Role of government in microeconomics: Practice Questions

Which of the following best describes a specific tax imposed by a government?

In a standard supply and demand diagram, the government imposes a price floor (\(P_f\)) above the equilibrium price (\(P_e\)). The resulting welfare loss (deadweight loss) is best described as the area:

A government aims to maximize its tax revenue from an indirect tax. Which combination of Price Elasticity of Demand (\(PED\)) and Price Elasticity of Supply (\(PES\)) for a good would most likely achieve this goal?

A government decides to impose a price ceiling on the market for rental apartments. What is a likely consequence of this policy if the ceiling is set below the equilibrium price?

A specific tax is imposed on a luxury good that has perfectly inelastic demand. Which of the following statements about the tax incidence is correct?

Explain why the provision of a pure public good, such as national defense, typically requires government intervention rather than relying solely on the free market.

In a market where the Price Elasticity of Supply (PES) is perfectly elastic (i.e., \(PES = \infty\)), evaluate the impact of a specific indirect tax on the equilibrium quantity and the distribution of the tax burden between consumers and producers.

Analyze how government intervention through the imposition of a maximum price (price ceiling) for a good in a competitive market can lead to both intended benefits for consumers and unintended consequences, such as the emergence of a black market.

a) Define market failure in the context of public goods and explain how the free-rider problem leads to a missing market. (2 points)

b) Governments often intervene to ensure the provision of public goods. Explain two reasons why a government might choose direct provision (government-funded and operated) rather than providing subsidies to private sector firms to encourage them to provide the good. (3 points)

a) Explain two distinct roles a government can play in correcting market failures, using a different real-world example for each role (e.g., for positive externalities, negative externalities, or public goods).

b) Evaluate the challenges and potential limitations governments face when attempting to correct market failures. You may refer to concepts such as information failure, political self-interest, administrative costs, or unintended consequences in your answer.