XAT 2015 Question 27

Instructions

Analyse the following passage and provide appropriate answers for questions that follow.

For private goods, competitive markets ensure efficiency despite the decentralized nature of the information about individual’s tastes and firm technologies. Implicitly, market competition solved adverse selection problems and the fixed - price contracts associated with exogenous prices solve moral hazard problems. However, markets fail for pure public goods and public intervention is thus needed. In this case, the mechanisms used for those collective decisions must solve the incentive problem of acquiring the private information that agents have about their references for public goods. Voting mechanisms are particular incentive mechanisms without any monetary transfers for which the same question of strategic voting, i.e., not voting according to the true preferences, can be raised. For private goods, increasing returns to scale create a situation of natural monopoly far away from the world of competitive markets. When the monopoly has private information about its cost or demand, its regulation by a regulatory commission becomes a principal - agent problem.

(Note: Public goods are those in which individuals cannot be excluded from use and where use by one individual does not reduce availability to others, while an individual can be excluded in case of private goods.)

Question 27

Which of the following cannot be concluded from the above paragraph?

Solution

Option B can be concluded from the line, "market competition solved adverse selection problems and the fixed - price contracts associated with exogenous prices solve moral hazard problems."

Option C can be concluded from the line, "Voting mechanisms are particular incentive mechanisms without any monetary transfers."

Options D and E can be concluded from the line, "When the monopoly has private information about its cost or demand, its regulation by a regulatory commission becomes a principal - agent problem."

Option A cannot be concluded as the passage states that public intervention is necessary when "markets fail for pure public goods". It does not apply to the private goods market.

Hence, the answer is option A.



Create a FREE account and get:

  • All Quant Formulas and shortcuts PDF
  • 40+ previous papers with solutions PDF
  • Top 500 MBA exam Solved Questions for Free

    Comments

    Register with

    OR

    Boost your Prep!

    Download App