Q.1 What is the main focus of welfare economics?
Analyzing government budgets
Studying resource allocation to maximize social welfare
Determining firm profits
Examining international trade policies
Explanation - Welfare economics focuses on how resources can be allocated to improve overall social welfare and economic efficiency.
Correct answer is: Studying resource allocation to maximize social welfare
Q.2 Which concept measures the extra satisfaction a consumer gains from consuming one more unit of a good?
Producer surplus
Marginal cost
Marginal utility
Social welfare
Explanation - Marginal utility refers to the additional satisfaction or benefit a consumer derives from consuming an extra unit of a good or service.
Correct answer is: Marginal utility
Q.3 In welfare economics, Pareto efficiency occurs when:
Resources are equally distributed
No one can be made better off without making someone else worse off
Government controls all prices
Total utility is zero
Explanation - Pareto efficiency is achieved when it is impossible to improve one person's welfare without reducing another person's welfare.
Correct answer is: No one can be made better off without making someone else worse off
Q.4 Consumer surplus is defined as:
Difference between market price and marginal cost
Difference between what consumers are willing to pay and what they actually pay
Total expenditure on goods and services
Government tax revenue
Explanation - Consumer surplus represents the benefit consumers get when they pay less for a good than the maximum price they are willing to pay.
Correct answer is: Difference between what consumers are willing to pay and what they actually pay
Q.5 Producer surplus occurs when:
Producers sell goods at a price lower than marginal cost
Producers receive more than the minimum they are willing to accept
Consumers gain extra utility
Government sets a price ceiling
Explanation - Producer surplus measures the difference between the actual price a producer receives and the minimum price they would accept.
Correct answer is: Producers receive more than the minimum they are willing to accept
Q.6 Which economist is most closely associated with the development of welfare economics?
Adam Smith
Arthur Pigou
David Ricardo
Karl Marx
Explanation - Arthur Pigou is known for his contributions to welfare economics, particularly the analysis of externalities and social welfare.
Correct answer is: Arthur Pigou
Q.7 A negative externality leads to:
Overproduction of a good
Underproduction of a good
Equilibrium at Pareto efficiency
Maximized consumer surplus
Explanation - Negative externalities, such as pollution, lead to overproduction because the social cost exceeds the private cost.
Correct answer is: Overproduction of a good
Q.8 The social welfare function is used to:
Calculate government revenue
Aggregate individual utilities into a measure of overall social welfare
Determine market equilibrium
Set interest rates
Explanation - The social welfare function is a tool to evaluate different allocations of resources by combining individual utilities into a single measure of social welfare.
Correct answer is: Aggregate individual utilities into a measure of overall social welfare
Q.9 Which of the following is an example of a public good?
Bread
Street lighting
Smartphone
Private car
Explanation - Public goods are non-excludable and non-rivalrous, meaning everyone can benefit without reducing availability for others, like street lighting.
Correct answer is: Street lighting
Q.10 In welfare economics, the marginal social benefit equals:
Marginal private benefit minus external cost
Marginal private benefit plus external benefit
Marginal cost of production
Total utility of all consumers
Explanation - Marginal social benefit combines private benefits to consumers and any positive externalities that affect society.
Correct answer is: Marginal private benefit plus external benefit
Q.11 Deadweight loss occurs when:
Market is in perfect competition
Market is distorted by taxes or subsidies
All consumers maximize utility
All producers maximize profit
Explanation - Deadweight loss represents the loss of total welfare due to market distortions like taxes, subsidies, or price controls.
Correct answer is: Market is distorted by taxes or subsidies
Q.12 Which of the following is NOT a goal of welfare economics?
Maximizing social welfare
Analyzing efficiency of resource allocation
Measuring individual utility
Maximizing firm profit
Explanation - Welfare economics focuses on social welfare, efficiency, and equity, not on maximizing individual firm profits.
Correct answer is: Maximizing firm profit
Q.13 Which condition must hold for a competitive market to achieve Pareto efficiency?
Perfect competition and no externalities
Government intervention in all markets
Monopoly power must exist
Price ceilings must be set
Explanation - Pareto efficiency in markets requires perfect competition and absence of externalities; otherwise, resources are not optimally allocated.
Correct answer is: Perfect competition and no externalities
Q.14 Which of the following is a limitation of welfare economics?
Cannot measure individual utility
Assumes utility can be compared across individuals
Focuses only on profit maximization
Ignores social welfare entirely
Explanation - A major limitation is that welfare economics often assumes interpersonal comparisons of utility, which may not be practically measurable.
Correct answer is: Assumes utility can be compared across individuals
Q.15 The Kaldor-Hicks criterion is used to:
Determine if an outcome increases social welfare even if some are worse off
Calculate consumer surplus
Determine tax rates
Measure government expenditure
Explanation - Kaldor-Hicks efficiency occurs if winners could theoretically compensate losers, leading to a net gain in social welfare.
Correct answer is: Determine if an outcome increases social welfare even if some are worse off
Q.16 Which of the following policies can correct a negative externality?
Subsidies
Price ceiling
Pigovian tax
Free trade agreements
Explanation - A Pigovian tax is levied on activities causing negative externalities to reduce overproduction and align private costs with social costs.
Correct answer is: Pigovian tax
Q.17 Which of the following best describes equity in welfare economics?
Equal prices for all goods
Fair distribution of resources and welfare
Maximizing profits for producers
Minimizing government intervention
Explanation - Equity focuses on fairness in the allocation of resources and social welfare across society.
Correct answer is: Fair distribution of resources and welfare
Q.18 Which of the following is an example of a positive externality?
Pollution from a factory
Vaccination against contagious disease
Traffic congestion
Smoking in public
Explanation - Positive externalities provide benefits to third parties, such as reduced disease spread from vaccination.
Correct answer is: Vaccination against contagious disease
Q.19 Which curve in welfare economics shows the relationship between price and quantity demanded?
Marginal cost curve
Demand curve
Supply curve
Social welfare curve
Explanation - The demand curve reflects how much quantity consumers are willing to buy at different prices.
Correct answer is: Demand curve
Q.20 Total social welfare is the sum of:
Consumer surplus and producer surplus
Government revenue and taxes
Exports and imports
Marginal cost and marginal utility
Explanation - Total social welfare in economics is often measured as the sum of consumer and producer surplus, representing overall benefits.
Correct answer is: Consumer surplus and producer surplus
Q.21 A price ceiling below equilibrium causes:
Shortage and welfare loss
Surplus and welfare gain
Equilibrium without welfare change
Pareto efficiency
Explanation - A price ceiling below equilibrium leads to excess demand, creating shortages and a deadweight loss.
Correct answer is: Shortage and welfare loss
Q.22 Which of the following approaches in welfare economics is normative?
Pareto efficiency analysis
Kaldor-Hicks criterion
Social welfare function
All of the above
Explanation - Welfare economics often involves normative judgments, such as defining social welfare or efficiency standards.
Correct answer is: All of the above
Q.23 Which concept evaluates efficiency without considering distribution?
Equity
Pareto efficiency
Social welfare function
Kaldor-Hicks efficiency
Explanation - Pareto efficiency focuses only on resource allocation efficiency, ignoring the distribution of welfare among individuals.
Correct answer is: Pareto efficiency
Q.24 Which of the following is a corrective measure for a positive externality?
Subsidy
Tax
Price floor
Quota
Explanation - A subsidy encourages activities with positive externalities, increasing production or consumption to achieve socially optimal levels.
Correct answer is: Subsidy
Q.25 Which type of market failure is addressed directly by welfare economics?
Monopoly power
Externalities
Public goods
All of the above
Explanation - Welfare economics studies market failures, including monopolies, externalities, and public goods, to improve social welfare.
Correct answer is: All of the above