Unit notes and practice questions
Everything here is for unit 3 of the Grade 12 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.
The cards filed under this chapter on the Grade 12 Economics page. Open one at a time.
When you use it
Use this when distinguishing between types of asymmetric information problems in markets.
Watch out
Do not confuse the timing. Adverse selection is hidden information occurring before the transaction, while moral hazard is hidden action occurring after the contract is signed.
Drafted from Grade 12 Economics, pages 49-71, then checked twice before it went up
| Good Type | Rivalry | Excludability | Example |
|---|---|---|---|
| Pure private goods | Rivalrous | Excludable | Food, clothing |
| Pure public goods | Non-rivalrous | Non-excludable | National defence, clean air |
| Impure public (toll) | Non-rivalrous | Excludable | Toll express roads, cable TV |
| Impure public (common) | Rivalrous | Non-excludable | Ocean fish, shared grazing |
When you use it
Use this table to classify economic goods based on rivalry and excludability criteria.
Watch out
Pure public goods require both non-rivalry and non-excludability. Goods possessing only one characteristic are impure public goods.
Drafted from Grade 12 Economics, pages 49-71, then checked twice before it went up
When you use it
Use this rule to determine the direction of market failure and corrective policies for external effects.
Watch out
Negative externalities lead to overproduction where MSC exceeds MPC, requiring a per unit tax. Positive externalities lead to underproduction where MSB exceeds MPB, requiring a per unit subsidy.
Drafted from Grade 12 Economics, pages 49-71, then checked twice before it went up
When you use it
Use this formula to calculate the total cost to society from producing an additional unit of output.
Watch out
In a negative externality, marginal social cost exceeds marginal private cost. The market price mechanism ignores the marginal external cost.
Drafted from Grade 12 Economics, pages 49-71, then checked twice before it went up
10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.
Question 1
According to economics, what condition defines allocative efficiency in an economy?
Answer: A Marginal social benefit equals marginal social cost
Why
Allocative efficiency is achieved when it is impossible to reallocate resources to increase society welfare, which occurs when marginal social benefit (MSB) is equal to marginal social cost (MSC).
Question 2
What are the two major features that define a pure public good?
Answer: B Non-rivalry in consumption and non-excludability
Why
A pure public good has two primary features: non-rivalry in consumption (one person using it does not reduce the amount available to others) and non-excludability (it is difficult or expensive to prevent non-payers from consuming it).
Question 3
Which Ethiopian law sets out the legal rights of consumers and protects them from unfair market practices?
Answer: A Consumer Proclamation No. 813/2013
Why
In Ethiopia, Consumer Proclamation No. 813/2013 outlines consumer rights, protection against unfair practices, and mechanisms for consumer grievance redressal.
Question 4
What business malpractice refers to adding an inferior substance to the product being sold?
Answer: B Sale of adulterated goods
Why
The sale of adulterated goods is defined as adding something inferior or impure to the product being sold to consumers.
Question 5
Why does the private market fail to provide pure public goods efficiently?
Answer: B The free rider problem arises because non-payers cannot be excluded
Why
Because public goods are non-excludable, people can benefit without paying (free riders). Since private sellers cannot easily collect payment, the free market underprovides or fails to supply them.
Question 6
In the presence of a negative externality in production, how does marginal social cost (MSC) compare to marginal private cost (MPC)?
Answer: C MSC is greater than MPC, leading to overproduction
Why
When a negative externality exists, MSC = MPC + MEC. Because MSC is greater than MPC, the competitive market produces more output than the socially optimal level (overproduction).
Question 7
A bank in Hawassa reviews a borrower's credit history, job security, and assets before approving a loan. This strategy to combat adverse selection is called:
Answer: B Screening
Why
Screening is an action taken by the uninformed party (in this case, the bank) to gather information about the other party to reduce adverse selection.
Question 8
An individual in Addis Ababa buys comprehensive insurance against car theft and then becomes less careful about locking the vehicle. This situation is an example of:
Answer: C Moral hazard
Why
Moral hazard occurs when a party insulated from risk changes behavior and acts less carefully because another party (the insurer) bears the negative consequences.
Question 9
According to the Coase theorem, private bargaining can resolve externalities without government taxes under which conditions?
Answer: B Zero or minimal transaction costs, a small number of affected parties, and well-defined property rights
Why
Coase (1960) showed that bargaining achieves an efficient outcome when transaction costs are zero or minimal, the number of affected individuals is small, and property rights are well defined.
Question 10
To correct a negative production externality, what solution did economist A. C. Pigou propose?
Answer: B A per-unit tax equal to the difference between marginal social cost and marginal private cost at the socially optimal output
Why
Pigou proposed imposing a per-unit tax equal to the difference between marginal social cost (MSC) and marginal private cost (MPC) corresponding to the socially optimal output level to internalize the externality.
The app holds 12 questions on this unit, marked as you go. These are the first 10.
Unit 3 runs from page 49 to page 71 of the Ministry of Education edition.
Ministry of Education edition, English, 214 pages
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