1. Market Failure and the Role of Government Sample Questions
Mr. Bordelon
AP Economics

2. Which of the following is an example of an activity generating a negative externality?
You buy a new car, and then discover it needs a new transmission.
Jane enjoys canoeing on a quiet mountain lake.
The only two coffee shops in town conspire to raise prices.
After Jane bought health insurance, she began racing motorcycles on the weekends.
Your next-door neighbor mows the lawn at 6AM.

3. Which of the following is an example of an activity generating a negative externality?
You buy a new car, and then discover it needs a new transmission.
Jane enjoys canoeing on a quiet mountain lake.
The only two coffee shops in town conspire to raise prices.
After Jane bought health insurance, she began racing motorcycles on the weekends.
Your next-door neighbor mows the lawn at 6AM.

4. If the current amount of pollution emitted is 150, then:
This economy needs to increase production goods that generate pollution.
The marginal social benefit is greater than the marginal social cost of pollution.
This is not the socially optimal level of pollution.
This economy is producing at the socially optimal level of pollution.
Efficiency would be improved by subsidizing goods that generate pollution.

5. If the current amount of pollution emitted is 150, then:
This economy needs to increase production goods that generate pollution.
The marginal social benefit is greater than the marginal social cost of pollution.
This is not the socially optimal level of pollution.
This economy is producing at the socially optimal level of pollution.
Efficiency would be improved by subsidizing goods that generate pollution.

6. The socially optimal level of pollution emissions for this economy is:0.
50.
100.
150.
200.

7. The socially optimal level of pollution emissions for this economy is:0.
50.
100.
150.
200.

8. In the absence of government intervention, the quantity of pollution will be:
20 tons.
30 tons.
40 tons.
45 tons.
15 tons.

9. In the absence of government intervention, the quantity of pollution will be:
20 tons.
30 tons.
40 tons.
45 tons.
15 tons.

10. If this market produced _____ tons, then _____.
20; the marginal social benefit would be $7
45; marginal social cost would be less than marginal social benefit
20; marginal social benefit would be less than marginal social cost
30; it would be efficient
15; the marginal social benefit would be $5

11. If this market produced _____ tons, then _____.
20; the marginal social benefit would be $7
45; marginal social cost would be less than marginal social benefit
20; marginal social benefit would be less than marginal social cost
30; it would be efficient
15; the marginal social benefit would be $5

12. According to the Coase theorem, the private market can achieve an efficient outcome:
As long as the enforcement of property rights costs less than the marginal benefit of emissions.
Only if the property right to clean air is assigned to the polluter.
Only if the property right to clean air is assigned to the party harmed by pollution.
If bargaining costs are low.
If the number of parties involved in the bargaining is large.

13. According to the Coase theorem, the private market can achieve an efficient outcome:
As long as the enforcement of property rights costs less than the marginal benefit of emissions.
Only if the property right to clean air is assigned to the polluter.
Only if the property right to clean air is assigned to the party harmed by pollution.
If bargaining costs are low.
If the number of parties involved in the bargaining is large.

14. An optimal Pigouvian tax of _____ can move the market to the socially optimal quantity of pollution.$5
$15
$25
$45
$10

15. An optimal Pigouvian tax of _____ can move the market to the socially optimal quantity of pollution.$5
$15
$25
$45
$10

16. A Pigouvian tax of $10 will result in a quantity of pollution for which the:
Marginal social benefit is less than the marginal social cost.
Marginal social benefit exceeds the marginal social cost.
Marginal social benefit equals the marginal social cost.
Resources are allocated efficiently.
Social welfare has been maximized.

17. A Pigouvian tax of $10 will result in a quantity of pollution for which the:
Marginal social benefit is less than the marginal social cost.
Marginal social benefit exceeds the marginal social cost.
Marginal social benefit equals the marginal social cost.
Resources are allocated efficiently.
Social welfare has been maximized.

18. If the government imposed an environmental standard that did not allow the quantity of pollution to exceed 40 tons, there would be:
A socially optimal quantity of pollution.
Too little pollution, because the marginal social benefit of pollution would exceed the marginal social cost of pollution.
Too much pollution, because the marginal social cost of pollution would exceed the marginal social benefit of pollution.
Too little pollution, because the marginal social cost of pollution would exceed the marginal social benefit of pollution.
Too much pollution, because the marginal social benefit of pollution would exceed the marginal social cost of pollution.

19. If the government imposed an environmental standard that did not allow the quantity of pollution to exceed 40 tons, there would be:
A socially optimal quantity of pollution.
Too little pollution, because the marginal social benefit of pollution would exceed the marginal social cost of pollution.
Too much pollution, because the marginal social cost of pollution would exceed the marginal social benefit of pollution.
Too little pollution, because the marginal social cost of pollution would exceed the marginal social benefit of pollution.
Too much pollution, because the marginal social benefit of pollution would exceed the marginal social cost of pollution.

20. Three firms in a small city are responsible for emitting pollution, and the marginal benefit of the individual polluters is shown in the figure. If each company is only allowed to emit 300 tons of pollution per day, which company will be most adversely affected?
Firm A
Firm B
Firm C
They are equally affected.
Firms B and C will be equally the most adversely affected.

21. Three firms in a small city are responsible for emitting pollution, and the marginal benefit of the individual polluters is shown in the figure. If each company is only allowed to emit 300 tons of pollution per day, which company will be most adversely affected?
Firm A
Firm B
Firm C
They are equally affected.
Firms B and C will be equally the most adversely affected.

22. If the city imposes a tax of $400 per ton of mercury, Firm B will produce _____ while Firm A will produce _____ than Firm C.
600 tons; 200 tons less
700 tons; 200 tons less
300 tons; 500 tons more
300 tons; 200 tons less
300 tons; 200 tons more

23. If the city imposes a tax of $400 per ton of mercury, Firm B will produce _____ while Firm A will produce _____ than Firm C.
600 tons; 200 tons less
700 tons; 200 tons less
300 tons; 500 tons more
300 tons; 200 tons less
300 tons; 200 tons more

24. At what tax rate would Firm C produce zero tons of pollution?
$150
$100
$200
$400 $0

25. At what tax rate would Firm C produce zero tons of pollution?
$150
$100
$200
$400 $0

26. No individual is willing to pay for providing the efficient level of a public good since the:
Marginal cost of production is zero.
Good will be non-rival, and thus under consumed.
Individual’s marginal benefit is less than the marginal social benefit.
Marginal benefit of allowing one more individual to consume the good is zero.
Good is non-excludable and overconsumed.

27. No individual is willing to pay for providing the efficient level of a public good since the:
Marginal cost of production is zero.
Good will be non-rival, and thus under consumed.
Individual’s marginal benefit is less than the marginal social benefit.
Marginal benefit of allowing one more individual to consume the good is zero.
Good is non-excludable and overconsumed.

28. Quantity of Animal Control Officers Total Individual Benefit
The table shows the total cost and total individual benefit of animal control for residents of a small town. If there are 1,000 residents, what is the total social benefit of three animal control officers?
$10
$9,000
$10,000
$90,000
$90
Quantity of Animal Control Officers
Total Cost
Total Individual Benefit $0 1
20,000 40 2
40,000 70 3
60,000 90 4
80,000
100 5
100,000
105

29. Quantity of Animal Control Officers Total Individual Benefit
The table shows the total cost and total individual benefit of animal control for residents of a small town. If there are 1,000 residents, what is the total social benefit of three animal control officers?
$10
$9,000
$10,000
$90,000
$90
Quantity of Animal Control Officers
Total Cost
Total Individual Benefit $0 1
20,000 40 2
40,000 70 3
60,000 90 4
80,000
100 5
100,000
105

30. Quantity of Animal Control Officers Total Individual Benefit
If there are 1,000 residents, what is the marginal social benefit of the fourth animal control officer?
$10
$9,000
$10,000
$90,000
$100,000
Quantity of Animal Control Officers
Total Cost
Total Individual Benefit $0 1
20,000 40 2
40,000 70 3
60,000 90 4
80,000
100 5
100,000
105

31. Quantity of Animal Control Officers Total Individual Benefit
If there are 1,000 residents, what is the marginal social benefit of the fourth animal control officer?
$10
$9,000
$10,000
$90,000
$100,000
Quantity of Animal Control Officers
Total Cost
Total Individual Benefit $0 1
20,000 40 2
40,000 70 3
60,000 90 4
80,000
100 5
100,000
105

32. Assume that there is an external cost involved in the market illustrated in the figure provided. Economists argue that in an unregulated private market, _____ is produced. In the graph, supply curve S1 reflects _____ cost.
Too little; private
Too much; private
Too much; external
Too little; the sum of external and private
Too much; the sum of external and private

33. Assume that there is an external cost involved in the market illustrated in the figure provided. Economists argue that in an unregulated private market, _____ is produced. In the graph, supply curve S1 reflects _____ cost.
Too little; private
Too much; private
Too much; external
Too little; the sum of external and private
Too much; the sum of external and private

34. When the government intervenes to correct for the external cost, the output will _____ from _____ to _____.
Fall; W; R
Increase; W; R
Fall; R; W
Fall; W; 0
Fall; P1; P2

35. When the government intervenes to correct for the external cost, the output will _____ from _____ to _____.
Fall; W; R
Increase; W; R
Fall; R; W
Fall; W; 0
Fall; P1; P2

36. In the graph, the marginal social cost curve lies above the supply curve:
Because the marginal social benefit is greater for a common resource.
And the efficient quantity of this common resource is point E.
Because the marginal social cost includes the cost of depleting this common resource.
Because this is a public good.
Because this private good generates an external benefit.

37. In the graph, the marginal social cost curve lies above the supply curve:
Because the marginal social benefit is greater for a common resource.
And the efficient quantity of this common resource is point E.
Because the marginal social cost includes the cost of depleting this common resource.
Because this is a public good.
Because this private good generates an external benefit.

38. Price Quantity a. ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC
The graph above shows a natural monopoly. If the firm is regulated such that zero economic profits are earned, what will be the corresponding price and quantity?
Price
Quantity a.
ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC

39. Price Quantity a. ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC
The graph above shows a natural monopoly. If the firm is regulated such that zero economic profits are earned, what will be the corresponding price and quantity?
Price
Quantity a.
ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC

40. Price Quantity a. ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC
If the firm is regulated so that the outcome is socially efficient, what will be the corresponding price and quantity?
Price
Quantity a.
ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC

41. Price Quantity a. ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC
If the firm is regulated so that the outcome is socially efficient, what will be the corresponding price and quantity?
Price
Quantity a.
ATCm Qm b. Pr Qr c. Pm d. Pc Qc e. MC

42. Which of the following identifies the area of deadweight loss in this market?
½(Pm – Pc)(Qc – Qm)
(Pm – ATCm)(Qm)
(Pm – Pr)(Qm)
½(Pr – Pc)(Qc – Qr)
(Pr – Pc)(Qr – Qm)

43. Which of the following identifies the area of deadweight loss in this market?
½(Pm – Pc)(Qc – Qm)
(Pm – ATCm)(Qm)
(Pm – Pr)(Qm)
½(Pr – Pc)(Qc – Qr)
(Pr – Pc)(Qr – Qm)

44. Suppose there is an unregulated natural monopoly operating in the local market for electricity. If the government wished to regulate the monopolist so that the firm earned zero economic profit, the government would:
Require the firm to produce the level of output where the demand curve intersected the marginal cost curve.
Require the firm to produce the level of output where the marginal revenue curve intersected the marginal cost curve.
Require the firm to set the price equal to marginal cost.
Require the firm to produce the level of output where the marginal cost curve intersected the average total cost curve.
Require the firm to produce the level of output where the demand curve intersected the average total cost curve.

45. Suppose there is an unregulated natural monopoly operating in the local market for electricity. If the government wished to regulate the monopolist so that the firm earned zero economic profit, the government would:
Require the firm to produce the level of output where the demand curve intersected the marginal cost curve.
Require the firm to produce the level of output where the marginal revenue curve intersected the marginal cost curve.
Require the firm to set the price equal to marginal cost.
Require the firm to produce the level of output where the marginal cost curve intersected the average total cost curve.
Require the firm to produce the level of output where the demand curve intersected the average total cost curve.

46. The government has decided to regulate a natural monopoly so that the firm produces the perfectly competitive level of output. Compared to the unregulated outcome, one negative consequence of this decision is that:
The firm will earn very high and “unfair” economic profits.
The firm will be encouraged to reduce output and increase the price.
The government may need to subsidize the firm’s economic losses.
Deadweight loss will increase.
Consumer surplus will fall.

47. The government has decided to regulate a natural monopoly so that the firm produces the perfectly competitive level of output. Compared to the unregulated outcome, one negative consequence of this decision is that:
The firm will earn very high and “unfair” economic profits.
The firm will be encouraged to reduce output and increase the price.
The government may need to subsidize the firm’s economic losses.
Deadweight loss will increase.
Consumer surplus will fall.

48. The government has decided to regulate a natural monopoly so that the firm produces the break-even level of output. Compared to the unregulated outcome, one positive consequence of this decision is that:
The firm will earn very high and “unfair” economic profits.
The firm will be encouraged to reduce output and increase the price.
The government may need to subsidize the firm’s economic losses.
Deadweight loss will decrease.
Consumer surplus will fall.

49. The government has decided to regulate a natural monopoly so that the firm produces the break-even level of output. Compared to the unregulated outcome, one positive consequence of this decision is that:
The firm will earn very high and “unfair” economic profits.
The firm will be encouraged to reduce output and increase the price.
The government may need to subsidize the firm’s economic losses.
Deadweight loss will decrease.
Consumer surplus will fall.

50. An example of a means-tested program is:
Expenditure on national defense.
Social security payments to the disabled.
Social Security payments to those who have deceased spouses.
Purchasing a new city police car.
The food stamp program.

51. An example of a means-tested program is:
Expenditure on national defense.
Social security payments to the disabled.
Social Security payments to those who have deceased spouses.
Purchasing a new city police car.
The food stamp program.

52. Which of the following transactions represents a transfer payment?
The government pays an employee by making a direct transfer to the employee’s bank account.
An army officer, paid by the government, transfers part of the money he receives back to the government to pay his taxes.
A senior citizen receives a Social Security payment.
The Department of Defense purchases military vehicles from General Motors.
The government pays interest to those who have purchased Treasury bonds.

53. Which of the following transactions represents a transfer payment?
The government pays an employee by making a direct transfer to the employee’s bank account.
An army officer, paid by the government, transfers part of the money he receives back to the government to pay his taxes.
A senior citizen receives a Social Security payment.
The Department of Defense purchases military vehicles from General Motors.
The government pays interest to those who have purchased Treasury bonds.

54. In Nation X, if the median household income in 2006 was $48,000, this means that:
The average income for a typical household was $48,000.
Poverty rates fell during this period.
Half of all households in Nation X earned less than $48,000 and half of all households in Nation X earned more than $48,000.
Incomes in Nation X were rising.
The top 10% of households in Nation X earned more than $48,000 and the rest of the households earned less than $48,000.

55. In Nation X, if the median household income in 2006 was $48,000, this means that:
The average income for a typical household was $48,000.
Poverty rates fell during this period.
Half of all households in Nation X earned less than $48,000 and half of all households in Nation X earned more than $48,000.
Incomes in Nation X were rising.
The top 10% of households in Nation X earned more than $48,000 and the rest of the households earned less than $48,000.

56. Welfare state programs are believed to create deadweight loss since they:
Impact government’s budgets.
Affect incentives to work and to save in a society.
Are supported by many political parties.
Are based on the ability-to-pay principle.
Lessen income inequality in a nation.

57. Welfare state programs are believed to create deadweight loss since they:
Impact government’s budgets.
Affect incentives to work and to save in a society.
Are supported by many political parties.
Are based on the ability-to-pay principle.
Lessen income inequality in a nation.

58. The mean household income is:
The income of households lying at the exact middle of the income distribution.
The average income across all households.
The income level that policy makers wish to achieve for all households on average.
Also the poverty threshold level.
The income level that separates the wealthy households from the poor households.

59. The mean household income is:
The income of households lying at the exact middle of the income distribution.
The average income across all households.
The income level that policy makers wish to achieve for all households on average.
Also the poverty threshold level.
The income level that separates the wealthy households from the poor households.

60. Means-tested programs:
Provide benefits for all.
Are poverty programs that specifically help those with low incomes.
Provide benefits only for those households that earn below the mean household income in the United States for a given year.
Provide only in-kind benefits.
Benefit the wealthy at the expense of the poor.

61. Means-tested programs:
Provide benefits for all.
Are poverty programs that specifically help those with low incomes.
Provide benefits only for those households that earn below the mean household income in the United States for a given year.
Provide only in-kind benefits.
Benefit the wealthy at the expense of the poor.