Test Questions without Answers
Chapter 17. Markets and the Government I. Microeconomic Policy and Market Failure
Chapter 17– Question 1
What does non-rivalness stand for? Give an example.
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Chapter 17– Question 2
Explain why, if there are negative externalities, there is a difference between optimum price and output on the one hand and market equilibrium price and output.
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Chapter 17– Question 3
Explain why private solutions suggested by the Coase theorem often do not work.
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Chapter 17– Question 4
Why is the market not efficient in supplying non-excludable, non-rival goods?
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Chapter 17–Question 5
If the price charged for a good does not cover the negative externalities it causes, which of the following will happen
- the quantity produced will not be sufficient
- the quantity bought will be low
- too much of the good will be produced
- the price of the good will be lowered
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Chapter 17–Question 6
Define asymmetric information.
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Chapter 17–Question 7
Define adverse selection.
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Chapter 17–Question 8
Explain the famous lemon example of adverse selection.
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Chapter 17–Question 9
What can the government do to internalise external costs generated by an industry whose firms produce negative externalities?
- It can grant subsidies to firms
- It can set a price ceiling for the firms' products
- It can set a price floor for the firms' products
- It can correct the overallocation of resources to this industry by imposing a tax on firms
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Chapter 17–Question 10
Describe the consequences of the following for insurance markets
- asymmetric information
- adverse selection
- moral hazard
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Chapter 17–Question 11
Moral hazard is in the main due to the fact that
- all people have a propensity to cheat
- complete control is never possible
- a principal is more likely to pursue his self-interest than an agent
- an agent is more likely to pursue his self-interest than a principal
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Chapter 17–Question 12
The price of installing airbags is $1,000. A buyer of a car supposes airbags to reduce the risk of dying in an accident by 1/600. What value does he place on life if he has the airbag installed?
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