VCE-ECON-U12 9.1 📋 Practice Exam 6: Question Paper

Practice Exam 6

VCE Economics | Market Failure – Externalities, Public Goods and Information Failure

Question 1

A negative production externality occurs when:

A) A firm’s output benefits third parties
B) A firm’s production imposes uncompensated costs on third parties not involved in the transaction
C) Consumers overconsume a good
D) Government subsidises production

Question 2

Which of the following is an example of a negative consumption externality?

A) A person getting a flu vaccination
B) Second-hand smoke from a cigarette smoker affecting bystanders
C) A firm installing solar panels
D) A student attending university

Question 3

Non-excludability means:

A) A good cannot be consumed by more than one person at once
B) It is not possible, or very costly, to prevent someone who has not paid from consuming the good
C) The good is provided free by government
D) The good has no substitutes

Question 4

Non-rivalry means:

A) One person’s consumption does not reduce the amount available for others
B) The good is provided by a monopolist
C) The good has no competitors
D) Consumption is restricted to those who pay

Question 5

A lighthouse is a classic textbook example of:

A) A private good
B) A pure public good, being non-excludable and non-rival
C) A merit good
D) A demerit good

Question 6

The socially optimal output of a good generating a positive externality in consumption is:

A) Lower than the free market output
B) Higher than the free market output, as the market underprovides the good
C) The same as the free market output
D) Zero

Question 7

A subsidy to households for installing home insulation is best justified as a response to which market failure?

A) A negative externality
B) A positive externality, since reduced household energy use benefits third parties and households may undervalue long-run savings
C) A public good
D) Monopoly power

Question 8

The tragedy of the commons occurs when:

A) A resource is privately owned and overused
B) A common, non-excludable but rival, resource such as an ocean fishery is overexploited because no individual has an incentive to conserve it
C) A public good is underused
D) A firm monopolises a resource

Question 9

Which of the following is an example of a common resource (rival but non-excludable)?

A) A subscription streaming service
B) An open-access fishing ground
C) National defence
D) A toll road

Question 10

A congestion charge on driving into a city centre is an example of:

A) A subsidy correcting a positive externality
B) A Pigouvian tax correcting the negative externality of traffic congestion and pollution
C) A price floor
D) Public good provision

Question 11

Asymmetric information exists in the market for second-hand smartphones because:

A) Buyers know more about the phone’s condition than sellers
B) Sellers typically know more about the true condition and history of the phone than buyers
C) Both parties have identical information
D) Government controls all information

Question 12

Moral hazard in the context of comprehensive car insurance describes the tendency for insured drivers to:

A) Drive more carefully because they fear losing their insurance
B) Take greater risks, such as less careful driving, because they are insulated from the financial consequences of an accident
C) Pay lower premiums
D) Avoid using their car

Question 13

A demerit good, such as tobacco, is characterised by:

A) Positive externalities and underconsumption
B) Negative externalities and/or imperfect information about harms, leading to overconsumption relative to the social optimum
C) Being a public good
D) Perfectly elastic supply

Question 14

Which policy is most directly aimed at correcting the underprovision of a merit good such as vaccination?

A) A tax on the good
B) A subsidy to lower the price and/or public information campaigns to correct information failure
C) A price ceiling
D) A tariff on imports

Question 15

Allocative efficiency in the presence of a negative externality requires:

A) Producing where marginal private cost equals demand
B) Producing where marginal social cost equals marginal social benefit
C) Maximising producer profit
D) Minimising government intervention

Question 16

Cap-and-trade (tradeable permit) schemes address negative externalities by:

A) Banning the polluting activity entirely
B) Setting a total quantity limit (cap) on pollution and allowing firms to trade permits, so abatement occurs where it is cheapest
C) Fixing the price of the polluting good
D) Subsidising pollution

Question 17

Which best describes the free-rider problem in relation to a public good such as street lighting?

A) People are charged too much for the good
B) Individuals can benefit from the good without paying, so they have no incentive to voluntarily contribute, and the private market underprovides it
C) The good is overprovided by government
D) The good is rival in consumption

Question 18

Mandatory minimum energy efficiency standards for household appliances are a policy response to:

A) A public good problem only
B) A negative externality and/or an information failure, since consumers may not know or account for the long-run energy and environmental costs
C) A monopoly problem
D) A price ceiling

Question 19

Adverse selection in the market for health insurance results in:

A) Only healthy people buying insurance
B) A disproportionate number of higher-risk individuals seeking insurance, pushing up average premiums and potentially driving lower-risk individuals out of the market
C) Insurance companies knowing more than applicants
D) Insurance premiums falling over time

Question 20

Large-scale deforestation for agriculture is often cited as a market failure because:

A) Farmers make excessive profit
B) The market price of clearing land does not reflect the social costs of lost biodiversity, carbon storage and other ecosystem services
C) Government always subsidises clearing
D) Demand for agricultural land is perfectly elastic

Question 1 (4 marks)

Question 2 (4 marks)

Question 3 (4 marks)

Question 4 (4 marks)

Question 5 (4 marks)

Question 6 (4 marks)

Question 7 (4 marks)

Question 8 (4 marks)

Extended Response 1(a) (6 marks)

Extended Response 1(b) (3 marks)

Extended Response 2(a) (5 marks)

Extended Response 2(b) (3 marks)