Test on Market Failure and Government Intervention

Question 1: The free-rider problem motivates the private sector to provide public goods and services, as they can easily track and exclude non-payers.

A. Ano

B. Ne

Explanation: The free-rider problem occurs when people benefit from a good or service without paying for it because it is difficult or impossible to exclude them. This problem means the private sector has no incentive to provide public goods and services, as it would be non-profitable because they cannot track or exclude non-payers.

Question 2: According to the study materials, which characteristic defines public goods and services?

A. They are easily priced and sold in private markets, leading to efficient allocation.

B. They are non-excludable, meaning it's impossible to prevent non-payers from benefiting.

C. Their consumption by one person reduces the amount or quality available to others.

D. They are rivalrous, implying that individuals must pay to access them.

Explanation: The study materials state that public goods and services are defined by their characteristics of being non-excludable and non-rival. Non-excludability means that once a public good or service has been provided, it is impossible to prevent people from accessing or benefiting from it based on non-payment. This directly aligns with option 1.

Question 3: A 'lemon' car, in the context of asymmetric information, exists because the buyer cannot easily detect hidden defects before purchasing.

A. Ano

B. Ne

Explanation: A 'lemon' exists because of asymmetric information: the seller knows the true condition of the car, but the buyer does not know whether the car is good or bad and cannot easily detect hidden defects.

Question 4: What is the primary impact on the car market when buyers fear purchasing a 'lemon'?

A. Buyers become willing to pay premium prices for all cars.

B. Good-quality car owners and sellers may leave the market.

C. The overall quality of cars in the market improves significantly.

D. Sellers gain more information about the true condition of their cars.

Explanation: The study materials state that 'Because buyers fear getting a lemon, they are only willing to pay an average price. This can cause good-quality car owner and sellers to leave the market and more bad-quality cars (lemons) to remain.' Therefore, good-quality car owners and sellers may leave the market due to this fear.

Question 5: The immobility of factors of production always ensures that markets adapt quickly to changing demands and supply conditions, preventing market failure.

A. Ano

B. Ne

Explanation: The study materials state that 'st markets fail to adapt quickly enough leading to market failure' and that 'in a perfectly functioning market, factors of production should flow freely between industries and regions to meet changing demands and supply conditions'. Immobility of factors means they do not flow freely, which hinders adaptation and can lead to market failure, rather than preventing it.