Page 1 Classroom Questions Chapter 7 Unit 2 ( Mkt Failure, Govt Intervention

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Public Finance: (Chapter 7): Unit-2

Unit 2: Mkt Failure, Govt Intervention to Failure

A.) Multiple Choice Questions.

1) The activities of economy are generally efficient & capable of

achieving _____ allocation of resources:
a) Maximum
b) Minimum
c) Optimum
d) Both a & c
2) Market failure in free market leads to ____allocation of
society’s scarce resources:
a) Efficient c) Optimum
b) Inefficient d) Both a & c
3) “Market Failure” occurs:
a) When public goods are not sufficiently provided by the public
sector:
b) The market fails to allocate resources efficiently & therefore market
outcomes becomes inefficient:
c) When private goods are utilized full:
d) Both a & b
4) Market failure is a situation in which free market leads to…. of
resources:
a) Full utilisation c) Misallocation
b) Under utilisation d) Both b & c
5) When demand curves do not take into account we get:
a) Demand –side market failure
b) Free fountain easily observed.
c) Streetlight
d) All of the above
6) When supply curves do not take incorporate full cost, we
observe:
a) Supply-side market failure
b) Natural gas producers do not pay social cost
c) Both a & b
d) None of the above.
Page 2 Classroom Questions Chapter 7 Unit 2 ( Mkt Failure, Govt Intervention
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7) When thermal power plant that uses, coal may not have to
include or pay for cost of society, we get:
a) Demand-side market failure
b) Supply-side market failure
c) Not at all failure
d) Nothing can be concluded.
8) When single producer produces lesser amount of output than
competitive firms we observe, market failure due to___:
a) Externalities
b) Supply side
c) Market power
d) All
9) Causes of market failure are:
a) Imperfect competition
b) Externalities
c) Public goods
d) All
10) Excessive market power causes:
a) Dead-weight loss
b) Welfare loss
c) Non-existence of market
d) All
11) Market power causes inefficiency as it keeps_____ price than
required:
a) Lower
b) Higher
c) Medium
d) None
12) It is initiated & experienced not through the operation of the
price system, but outside the market:
a) Market achievement
b) Optimum allocation of resources
c) Externalities
d) All
13) Externalities implies:
a) Spill-over effects
b) Neighbourhood effects
c) Third party effect
d) All
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14) “Externalities” implies ‘____’ cost & ‘____’benefit which does

not affect concerned persons but ‘Third Party’:

a) External: External c) Both a & b

b) Internal: Internal d) None of the above

15) Which among the following cannot be satisfied through

mechanism of the market?

a) Social wants c) Merit wants

b) Private wants d) Group wants

16) The Price system works….. in externalities:

a) Efficiently
b) Inefficiently
c) Both a & b
d) None of the above
17) When chemical manufacturer discharges waste to river it
affects people, who use the water for drinking, this is known
as:
a) Negative production externalities received in production.
b) Negative production externalities received in consumption.
c) Positive production externalities received in production.
d) Positive production externalities received in consumption.

18) When chemical manufacturer discharges waste to river it

affects people, who use the water for catching fish, this is
known as:
a) Negative production externalities received in production.
b) Negative production externalities received in consumption.
c) Positive production externalities received in production.
d) Positive production externalities received in consumption.

19) When corporates provide training programme for its workers

to increase skills, we observe:
a) Negative production externalities received in production.
b) Negative production externalities received in consumption.
c) Positive production externalities received in production.
d) Positive production externalities received in consumption.
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20) When an individual raises an attractive garden & the person

walking by enjoy the garden, we conclude:
a) Negative production externalities received in production.
b) Negative production externalities received in consumption.
c) Positive production externalities received in production.
d) Positive production externalities received in consumption

21) When an alcoholic neighbour disturbs your premises at night

people residing in same premises suffer:
a) Negative consumption externalities received in production.
b) Negative production externalities received in consumption.
c) Positive production externalities received in production.
d) Positive production externalities received in consumption.
22) Smoking cigarettes in public in public place causing
passive smoking by others:
a) Negative consumption externalities received in production.
b) Negative production externalities received in consumption.
c) Negative production externalities received in production.
d) Positive production externalities received in consumption
23) The act of undisciplined students talking & creating
disturbance in a class preventing teachers from delivering
proper lecture:
a) Negative production externalities received in production
b) Negative production externalities received in consumption.
c) Negative consumption externalities received in production..
d) Positive production externalities received in consumption.
24) When big firm makes road for its own purpose but other
small firm’s average cost decreases, it is known as:
a) Negative-Production Externalities
b) Positive-Production Externalities
c) Negative-Consumption Externalities
d) Both a & b
25) Prevention of contagious disease is an example of:
a) Negative –Consumption Externalities
b) Positive-Consumption Externalities
c) Negative-Production Externalities
d) All of the above
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26) When people immunized against contagious diseases, they

would confer social benefits:
a) Negative production externalities received in production
b) Negative consumption externalities received in production.
c) Positive consumption externalities received in production.
d) Positive production externalities received in consumption
27) “Market Failure” occurs:
a) The market fails to allocate resources efficiently & therefore
market outcomes becomes inefficient
b) When public goods are not sufficiently provided by public sector
c) People are not willing to pay & want to free-ride
d) Both a & c
28) Market fails because:
a) Externalities are not accounted for in pricing & quantity
decisions
b) Most often the pre-requisites of competition are unlikely to be
present
c) Prices fail to reflect the true costs & benefits to the society
d) All of the above
29) Market Power:
a) Makes price equals marginal cost & produce a positive external
benefit on others
b) Can cause market to be inefficient because it keeps price &
output away from equilibrium of demand & supply
c) Makes the firms price makers & restrict output.
d) Both b & c

30) The unique feature of an externality is that it is

(a) initiated and experience, not through the operation of the
price system but affects an external agent
(b) initiated and experience, not through the operation of the
price system, but outside the market
(c) initiated and experience by the same entity, but causes
decrease in social welfare
(d) causes decreases in social welfare through the system of
prices prevailing in the market
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31) All but one of the following statements is incorrect. Identify

the correct statements
(a) When there is a negative externality, the social marginal
cost will exceed private marginal cost
(b) When there is a positive externality the social marginal cost
will exceed private marginal cost
(c) Common property resources are non rival and non
excludable public goods so that the problem of sustainability
becomes grave
(d) Goods that are rival in consumption and are non excludable
are known as private goods
32) In case of a positive externality
(a) the social marginal cost will exceed private marginal cost
(b) the social marginal cost will be equal to private marginal cost
(c) the social marginal cost will be less than private marginal cost
(d) the social marginal cost has no relation to private marginal cost
33) Private cost of producer implies:
a. Cost on labour, raw material
b. Cost on society
c. Cost on welfare
d. All

34) Social cost implies:

a. Private cost + Production cost
b. Private cost + External cost
c. External cost – welfare cost
d. Both b & c

35) Match the following

(a) Pure public goods (i) Excludable and rival
(b) Club goods (ii) Non excludable and rival
Common resources (iii) Non excludable and non
(c)
rival
(d) Private goods (iv) Non rival and excludable
(a) (a) (i); (b) (ii); (c) (iv); (d) (iii)
(b) (a) (ii); (b) (i); (c) (iii); (d) (iv)
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(c) (a) (iii); (b) (i); (c) (ii); (d) (iv)

(d) (a) (iii); (b) (iv); (c) (ii); (d) (i)

36) Pollution is an instance of market failure

(a) because the equilibrium price is higher than the efficient price
(b) because the equilibrium price is less than the efficient price
(c) because property rights are poorly distributed
(d) because the market does not produce enough of the good
37) Public goods is characterized by:

a) Rival-ness c) Contestability
b) Non-excludability d) All of the above
38) Marginal cost for pure public goods is:

a) Zero or close to zero

b) One
c) Both a & b
d) None of the above
39) A good that is scarce relative to total demand for, it
is:

a) Public goods
b) Economic goods
c) Quasi- public good
d) None

40) An adequate amount of pure public good will not be

provided by the private market because of
(a) the existence of negative externalities
(b) governments would any way produce them
(c) There are restrictions as well as taxes on the private market
(d) The possibility of free riding

41) The free rider problem arises because of

(a) ability of participants to produce goods at zero marginal
cost
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(b) marginal benefit cannot be calculated due to externalities

present
(c) the good or service is non excludable
(d) general poverty and unemployment of people

42) Which of the following is an example of an impure

public good?
(a) a lighthouse provided by government
(b) a congested highway during peak hours
(c) a polio vaccination program sponsored by the government
(d) national and defence and the security offered by it
43) A situation where a pharmaceutical company has full
information regarding the risks of a product, but
continues to sell it is a case of
(a) asymmetric information (c) free riding
(b) moral hazard (d) and (c) above
44) If an individual tends to drive his car in a dangerously
high speed because he has a comprehensive
insurance cover, it is a case of
(a) free riding (c) negative externality
(b) moral hazard (d) efficiency
45) Read the following statements
(I) Common resources are pure public goods which are non-
rival
(II) Since price mechanism does not apply to common
resources, producers and consumers do not pay for these
resources
(III) Self-interest makes them overuse the common resources
and cause their depletion and degradation
(IV) Common resources impure public goods which are
excludable by rival
(a) Statement I alone is correct
(b) Statements I and IV are correct
(c) Statements II and III are correct
(d) Statements I, II and III are correct
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46) Market failure will never occur in a

(a) Socialist economy which is developed
(b) Unplanned economy which is under developed
(c) Capitalist economy which is developed
(d) None of the above
47) If one gets inoculated against malaria it is an example
of :
a) Quasi-public goods c) Pure Public goods
b) Impure-Public goods d) Both a & b

48) When natural resources are losing their efficiency, it is

an example of:
a) Tragedy of Commons c) Impure public goods
b) Common Access d) All of the above
Resources
49) Trade- union movement is an example of:
a) Market Failure
b) Free-Rider Problem
c) Private goods
d) Both a & b

50) To describe the problem which occurs when rivalrous

but non excludable goods are overused to the
disadvantage of universe:
a. Tragedy of commons
b. Externalities
c. Impure public goods
d. None
51) The change in the producer’s total cost brought about
by the production of an additional unit of a good or
service is known as:
a. MEC c. MPC
b. MPB d. MEB
52) The change in the cost to parties other than the
producer or buyer of a good or service due to
additional unit of the good or service:
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a. MEC c. MPC
b. MPB d. MEB
53) The change in society’s total cost brought about by
an additional unit f a good or service:
a. MEC c. MSC
b. MPB d. MEB
54) The change in the benefit to parties other than the
producer or buyer of a good or service due to
additional unit of good or service:
a. MEC c. MPC
b. MPB d. MEB
55) The change in society’s total benefits associated
with an additional unit of a good or service:
a. MEC c. MSB
b. MPB d. MEB
56) The change in producer’s total benefits associated
with an additional unit of a good or service:
a. MEC c. MSB
b. MPB d. MEB

57) To maintain well-functioning market government

provides institutional infrastructure namely:
a. Roads & bridges
b. Airports, highways
c. Legal & regulatory framework
d. All
58) To rectify market failure government establishes:
a. Market power
b. Market rectification
c. Rule of Law
d. All
59) Market power results in inefficiency as it leads to
____ price than competitive market:
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a. Higher
b. Lower
c. Same
d. None
60) In India we started Competition Amendment Act
2007 to minimise:
a. Market price
b. Monopoly
c. Monopsony
d. Market power
61) Government may rectify market failure by:
a. Correcting externalities
b. Providing proper information
c. Minimising market power
d. All
62) Market liberalisation done by government by
introducing competition in ______ & _____ sectors:
a. Electricity: Gas
b. Post & Telegraph
c. Energy & Telecommunication
d. All
63) Restrictions on monopsony power, controls on
mergers & acquisitions are known as measure of :
a. Market power
b. Market price
c. Market quantity
d. None
64) When some producers make cartel among
them to under-cut price for removing competitor,
we call it:
a. Under cutting pricing policy
b. Dubious pricing system
c. Predatory pricing
d. All
65) ‘Price regulation’ in the form of price ceiling is also
known as:
a. Rate of return regulation
b. Minimum price regulation
c. Price capping
d. All

66) ________ can produce the entire amount at a lower

cost than other firms in market:
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a. Monopsony
b. Bilateral monopoly
c. Monopolistic competition
d. Natural monopoly
67) Electricity, gas & water supplies is known as:
a. Monopsony
b. Bilateral monopoly
c. Monopolistic competition
d. Natural monopoly
68) A thermal power plant uses coal and creates
pollution in an otherwise unpolluted area which of
the following would ensure that a socially optimal
output of electricity is produced?
a. Where MPC equals to MPB
b. Where MPC equals to MSB
c. Where MSC equals to MPB
d. Where MSC equals to MSB
69) Environment Protection Act 1986 is imposed by
government to rectify:
a. Market power
b. Monopsony
c. Externalities
d. Monopoly
70) When ‘Pollution – Control’ measures are imposed
on firms, they must incur average cost in terms of:
a. Pollution cost
b. Production expenditure
c. Abatement expenditure
d. Both a & c
71) Read the following statements:
i. The market- b a s e d approaches to control
externalities operate through price mechanism.
ii. When externalities are present the welfare loss
would be eliminated
iii. The key to internalizing an externality is to ensure
that those who create externalities include them
while making decisions
Of the above statements, which one is correct?
a. ii & iii are correct.
b. i is only correct.
c. ii only is correct.
d. i & iii are correct
72) Arguments against pollution tax are:
a. Difficult to measure.
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b. Demand is inelastic.
c. Method of calculating tax has limitations
d. All
73) Ministry of Environment and Forest, pollution
control Board of India, State Pollution control
Boards are responsible to:
a. To change emissions fee
b. Control pollution
c. To rectify market failure
d. All
74) ‘Pigovian tax’ is under:
a. Pollution tax
b. Market based
operating.
c. Direct Control
d. Both a & b
75) With the help of Pigovian tax, government can:
a. Eliminate under productions.
b. Eliminate over production.
c. Attain at MSB = MPC
d. Both b & c
76) ‘Gas emissions within a limit and provision of
permit to a certain amount known as:
a. Price capping
b. Cap & trade
c. Pigovian tax
d. All

77) Which of the following statements is false?

a. Tradable permits provide incentive to innovate
b. A subsidy on a good which has substantial positive
externalities would reduce its cost and consequently
price
c. Substantial negative externalities are involved in the
consumption of merit goods
d. Merit goods are likely to be under produced and
under-consumed through the market mechanism.
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78) A Pigovian subsidy

a. Cannot be present when externalizing are present.
b. is a good solution for negative externality as prices will
increase
c. is not measurable in terms of money and therefore not
practical too
d. may help production to be socially optimal when
positive externalities are present.

79) When governments make it compulsory to avail

insurance protection, it is because
a. Insurance companies need to be running profitably
b. Insurance will generate moral hazard and adverse
selection
c. Insurance is a merit good and government wants
people to consume it.
d. None
80) When merit goods are provided free by the
government:
a. The quantity demanded of merit good will be less than
supply.
b. The quantity demanded of merit goods will be equal to
supply.
c. The quantity demanded of merit good is likely to be
more than supply.
d. Any of the above
81) The government should intervene in the
marketplace to discourage the production and
consumption of:
a. Good which are not necessary.
b. Goods having no externalities.
c. Demerit goods
d. Goods which the market produce less.
82) The Competition Act,2002 aims to –
a. monopoly positions of firms that have developed
unique
b. To promote and sustain competition in markets.
c. To determine pricing Protect under natural
monopoly.
d. None of the above
83) Rules regarding product labelling
a. Seeks to correct market failure due to
externalities.
b. Is a method of solving the problem of public good
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c. May help solve market failure due to information

failure
d. Reduce the problem of monopolities in the product
market
84) Identify the incorrect statements.
a. minimum support price for agricultural goods is a
market intervention method to guarantee steady and
assured income to farmers
b. an externality is internalized if once that generated
the externality incorporate them into their private
cost benefit analysis
c. the production and consumption of demerit goods
are likely to be less than optimum under free market
d. compared to pollution tax the cap and trade method
is administratively cheap and simple to implement
and ensures that pollution is minimized in the most
cost effective way
85) The incentive to let other people pay for a goods
or service, the benefits of which are injured by an
individual:
a. is a case of negative externality
b. is a case of market efficiency
c. is a case of free riding problem
d. is inappropriate and warrant action
86) A government subsidy:
a. is a market based policy
b. involves the government paying part of the cost to
the firms in order to promote the production of goods
having positive externalities
c. is generally provided for married goods
d. all of the above
87) The production and consumption of demerit
goods are:
a. likely to be more than optimal on the free market
b. likely to be less than optimum under free market
c. likely to be subjected to price intervention by
government
d. both a & c
88) The argument of education subsidies based on:
a. education is costly
b. the ground that education is merit good
c. education creates positive externality
d. both b&C
89) Read the following statement
I. Social costs are the total cost incurred by society
when goods is consumed are produced
II. The external cost are not included in firmns
income statement or consumers decisions
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III. Each Firms cost which is considered for

determining output would be only the private
costs or direct cost of production which does not
include external cost
IV. Production and consumption decision are
efficiently only when private costs are considered
Of the above
a. Statement I and III are correct
b. Statement I,II and III are correct
c. Statement I only is correct
d. All the above are correct
90) Government failures occurs when.
a. Government fails to implement its election promises
on policies.
b. A government is unable to get reelected.
c. Government intervention is inefficient and produces
fresh and more serious problems.
d. None of the above
B) Short answer type questions (Marks 2)
1. What do you mean by mark failure?
2. Explain with the aid of examples, the main characteristics of
private goods
3. Identify a pure public good using the criteria for identification
4. Explain the free rider problem. Give examples
5. Why do economists use the word external to describe third –
party effects that are harmful or beneficial?
6. Explain why environmental pollution is called as source of
market failure?
7. Define externalities. Why are they called as a source of market
failure?
8. Distinguish between positive and negative externalities
9. Appraise the role of incomplete information in generating
market failure.
10. What do you understand by externalities in consumption?
11. What criteria are used to distinguish between pure & impure
public goods?
12. How can social costs be differentiated from private cost?
13. What is the consequence of a negative externality on price and
output?
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14. How does the presence of positive externality influence price

and output?
15. Describe the term ‘Tragedy of Commons’.

16. Discuss the importance of the distinction between private &

social costs.

17. Why are health and education not pure public goods?

18. Describe features of public goods. (Marks-2) May;2018

19. Define market power. What is disadvantage?

(Marks-2) Nov;2019.
20. Distinguish between Positive & Negative externalities.
(Marks-2). Nov:19
21. Describe features of “Public Goods”.
(Marks-2 : Nov:20 exam held on 7th Dec,20)
22. Explain the various types of externalities.
(Marks-3 : Nov:20 exam held on 7th Dec,20)
23. Explain the concept of “Private Cost”.
(Marks-2 : Nov:20 exam held on 7th Feb, 21)
24. Describe various types of externalities which cause market
failure. (Marks 3) May 2020 held on July 21
25. “Lemons problem” is an important source of market failure.
How? How to rectify?

(Marks-2 : Nov:20 exam held on 7th Dec,20)

26. Discuss the meaning and consequences of negative
production externalities. (Marks 2: Dec 2021)
27. Identify the market outcomes for each of the following
situations:
a. Playing of loud music at night resulting in inability to
sleep.
b. Wearing of mask during covid-19 pandemic.
(Marks 3: May 2023)
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D) Application Oriented Questions:

Identify the market outcomes for each of the following situations

1. A few youngsters play loud music at night. Neighbors may not

be able to sleep.

2. Ram buys a large SUV which is very heavy

3. X smokes in a public place

4. Rural school students given vaccination against measles

5. Traffic congestion making travel very uncomfortable

6. Piracy of computer programs

7. Some species of fish are now getting extinct because they have

been caught indiscriminately.

8. The municipality provides sirens four times a day

9. Burglar alarms are installed by many in your locality

10. Global warming increases due to emissions of fossil fuels.

…………………………….X………………………………..