1.3

Question 1

What does market failure refer to ?

Answer 1

• When the price mechanism leads to an inefficient allocation of resources, away from the market equilibrium price

Question 2

What is an external cost ?

Answer 2

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

Question 3

What kind of externality is an external cost ?

Answer 3

Negative externality

Question 4

What is an external benefit ?

Answer 4

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

Question 5

What kind of externality is an external benefit ?

Answer 5

Positive externality

Question 6

What are the key features of public goods ?

Answer 6

• Non rivalrous

- Non excludable

Question 7

What are the key features of private goods ?

Answer 7

• Rivalrous

- Excludable

Question 8

What does non rivalrous mean ?

Answer 8

Non-rivalrous means that consumption of a product does not prevent another person from also consuming that product

Question 9

Give an example of a non rivalrous good

Answer 9

A radio programme demonstrates non-rivalry, because if one person listens to the programme it does not prevent another person from also listening to it. However, the radio itself is a rival good.

Question 10

What does non excludable mean ?

Answer 10

Non-excludable means that once a good is provided, it is impossible to stop people from using it

Question 11

Give an example of a non excludable good

Answer 11

Once a lighthouse is provided, then ships at sea cannot be prevented from benefiting from it. However, if a car manufacturer provides a new model of car, people can be excluded from purchasing one if they cannot afford one.

Question 12

What is the free rider problem ?

Answer 12

It is a type of market failure that occurs because everybody is able to benefit from that particular good or service

Question 13

Why are free riders a problem ?

Answer 13

• Because while not paying for the good, they may continue to use it
• Thus, the good is likely to be under provided or not provided at all

Question 14

Why are consumers able to free-ride on public goods?

Answer 14

People continue to use them even though they don’t pay for them

Question 15

Why does the free-rider problem lead to market failure?

Answer 15

No revenue is being generated

Question 16

What is the equation for social benefits ?

Answer 16

Private benefits + external benefits

Question 17

What is the equation for social costs ?

Answer 17

Private costs + external costs

Question 18

When does the social optimum level of output occur ?

Answer 18

The social optimum level of output occurs when all external costs and benefits are accounted for

Question 19

What will there be if external benefits are present ?

Answer 19

There will be under production / under consumption in a free market

Question 20

What will there be if external costs are present ?

Answer 20

There will be over production / over consumption in a free market

Question 21

What is the relationship between the demand curve and marginal utility ?

Answer 21

The law of diminishing marginal utility is one of the reasons that the demand curve is downward sloping

Question 22

What does demand equal ?

Answer 22

D = MU

Question 23

What is the supply curve the same as ?

Answer 23

The supply curve is also the same as the marginal cost curve

Question 24

Why is the supply curve the same as the marginal cost curve ?

Answer 24

• This is because the supply curve shows us the cost of producing an extra unit
• Hence making it the same as the marginal cost curve

Question 25

What is the marginal cost curve the same as ?

Answer 25

The marginal private cost curve

Question 26

Define social welfare loss

Answer 26

Economic welfare that is lost due to a misallocation of resources

• Over/under consumption/production

Question 27

What is social welfare loss a cost to ?

Answer 27

It is a cost to society created by market inefficiency and market disequilibrium

Question 28

What is larger when there are external benefits, social or private benefits ?

Answer 28

The social benefits will be greater than the private benefits

Question 29

How can external benefits be shown on a diagram ?

Answer 29

Drawing the marginal social benefit curve to the right of the marginal private benefit curve

Question 30

What is perfect information ?

Answer 30

When a buyer and/or seller has a complete understanding of the quality and nature of a good or service.

Question 31

What is imperfect information ?

Answer 31

When a buyer and/or seller lacks a complete understanding of the quality and nature of a good or service.

Question 32

What is symmetric information ?

Answer 32

When buyers and sellers have equal amounts of knowledge about a good or service.

Question 33

What is assymetric information ?

Answer 33

When either the buyer or the seller has more information about a good or service than the other party.

Question 34

What is an information gap ?

Answer 34

When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.

Question 35

What is marginal social benefit equal to ?

Answer 35

Marginal private benefit + marginal external benefit

Question 36

Give some examples of positive consumption externalities

Answer 36

• Vaccinations
• Gym memberships
• Healthy food
• Public transport

Question 37

Give some examples of positive production externalities

Answer 37

• Beekeeping

- Research and development

Question 38

What is marginal social cost equal to ?

Answer 38

Marginal private cost + Marginal external cost

Question 39

Give some examples of negative consumption externalities

Answer 39

• Alcohol
• Cigarettes
• Junk food

Question 40

Give some examples of negative production externalities

Answer 40

• Factories that emit pollutants
• Coal power plants
• Bars and clubs that play loud music