Reasons for government intervention in markets: Practice Questions

• a.The market price of demerit goods is usually set below the equilibrium level.
• b.Consumers may have imperfect information and underestimate the long-term personal costs of consumption.
• c.To encourage a more equitable distribution of income across the economy.
• d.Demerit goods are non-excludable and non-rival in nature.

• a.To address a shortage in the market caused by excessive demand.
• b.To reduce the over-consumption of a demerit good by raising its cost to consumers.
• c.To increase the producer surplus for firms manufacturing alcoholic beverages.
• d.To transition the good from a private good to a public good.

• a.Because information provision always shifts the supply curve to the right.
• b.Because a subsidy would lead to a decrease in the consumer surplus.
• c.If the market failure is primarily caused by an information gap rather than just an affordability issue.
• d.Because information provision eliminates the need for any price mechanism in the market.

• a.To address the under-consumption of merit goods caused by imperfect information.
• b.To prevent the over-consumption of public goods in the private sector.
• c.To ensure that the price mechanism allocates resources at the point where \( P = MC \).
• d.To discourage the production of goods that create negative externalities.

• a.Through direct provision funded by general taxation, as the good is non-excludable.
• b.By granting a subsidy to private firms to lower the cost of production.
• c.By imposing a maximum price to make lighting more affordable for the local council.
• d.By providing information to consumers to increase their private demand for lighting.

Write your answer out first, then check it against the worked solution.