Question 1 2 marks

Why is the free market generally regarded as allocating resourcesefficiently?

Question 2 4 marks

From the following differentiate what are the positive and negative externalities. Why is this so, please provide the justification.

1. Medical research
2. Education
3. Pollution
4. A Big Mac

Question 3 2 marks

Which one among these four is correct answer If a government decided to privatise its railway transport business, how could it make the market for rail transport contestable? Explain.

A. The government could bring about contestability by creating network externalities from the railway infrastructure.

B. The government could bring about contestability by forcing the private owner of the railway transport business to give other firms access to the railway infrastructure.

C. The government could bring about contestability by regulating the private railway transport business as a natural monopoly.

D. The government could bring about contestability by selling its railway transport business to two different private owners.

Question 4 2 marks

Under what circumstances can deregulation reduce market failure? Please explain which one among these four is correct answer

A. In the case of market failure that arises due to asymmetric information

B. In the case of market failure that arises due to an externality

C. In the case of market failure that arises due to a lack of competition or due to monopoly power

D. In the case of market failure that arises due to the existence of a public or merit good