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Multiple Choice Questions for AQA AS Economics Click here to Commence quiz UNIT 1 Markets & Market Failure 1.4 Market Failure Test 1

AQA AS Economics Unit 1 – Markets & Market Failure Question 1 Market failure is defined as circumstances in which... some markets are uncompetitive Incorrect consumers lose sovereignty because they do not get what they want Each of the responses A to C describes some aspect of market failure, but only D - with its emphasis on misallocation of resources - defines market failure. Incorrect prices are higher than they ought to be Incorrect the choices made by consumers and producers lead to a misallocation of resources Correct Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 2 Complete market failure is defined as circumstances in which... businesses can maximise excessive profits Incorrect The market completely fails to deliver public goods. In all other types of market failure the market delivers goods but in a quantity and at a price which does not maximise social welfare. resources in a market are misallocated Incorrect a product cannot be delivered through a market Correct consumer information is poor Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 3 Demerit goods represent a source of market failure because... their production results in external costs Incorrect Demerit goods harm the consumer who through his / her own foolishness chooses to consume them. For this reason economists see this as an example of over-consumption. their consumption results in external benefits Incorrect they are over-consumed Correct they are not provided by the market Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 4 Public goods have a number of characteristics, for example: They are not produced by central or local government Incorrect C is one characteristic of a public good and, therefore, is the answer to the question. However, it should be pointed out that C does not represent a full definition of a public good since the other feature of public goods is non-rivalry. They have a value beyond what is appreciated by the buyer Incorrect No person can be excluded from benefiting from them Correct They do not generate externalities Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 5 Which one of the following is an example of a pure public good? Street lighting Correct It is not possible to exclude some people from the benefit of street lighting and consumption by one person does not reduce the benefit to others. Therefore, it passes the tests for being a public good. MMR vaccination Incorrect Health care Incorrect Public libraries Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 6 A quasi public good is one which... has the characteristics of excludability and rivalry Incorrect is produced by the private and public sector Quasi means almost or semi. This suggests that it has some but not all the characteristics of a public good. Incorrect has only some of the characteristics of a public good Correct is bought by the state Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 7 A private good is unlike a public good because... it is consumed Incorrect The reason that businesses can charge for private goods is that it is possible to exclude non payers from enjoying the benefits of the good. This is not the case with public goods. there is an opportunity cost incurred Incorrect businesses can charge for it Correct its provider competes for resources Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 8 Externalities are of interest to economists when... their impact on welfare is not recognised in the price Correct Externalities (positive and negative) are enjoyed by / inflicted on third parties. By definition they are not recognised by the price system since economic agents are selfish. Where they impact on welfare they become an issue for economic analysis. firms behave in a monopolistic fashion Incorrect they are negative and reduce economic welfare Incorrect the drawbacks of consumption are not fully appreciated Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 9 Economic activity which creates a positive externality... is over-priced Incorrect A positive externality is a benefit enjoyed by people not party to the transaction. The market ignores the benefits enjoyed by third parties and, instead, focuses on private benefit. is over-produced Incorrect is over-consumed Incorrect results in greater-than recognised-benefits Correct Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 10 A negative externality exists when the private benefit of consumption is less than the social benefit Incorrect the consumption of the product reduces the welfare of third parties A negative externality is an external cost imposed on third parties. Therefore, it reduces the welfare of third parties. Correct the production of a product incurs costs Incorrect third party costs incurred are not recognised by consumers and producers Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 11 Some people put Christmas lights on the outside of a house. This resulting externality is an example of a... It is clearly an externality because it is enjoyed or endured by other people. Also, because it results from the behaviour of a householder or consumer it is clearly a consumption externality. Although some people might find Christmas lights not to their taste, most people would see it as adding to Christmas cheer. Therefore, we can regard Christmas lights on houses as a positive rather than negative consumption externality. negative consumption externality Incorrect positive consumption externality Correct negative production externality Incorrect positive production externality Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 12 A social cost is defined as all costs... incurred as a by-product of economic activity Incorrect Social costs combine the private costs to the producer with the external costs inflicted on the rest of the community. For this reason C is the correct response. A refers just to external costs, and C and D relate to private costs. incurred by a business Incorrect arising from economic activity Correct that affect a business’s profitability Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 13 The diagram below shows that... A higher price at P1 would reflect the external costs generated P is the price in the free market in which no account is taken of externalities. If external costs were taken into account then the supply would shift to the left, thus pushing up equilibrium price. Correct Marginal Social Cost Costs & Benefits lower sales, Q to Q1 will be secured for a product whose production has incurred extra private costs Marginal Private Cost Incorrect P1 P quantity produced and sold, Q to Q1, will change as a result of a positive externality Incorrect Marginal Benefit Q1 Q Quantity changes in price, P to P1, will reflect lower business costs Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 14 The social (external plus private) cost of the car plant exceeds the private cost. If this business and, therefore, its customers were forced to take account of the negative externalities associated with the congestion, (at price OB), demand would fall to OD. Therefore, FGH represents the loss of welfare arising from only charging OC. The diagram below illustrates the impact of an externality arising from the extra congestion in the vicinity around a new car factory, as many more vehicles use local streets. gain represented by the triangle FGH Cost & Benefits MSC Incorrect A MPC G loss represented by the triangle GHJ B Incorrect C H J MSB = MPB gain represented by the triangle GHJ Incorrect O D E Quantity loss represented by the triangle FGH Correct Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 15 A merit good is defined as a good which... generates benefits to individuals greater than appreciated Correct is free at the point of consumption A merit good is under-appreciated by consumers and would be under-consumed. In simple terms, a merit good is something which is “good for you” even if you do not fully appreciate it. Incorrect can only be provided by government Incorrect improves the competitiveness of the UK economy by reducing business costs Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 16 Education is considered a merit good because... it is provided by the government Incorrect it provides benefits which are unappreciated by its consumers Education does produce external benefits but b is the more correct answer. A merit good is one which has private benefits which are not fully appreciated by consumers. Correct it would not be produced by private businesses Incorrect it generates positive externalities Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 17 Which of the following is an example of a demerit good? Pollution Incorrect Demerit products are demanded by consumers even though they are harmful. Tobacco clearly fits this description. Pollution and litter are economic bads, whereas the prison service is a publicly provided service designed to deal with law breakers. Cigarettes Correct Litter Incorrect The prison service Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 18 A misallocation of resources is likely to occur when... consumers are not given information on which to make their decisions Incorrect Merit and demerit goods are characterised by information failure which is also the substance of A. In all three cases consumers are not able or wiling to make rational decisions and, as a result, there is a misallocation of resources. merit goods are provided by the market forces Incorrect demerit goods are provided by market forces Incorrect all the above Correct Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 19 Markets allocate resources more successfully when... businesses are large Incorrect governments provide services Competition forces firms to be efficient and respond better to consumer demands. This leads to a more efficient allocation of resources. Incorrect there are many businesses in a market Correct there is no opportunity cost Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 20 A monopoly uniquely can cause economic inefficiency because such a business... generates externalities Incorrect dominates the market Under monopoly, price exceeds marginal costs in the long run, and the absence of competition removes the imperative to reduce costs. Incorrect makes a profit Incorrect has less incentive to cut costs and prices Correct Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 21 Competitive markets are more likely to deliver economic welfare because the businesses in these markets... can produce in large quantities and thereby exploit economies of scale Incorrect can only survive by accurately responding to what customers want Economic welfare will be greater where consumers can secure exactly what they want at the lowest prices. This is more likely to occur where businesses have to compete for customer sales. Correct have a greater incentive to make a profit Incorrect have to invest in advertising to attract customers Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 22 Barriers to entry are a source of market failure because... social costs are often greater than private costs Incorrect they lead to a reduction in business’s profitability Barriers to entry protect monopoly forces from competition and, as a result, enable firms with market power to force up prices. Incorrect they ensure that businesses have an incentive to cut costs and prices Incorrect they typically result in higher prices Correct Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 23 Consumers can benefit from a monopolistic market because... the profits the businesses earn can be invested in innovation Correct B, C and D are all negative consequences of monopoly, whereas A is a possible benefit of monopoly. With their high profits they have the financial resources to invest in new products which benefit consumers and, at the same time, protect or enhance their monopoly position. the barriers to entry will be high Incorrect the businesses can charge higher prices Incorrect of the diseconomies of scale it can exploit Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Question 24 Factor immobility is a source of market failure because... social benefits are greater than private benefits Incorrect resources are not being most productively used Factor immobility reduces the ability of firms to respond to changing consumer demand. Correct labour is inadequately educated and trained Incorrect some factor markets are uncompetitive Incorrect Next question APT Initiatives Ltd

AQA AS Economics Unit 1 – Markets & Market Failure Quiz Completed Question 25 Inequality can lead to market failure because, if left to the market... The harsh reality of the price mechanism is that those without the means to buy goods and services will not get a share of the goods and services produced. The ‘for whom’ question is answered in terms of who has the money to buy – the rich will enjoy a large share, the poor will have only a small share and those without any income will have nothing. These outcomes for poorer consumers are considered unacceptable and, therefore, on this basis, markets fall. some people could not afford to consume the necessities of life Correct richer people would have a higher standard of living Incorrect the level of income and wealth would affect the level of externalities Incorrect monopolies could more easily exploit their market position Incorrect Exit APT Initiatives Ltd

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