

Answer 2

Where free market, in the absence of government, fails to achieve allocative efficiency

Question 3

What is an externality?

Answer 3

When there is an effect on parties other than the buyer and seller

Question 4

Which is higher - private or social costs?

Answer 4

Social

Question 5

Differentiate private and social costs

Answer 5

Social includes private and any other costs imposed to third parties

Question 6

Externalities can lead to _

Answer 6

Allocative inefficiency

Question 7

With a negative externality, social marginal costs are (greater/less) than private marginal costs

Answer 7

Greater

Question 8

With a positive externality, social marginal costs are (greater/less) than private marginal costs

Answer 8

Less

Question 9

With a negative externality, free market produces too (much/little) of the product

Answer 9

Much

Question 10

With a positive externality, free market produces too (much/little) of the product

Answer 10

Little

Question 11

With a negative externality, the upward sloping MC shifts (up/down)

Answer 11

Up

Question 12

With a positive externality, the upward sloping MC shifts (up/down)

Answer 12

Down

Question 13

What does a tax effect? Subsidy?

Answer 13

Tax affects negative externalities

Subsidy affects positive externalities