Unit 5 of 5
Study guide for CLEP CLEP Principles of Microeconomics — Unit 5: Market Failure and Government. Practice questions, key concepts, and exam tips.
43
Practice Questions
15
Flashcards
4
Key Topics
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A public good is characterized by being
Rival and excludable
Excludable but not rival
Rival but non-excludable
Non-rival but excludable
Non-rival and non-excludable
Answer: E — Non-rival and non-excludable is correct because public goods are non-rival and non-excludable.
A negative externality occurs when
marginal social benefit exceeds marginal social cost
a private good is overproduced
a public good is underproduced
marginal social cost exceeds marginal social benefit
a firm maximizes profit
Answer: D — marginal social cost exceeds marginal social benefit is correct because negative externalities increase marginal social cost.
The main goal of antitrust policy is to
Promote monopolies and reduce competition
Encourage cartels and collusion
Increase government regulation and control
Decrease consumer choice and increase prices
Reduce market failures and promote competition
Answer: E — Reduce market failures and promote competition is correct because antitrust policy aims to promote competition and reduce market failures..
A chemical factory produces industrial solvents and dumps waste into a nearby river, causing health problems for downstream communities. Which of the following best explains why the market fails to allocate resources efficiently in this situation?
The factory has monopoly power and can restrict output to raise prices
Private marginal costs are less than social marginal costs, leading to overproduction
Consumer preferences for environmental quality are not reflected in market demand
The government has imposed price controls that prevent equilibrium from forming
Information asymmetry prevents consumers from knowing the true quality of the product
Answer: B — The correct answer is "Private marginal costs are less than social marginal costs, leading to overproduction". The factory's private marginal costs exclude the external costs (pollution damage) imposed on society. Since the factory only considers its own production costs when deciding output levels, it produces more than the socially optimal quantity. Option "The factory has monopoly power and can restrict output to raise prices" confuses market power with externalities. Option "Consumer preferences for environmental quality are not reflected in market demand" describes a preference issue but doesn't explain the efficiency failure mechanism. Option "The government has imposed price controls that prevent equilibrium from forming" involves price controls, not externalities. Option "Information asymmetry prevents consumers from knowing the true quality of the product" addresses information problems, which are a different type of market failure unrelated to pollution externalities.
The Gini coefficient measures
The wealth of the richest 1% of the population
The poverty rate of a country
The income inequality of a country
The unemployment rate of a country
The inflation rate of a country
Answer: C — The income inequality of a country is correct because the Gini coefficient measures income inequality..
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