Fill in the blank: Market power enables a firm to set prices ___ its marginal cost, leading to ___ economic welfare.

Above; reduced

Explain how externalities can lead to market inefficiency.

Externalities cause market inefficiency.

• Affects third parties' welfare.

• Costs not included in prices.

• Leads to over/underproduction issues.

True or False: Positive externalities always lead to overproduction in the market.

What role does government play in correcting market failures related to public goods?

Government provides public goods.

• Overcomes free-rider issues.

• Ensures adequate supply.

• Supports economic efficiency.

Fill in the blank: The concept of ___ refers to the situation where a party can take risks because they do not bear the full consequences of their actions.

Moral hazard

What is the 'lemons problem' in economics, and how does it illustrate market failure?

Lemons problem illustrates market failure.

• Sellers know car quality.

• Buyers distrust all vehicles.

• High-quality cars exit market.

True or False: Public goods are characterized by rivalry in consumption.

False. Public goods are non-rivalrous, meaning one person's consumption does not diminish availability for others.

What is the significance of tradable emissions permits in addressing pollution?

Tradable permits incentivize pollution reduction.

• Creates a market for emissions.

• Encourages cost-effective reductions.

• Promotes environmental accountability.

Fill in the blank: The government can intervene in the market for demerit goods by imposing ___ to discourage consumption.

High taxes

Explain the relationship between merit goods and government intervention.

Merit goods need government support.

• They create positive externalities.

• Market may underprovide them.

• Government ensures accessibility.

What are the two main types of market failure?

Market failures include two types.

• Complete failure in supply.

• Partial failure in quantity.

• Pricing issues affect function.