Question

I need the following questions answered with an explanation.

1. Which of the following constitutes market failure? The inability of markets to _____
a. internalize positive externalities
b. internalize negative externalities
c. Both a. and b.
d. None of the above
2. When is the burden of an excise tax incidence equally shared between producers and
consumers?
a.The tax burden is always equally shared between producers and consumers.
b. When the slope of the supply curve is steeper than the slope of the demand curve.
c. When the slope of the demand curve is steeper than the slope of the supply curve.
d. When the slope of the demand and supply curve are the same.
3. When is the burden of an excise tax fully carried by producers?
a. When the supply curve is perfectly inelastic.
b. When the supply curve is perfectly elastic.
c. When the demand curve is perfectly inelastic.
d. When the demand curve is perfectly elastic.
4. When is the burden of an excise tax fully carried by consumers?
a. When the supply curve is perfectly inelastic.
b. When the supply curve is perfectly elastic.
c. When the demand curve is perfectly inelastic.
d. When the demand curve is perfectly elastic.
5. When does a price floor not cause a dead weight loss?
a. When it is above the market equilibrium price.
b. When it is right at the market equilibrium price.
c. Both a. and b.
d. When it is below the market equilibrium price.
6. When does a price ceiling not cause a dead weight loss?
a. When it is above the market equilibrium price.
b. When it is right at the market equilibrium price.
c. Both a. and b.
d. When it is below the market equilibrium price.
7. Which government intervention leads to an inefficient reduction of economic activity and
therefore a dead weight loss?
a. A price floor
b. A price ceiling
c. A tax
d. All of the above.

8. Which of the following is associated with a suboptimal use of economic resources?
a. A negative externality
b. A positive externality
c. Both a. and b.
d. None of the above
9. Which statement is true? Whenever the government sets a price different from the market
equilibrium price,
a. there will be winners and losers
b. the winners will win more than what the losers lose
c. Both a. and b.
d. None of the above.
10. Which of the following adds to welfare?
a. Consumer surplus
b. Producer surplus
c. Tax revenues
d. All of the above.

Answer 1

(1) (c)

Both positive and negative externalities lead to market failure. If the market is unable to internalize these effects, the market failure will not be corrected.

(2) (d)

When demand and supply have equal elasticity, tax burden is equally shared.

(3) (a)

When supply is perfectly inelastic (vertical supply curve), an increase in price cause by tax will not impact the quantity supplied and therefore, producers will bear full tax burden.

(4) (c)

When demand is perfectly inelastic (vertical demand curve), an increase in price cause by tax will not impact the quantity demanded and therefore, consumers will bear full tax burden.

(5) (d)

A binding price floor is imposed above the equilibrium price, causing deadweight loss. So, when price floor is imposed below equilibrium price, the equilibrium price and qantity are not affected and there is no deadweight loss.

(6) (c)

A binding price ceiling is imposed below the equilibrium price, causing deadweight loss. So when price ceiling is imposed at or above the equilibrium price, the equilibrium price and qantity are not affected and there is no deadweight loss.

(7) (d)

(8) (c)

Any type of externality is socially inefficient and represents suboptimal resources usage.

(9) (a)

Setting a price ceiling or price floor different from equilibrium price will create a group of gainers and a group of losers, but it cannot be said who gains or loses more.

(10) (d)

Net welfare effect from tax = Loss in consumer surplus + Loss in producer surplus - Tax revenue