Market failure and remedial measures: asymmetric information, public goods and externalities. - One Line Questions

1. Which scenario illustrates asymmetric information? — A used car seller knowing about a car's defects that the buyer does not.
2. When a large number of buyers and sellers trade a homogeneous product, and there is perfect information, the market is considered: — A perfectly competitive market
3. A situation where an individual consumes a good, and this consumption provides a benefit to others, is known as: — A positive consumption externality
4. Which situation best illustrates moral hazard? — A person with fire insurance becoming less careful about preventing fires.
5. A situation where a single firm can supply the entire market at a lower cost than two or more firms is called: — A natural monopoly
6. Which of the following is an example of a common resource that may suffer from the tragedy of the commons? — A fishing ground in international waters
7. Which of the following is an example of a good that is excludable but rivalrous? — A movie theatre ticket
8. Which of the following best defines market failure? — A situation where the allocation of goods and services by a free market is not efficient.
9. If a government wants to encourage a socially beneficial activity that generates positive externalities, it might use: — A subsidy
10. The 'free-rider problem' is most closely associated with which type of market failure? — Public goods
11. The problem of adverse selection is particularly prevalent in markets where: — Sellers have more information about the quality of the product than buyers.
12. Which of the following is a method to combat moral hazard in lending? — Requiring collateral or down payments.
13. A cap-and-trade system sets a limit on total emissions and allows firms to trade permits, which is a form of: — Market-based solution for externalities
14. Government regulation of natural monopolies is often implemented to: — Prevent the monopolist from charging excessively high prices and restricting output.
15. The 'free-rider problem' arises because public goods are: — Non-excludable
16. The Sherman Antitrust Act in the US was primarily designed to address market failures related to: — Monopoly power
17. Which of the following is a potential private solution to an externality problem? — Negotiation between affected parties (Coase Theorem)
18. Which of the following is a characteristic of a natural monopoly that can lead to market failure if unregulated? — Declining average total costs over the entire range of market demand
19. Which of the following is a remedial measure for the market failure of asymmetric information? — Mandating product labeling or disclosure requirements.
20. A Pigouvian tax is designed to: — Reduce the production or consumption of a good that generates negative externalities.
21. Internalizing an externality means: — Reducing the divergence between private and social costs/benefits.
22. Information asymmetry can be reduced by: — Implementing screening and signaling mechanisms.
23. Government intervention in markets is typically justified when: — Market failures lead to inefficient outcomes.
24. The 'lemon problem' is a specific case of: — Adverse selection
25. A subsidy for education is a typical policy to address: — Positive externalities
26. Which of the following is a characteristic of a common resource (e.g., fish in the ocean)? — Non-excludable and rivalrous
27. Which of the following is NOT a characteristic of a public good? — The ability to charge a price based on individual consumption
28. Which of the following is a potential remedy for adverse selection in the insurance market? — Mandating insurance purchases.
29. Which of the following is a characteristic of a good that is non-excludable? — It is impossible to prevent people who have not paid for the good from consuming it.
30. The concept of 'social cost' includes: — The private cost plus any external cost.
31. The 'tragedy of the commons' is a problem that arises from: — Over-consumption of rivalrous but non-excludable resources.
32. The market failure associated with public goods is the tendency for the market to: — Under-produce and under-consume.
33. Which of the following is a classic example of a positive externality? — Vaccination against a contagious disease
34. Which type of externality occurs when a firm pollutes a river, harming downstream fishing businesses? — Negative production externality
35. Government provision of public goods like national defense is justified because: — The free market would under-provide these goods due to the free-rider problem.
36. A negative externality occurs when: — Production or consumption imposes a cost on a third party.
37. Which type of market failure occurs when one party in a transaction has more or better information than the other party? — Asymmetric information
38. Tradable pollution permits (cap-and-trade) are a market-based approach to control: — Externalities
39. Which of the following is a characteristic of a public good? — Non-rivalrous and non-excludable
40. The provision of street lighting is often cited as an example of a: — Public good
41. Information asymmetry can lead to market collapse if the market is characterized by: — Significant seller knowledge and buyer ignorance.
42. Which government intervention is most likely to address a negative externality like pollution? — Pigouvian tax
43. Which policy aims to internalize an externality by making the producer pay for the social cost of their actions? — Pigouvian tax
44. A tax imposed on each unit of a pollutant emitted by a factory is known as a: — Pigouvian tax
45. Adverse selection is a problem that arises due to: — The hidden characteristics of one party in a transaction.
46. Moral hazard is a problem that arises due to: — The hidden actions of one party in a transaction after it has been agreed upon.
47. The 'lemons problem' in Akerlof's market model refers to: — The market for low-quality goods driving out high-quality goods.
48. Which of the following is a consequence of a negative externality like pollution? — The market produces too much of the good.
49. Coase Theorem suggests that private parties can solve externality problems through bargaining if: — Property rights are well-defined and transaction costs are low.
50. An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. — True, and it is a primary cause of market failure.
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