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AP Microeconomics Unit 6: Market Failure and the Role of Government

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Unit 6: Market Failure and the Role of Government

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Question 1

When a $\$ 1$ per unit excise tax is imposed in a market where demand is perfectly inelastic, who bears the full burden of the tax?

A.Producers bear the full burden because they must lower the price to maintain sales.B.Consumers bear the full burden because the quantity demanded does not change with price.C.The burden is split equally between consumers and producers.D.The government bears the burden because tax revenue reduces consumer income.

Question 2

A factory upstream from a river discharges pollution that harms downstream fisheries without paying compensation. This is an example of:

A.A positive externality, because the factory creates jobs in the region.B.A negative externality, because third parties (fishers) bear costs not reflected in the market price.C.A public goods problem, because clean water is non-excludable.D.A government failure, because regulators have not prevented the pollution.

Question 3

When a good generates a positive externality, the free market will tend to:

A.Overproduce the good because producers earn extra profits from the social benefit.B.Underproduce the good because private demand understates the true social value.C.Produce the socially optimal quantity because price signals fully reflect social benefits.D.Automatically correct the underprovision through voluntary agreements between beneficiaries.

Question 4

The Gini coefficient is a measure of income inequality that ranges from 0 to 1. A Gini coefficient closer to 1 indicates:

A.Perfect equality, where every household earns the same income.B.Greater income inequality, with income concentrated among fewer households.C.Rapid economic growth, as high earners generate more productivity and investment.D.Low unemployment, because more people are earning income in the economy.

Question 5

According to the Coase theorem, externalities can be corrected through private bargaining when:

A.The government enforces a Pigouvian tax equal to the marginal external cost.B.Property rights are clearly defined and transaction costs are low.C.The number of affected parties is large and diverse.D.The externality is positive rather than negative.

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Question 6

Which of the following best describes the economic rationale for government subsidies for elementary education?

A.Education is a private good, and subsidies prevent overproduction by competitive firms.B.Education generates positive externalities (better-informed citizens, lower crime, economic growth) that private markets underprovide.C.Education is a pure public good because knowledge is non-rival and non-excludable.D.Government must provide education because private firms could never earn a profit providing it.

Question 7

The free-rider problem in public goods markets means that:

A.Private firms overprovide the good to attract paying customers.B.Individuals have no incentive to reveal their true willingness to pay, leading to underprovision.C.Wealthier individuals pay for the good and provide it free to everyone else.D.Public goods are consumed more rapidly than private goods, depleting them faster.

Question 8

Common-pool resources (common resources) differ from public goods because common-pool resources are:

A.Both non-rival and non-excludable, just like public goods.B.Rival in consumption (use by one reduces availability for others) but non-excludable.C.Non-rival but excludable, like cable television.D.Both rival and excludable, like a privately owned farm.

Question 9

If the government imposes an excise tax on a good with relatively elastic demand and inelastic supply, the larger share of the tax burden will be borne by:

A.Consumers, because they have less ability to respond to price changes.B.Producers, because their inelastic supply limits their ability to reduce output in response to the tax.C.The government, because an excise tax reduces total surplus in the economy.D.Neither side, because the market reaches a new equilibrium with no welfare loss.

Question 10

A Pigouvian tax is designed to correct a negative externality by:

A.Raising the private marginal cost to equal the social marginal cost.B.Subsidizing affected third parties to compensate them for the harm received.C.Eliminating all production of the good causing the externality.D.Lowering the price of the good so that more consumers can afford it.

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Question 11

A negative externality in production causes the market to produce more than the socially optimal quantity because:

A.The market supply curve is set below the social marginal cost curve, leading to artificially low prices.B.Demand is artificially high because consumers do not bear the external costs.C.The government subsidizes the externality-producing firm to maximize tax revenue.D.Marginal social cost equals marginal social benefit at the market equilibrium.

Question 12

Which of the following best describes a public good?

A.A good produced by the government and provided free of charge.B.A good that is non-rival in consumption and non-excludable.C.A good with high positive externalities that benefit all members of society.D.A good provided by a regulated monopoly to ensure fair access.

AP Microeconomics Unit 6: Market Failure and the Role of Government — Free with Answer Explanations | Test Practice Hub