ECON 202 Final Exam Questions with
correct Answers
Market failure definition - correct answer-✅any imperfection in the market mechanism that prevents
optimal outcomes
4 sources of market failure - correct answer-✅public goods, externalities, market power, inequality
Excludable and rival - correct answer-✅private good ex. tshirts, pizza
Excludable and non-rival - correct answer-✅club good ex. golf course
Non-excludable and rival - correct answer-✅common resources ex. public farm
Non-excludable and non-rival - correct answer-✅public good ex. national defense
Public goods - correct answer-✅a good or service whose consumption by one person does not exclude
consumption by another
Free rider problem - correct answer-✅the communal nature of public goods may cause some
consumers to try to free ride
Free rider - correct answer-✅an individual who reaps the direct benefits from someone else's
contribution to a pubic good or purchase
What is the solution to a market failure? - correct answer-✅government intervention- government
steps in as buyer of supplies, funded through taxes or other user few
Externality equation - correct answer-✅social cost- private cost
externality - correct answer-✅third party benefit (or are hurt) because of a market transaction
What curve moves with a positive externalitiy? - correct answer-✅the demand curve shifts to the right
and the subsidy is between p0 and p1
What curve moves with a negative externality? - correct answer-✅the cupply curve shifts to the left and
the external cost is the difference between s0 and s1
Excise tax - correct answer-✅tax on bad goods sometimes called the "sin tax"
What is the governments role in market power? - correct answer-✅restrict market power, promote
competition, and regulate price and quantity
What is income redistribution? - correct answer-✅reduced inequity in incomes by providing a minimum
amount of merit goods
Merit goods - correct answer-✅a good or service society believes everyone should have some minimal
quality of ex. healthcare, food, water
progressive income tax system - correct answer-✅collect taxes from income earners... the more you
make the higher % you pay
Transfer payments - correct answer-✅provides payments to individuals without anything in return ex.
food stamps
Goals of macro intervention - correct answer-✅foster economic growth by... full employment, price
sustainability, and increased production capacity
What is a regressive tax? - correct answer-✅as income rises, the % you pay decreases
Corporate taxes - correct answer-✅usually passed on to the customer through higher prices
Property tax - correct answer-✅regressive tax and is a major source of local taxes
How much government intervention is desirable? - correct answer-✅only desirable to the extent that it
improves market outcomes
What is the voting mechanism used for? - correct answer-✅To determine if the benefits of government
intervention outweigh the opportunity costs
Public choice theory - correct answer-✅the theory of public sector behavior emphasizing rational self-
interest of decision makers and voters
correct Answers
Market failure definition - correct answer-✅any imperfection in the market mechanism that prevents
optimal outcomes
4 sources of market failure - correct answer-✅public goods, externalities, market power, inequality
Excludable and rival - correct answer-✅private good ex. tshirts, pizza
Excludable and non-rival - correct answer-✅club good ex. golf course
Non-excludable and rival - correct answer-✅common resources ex. public farm
Non-excludable and non-rival - correct answer-✅public good ex. national defense
Public goods - correct answer-✅a good or service whose consumption by one person does not exclude
consumption by another
Free rider problem - correct answer-✅the communal nature of public goods may cause some
consumers to try to free ride
Free rider - correct answer-✅an individual who reaps the direct benefits from someone else's
contribution to a pubic good or purchase
What is the solution to a market failure? - correct answer-✅government intervention- government
steps in as buyer of supplies, funded through taxes or other user few
Externality equation - correct answer-✅social cost- private cost
externality - correct answer-✅third party benefit (or are hurt) because of a market transaction
What curve moves with a positive externalitiy? - correct answer-✅the demand curve shifts to the right
and the subsidy is between p0 and p1
What curve moves with a negative externality? - correct answer-✅the cupply curve shifts to the left and
the external cost is the difference between s0 and s1
Excise tax - correct answer-✅tax on bad goods sometimes called the "sin tax"
What is the governments role in market power? - correct answer-✅restrict market power, promote
competition, and regulate price and quantity
What is income redistribution? - correct answer-✅reduced inequity in incomes by providing a minimum
amount of merit goods
Merit goods - correct answer-✅a good or service society believes everyone should have some minimal
quality of ex. healthcare, food, water
progressive income tax system - correct answer-✅collect taxes from income earners... the more you
make the higher % you pay
Transfer payments - correct answer-✅provides payments to individuals without anything in return ex.
food stamps
Goals of macro intervention - correct answer-✅foster economic growth by... full employment, price
sustainability, and increased production capacity
What is a regressive tax? - correct answer-✅as income rises, the % you pay decreases
Corporate taxes - correct answer-✅usually passed on to the customer through higher prices
Property tax - correct answer-✅regressive tax and is a major source of local taxes
How much government intervention is desirable? - correct answer-✅only desirable to the extent that it
improves market outcomes
What is the voting mechanism used for? - correct answer-✅To determine if the benefits of government
intervention outweigh the opportunity costs
Public choice theory - correct answer-✅the theory of public sector behavior emphasizing rational self-
interest of decision makers and voters
