Question

check all true statements:

1) if a market failure exists, Qso, the quantity that maximizes total surplus is nit the same as Q*, the market determined quantity

2) if a market failure exists, government policy can potentially increase the total surplus

3) if a market failure exists, government policies will definitely increase total surplus

4) if NO market failure exists, government policies that change Q will refuce total surplus

Answer 1

Answer 1: True. When there is market failure, then there is difference in the level of quantity that maximizes total surplus and free market determined quantity.

Answer 2: True. It depends on the type of policy. Some policies can increase the level of total surplus while other policies may not increase total surplus in the market.

Answer 3: False. We cannot say whether government policies will definitely increase total surplus in the market.

Answer 4: True. Government intervention in case of free markets reduce the level of total surplus in the market.