1.17 Market failures And Externalities

Question 1

What does market failure refer to?

Answer 1

When the price mechanism leads to an inefficient allocation of resources

Question 2

What is an external cost (negative externality)?

Answer 2

A cost to a 3rd party that is not involved in the making, buying / selling and consumption of a specific good/service

Question 3

What is an external benefit (positive externality)?

Answer 3

A benefit to a third party that is not involved in the making, buying / selling and consumption of a specific good / service

Question 4

What is the difference between private benefits and costs and external benefits and costs?

Answer 4

Private benefits and private costs are only applicable to those within the transaction whereas external costs and external benefits apply to those that are third parties to the transaction