PUBLIC GOODS AND MARKET FAILURE
Test questions
1. Which two of the following qualities characterise a (purely) public good in an economic sense?
 a. Nobody can be excluded from consuming the good.
 b. The good is – by definition – always financed and offered by the government.
 c. Several people can consume or use the good at the same time without interfering with each other.
 d. The good is worthless for most people and is therefore not privately offered.
2. Which of the following statements best describes the problem arising from (purely) public goods?
 a. Nobody wants to consume the good because others may also consume it at the same time.
 b. The prices charged by suppliers of a public good are too high because public goods are of public interest.
 c. Generally, there is a shortage of public goods because nobody is willing to finance them.
 d. Generally, there is an excess supply of public goods because companies try to market themselves by offering a
public good.
Version October 2012
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PUBLIC GOODS AND MARKET FAILURE
Test questions
3. Fill in the gaps with the following three terms (use each only once): free riding, positive externality, social norms
When someone prefers to profit from other people’s contributions instead of paying their own, this is referred to as
……………………… . Anyone who supports a public good normally provides utility to other people as well, without being
compensated for it. In economics, this effect is called a …………………….……………… . In groups, members can be forced
(e.g. under threat of penalties) to contribute to a public good. The expectation that everyone should contribute and the
peer pressure experienced in this context are sometimes subsumed under the term …………………….… , which mostly
have a positive effect on contribution behaviour.
4. Which of the following statements are true from an economic point of view?
 a. It always makes sense when a public good is financed by the government (e.g. through taxes).
 b. Public goods may cause market failure. In some cases, government financing can lead to a better (more
efficient) situation.
 c. Some public goods are financed by private companies or persons.
5. If you use public transport, do you use a public good from an economic point of view? Explain your answer in two to
three sentences.
Version October 2012
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