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  1. Chapter Thirteen: Market Failure

Chapter Thirteen: Market Failure

1
Question 1

Which one of the following is not a source of market failure?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) Diminishing returns to scaleYour answer has been saved.
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2
Question 2

Which one of the following is not a source of market failure?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) Rivalrous and excludable productsYour answer has been saved.
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3
Question 3

Productive efficiency is a situation in which:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) It is impossible to produce more of any single product without producing less of another.Your answer has been saved.
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4
Question 4

Allocative efficiency is a situation in which:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is e) It is impossible to make one person better off without making at least one other person worse off.Your answer has been saved.
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5
Question 5

A natural monopoly arises when:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) The economies of scale are such relative to market size that only one firm can operate at minimum efficient scale.Your answer has been saved.
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6
Question 6

Negative externalities arise when:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Social costs exceed private costs.Your answer has been saved.
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7
Question 7

The Coase theorem implies that:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Bargaining at zero transaction cost between the two sides to an externality can lead to an efficient outcome if both agree voluntarily in their own self interest.Your answer has been saved.
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8
Question 8

The free rider problem arises when:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) Individuals have an incentive to understate the benefits they receive from a non-rivalrous and non-excludable product.Your answer has been saved.
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9
Question 9

List out the advantages that a market-based system of resource allocation has over its centralised counterpart.

Hint: re-read the section 'How markets work' pp275. In putting together your list, you might want to think of the criteria you are using to make your judgement.Hint

10
Question 10

What is the difference between 'productive efficiency' and 'allocative efficiency'? Why is the concept of perfect competition central to both?

Hint: re-read the sections 'Productive efficiency' and 'Allocative efficiency' pp276-77.Hint

11
Question 11

Under what circumstances may markets fail to allocate resources efficiently (or even 'reasonably' efficiently)?

Hint: re-read the section 'How markets fail' pp277.Hint

12
Question 12

What characteristics determine the degree to which a commodity is 'rivalrous', 'non-rivalrous' and 'non-excludable'?

Hint: re-read the section 'Rivalrous and excludable goods' pp278-79.Hint

13
Question 13

Using the example of a museum, consider what economists mean by the term 'inefficient exclusion'.

Hint: re-read the section 'Excludable goods' pp279 and Box 13.1 on p280.Hint

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Question 14

Why are fisheries, such as in the North Sea, destined to be over-exploited if governments choose not to intervene in regulating fishing activity? What problems will emerge if a government (or a group of governments) decides to restrict the amount of fishing taking place in order to conserve fish stocks?

Hint: re-read the section 'Non-excludable goods' pp279-81. You may also want to consider the impact of government intervention on trawler owners, the crews employed by the trawler owners, the economic and social infra-structure of fishing ports etc.Hint

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Question 15

Explain why the market demand curve for baked beans is the horizontal sum of the demand curves of the individual consumers of baked beans whereas the market demand curve for a public good is the vertical sum of individual consumers' demand curves.

Hint: re-read the section 'Public goods: non-excludable and non-rivalrous' pp281-83.Hint

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Question 16

Consider why an individual's decision to 'keep fit' by joining a private gym will generate positive externalities.

Hint: re-read the section 'Externalities' pp283-84. In formulating your answer, you may wish to make a list of all the people who might also benefit from the original decision.Hint

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Question 17

In the light of your answer to Question 16, consider how individuals could be encouraged to take a more proactive stance with respect to their own health and fitness.

Hint: another way of looking at the question is to also think about the factors that might be seen as a barrier to individuals undertaking regular exercise. Are these barriers the same for all age groups and for both sexes?Hint

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Question 18

Using the framework that underpins the Coase Theorem (i.e. property rights and transactions costs), write out a list of the problems associated with affected parties reaching an efficient outcome in the following situations:

(a) an individual wanting to smoke in a restaurant;
(b) a number of chemical plants located near each other that emit pollutants which is slowly contaminating local farmland and causing historical buildings to decay;
(c) countries seeking to reach an agreement over transboundary pollution.

Hint: re-read the section 'Externalities and the Coase Theorem' pp284-86.Hint

19
Question 19

What are the comparative advantages and disadvantages of using emissions taxes and direct regulation to control the pollution generated by firms?

Hint: re-read the section 'The control of pollution' pp286-87 and Box 13.3 p290. In your evaluation you may wish to take the following inter-linked issues into account:

(a) the accuracy by which the damage being caused by different pollutants (or combinations of different pollutants) can be estimated;

(b) the impact of scientific advance and changes in public attitudes towards polluting activities.

Hint

20
Question 20

What factors may prevent a market from emerging?

Hint: re-read the section 'Missing markets' pp290-91.Hint

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Question 21

To what extent do firms operating in perfectly competitive and oligopolistic industries have the same incentive to innovate?

Hint: re-read 'Unsettled questions: market structure in the long run' pp 295-96. Hint