Government Policies to Correct Market Failure
153 questions· page 1 of 16
What is not an example of government failure?
Options
A decreased maximum price causing producers to leave the market
B higher guaranteed price encouraging suppliers to overproduce
C increased minimum wage leading to employers dismissing workers
D increased subsidies encouraging the consumption of a socially desirable product
What is not a reason for imposing a tax on producers based on the amount of pollution caused in the production process?
Options
A Firms have a financial incentive to reduce pollution.
B It is relatively hard to administer and monitor this tax scheme.
C Some firms cause less pollution than others.
D Taxes on pollution reduce negative production externalities.
A government introduced a tax on soft drinks containing sugar. It was forecast that the tax would raise £520m per year for the government. However, the tax received was £240m.
What is the most likely reason why the tax collected was lower than forecast?
Options
A a specific tax instead of an ad valorem tax was introduced
B fewer drinks than originally forecast contained sugar
C most retailers did not increase the price of soft drinks
D the demand for soft drinks was price inelastic
Good X is a popular product that creates a negative externality when it is consumed.
The government wants to reduce the consumption of good X significantly.
Under which circumstances is the government most likely to meet its aim?
Options
| government policy | price elasticity of demand for good X | |
|---|---|---|
| A | subsidy | more than 1 |
| B | subsidy | less than 1 |
| C | indirect tax | more than 1 |
| D | indirect tax | less than 1 |
A government introduces tradeable pollution permits to reduce pollution.
What is an advantage of this scheme?
Options
A It allows consumers to determine the optimum pollution level.
B It can provide rewards for firms that reduce pollution.
C It enables the government to raise revenue from the resale of permits.
D It uses the market system with no administrative costs.
To reduce traffic congestion, a government built a new highway. A majority of the citizens were opposed to this. Some citizens responded by switching from public transport to private cars. This caused car journeys to take even longer.
What can be concluded about government failure in this case?
Options
A It occurred because the government‘s opportunity costs were not considered.
B It occurred because the wishes of the majority of citizens were ignored.
C It occurred because the result was unintended.
D It occurred from over-reliance on the market system.
What is an example of ‘nudge’ theory as applied to the prevention of tax evasion?
Options
A employing an extensive administration to ensure detection of evasion
B imposing heavy penalties on those who do evade tax
C providing information to taxpayers about the undesirable effects of tax evasion
D requiring employers to inform the tax authorities of workers’ pay
A country’s government imposes a tariff on steel imports.
What is the likely impact of this tariff on this country’s economy?
Options
A It will make this country’s steel exports more price competitive.
B It will lead to productive inefficiency in this country’s steel industry.
C There will be an improvement in this country’s terms of trade.
D There will be a decrease in producer surplus for this country’s steel producers.
The marginal social benefit of consuming a drink is less than the marginal private benefit.
What would be the best policy to improve resource allocation in this market?
Options
A give a subsidy to the producers of the drink
B increase competition in the drink industry
C impose a maximum price for the drink above the market equilibrium price
D impose a per unit tax on the drink
A country’s government banned cigarette smoking in enclosed public spaces, such as offices, shops, bars and restaurants.
What is a government failure arising from this ban?
Options
A decreased consumption of cigarettes by smokers
B decreased levels of passive cigarette smoking by non-smokers
C increased litter from used cigarettes outside offices and shops
D increased sales of cigarette substitutes like nicotine patches and gum