Government policies to achieve efficient resource allocation and correct market failure: Practice Questions

A government uses 'nudge' theory to encourage citizens to save more for retirement by making 'enrolment in a pension scheme' the default option for all employees. What is this policy an example of?

A diagram shows a market for a merit good. The government provides a subsidy to producers, shifting the supply curve downwards. What represents the total cost of the subsidy to the government?

In which situation is regulatory capture most likely to result in government failure?

Which of the following best defines government failure in microeconomic intervention?

A government introduces a mandatory licensing scheme for all providers of medical services. What is the most likely economic justification for this policy?

State the definition of a specific tax and give one example of a good on which it is commonly applied.

Explain how tradable pollution permits create a market-based incentive for firms to reduce their carbon emissions to the socially optimal level.

Analyze how regulatory capture acts as a form of government failure when an agency prioritizes the interests of a monopoly over the welfare of consumers.

(a) Define the terms non-excludable and non-rival in the context of public goods.
(b) Explain how these characteristics lead to the 'free-rider' problem and why this results in the non-provision of public goods by the private sector, requiring direct government intervention to achieve an efficient resource allocation.

Governments are increasingly using behavioural insights and 'nudge' theory to address market failures associated with merit and demerit goods.
(a) Explain the concept of 'nudge theory' and how it differs from traditional methods of intervention such as specific indirect taxes.
(b) Using the example of a merit good, evaluate the effectiveness of using a behavioural nudge compared to the provision of information in achieving a socially optimum level of consumption.