1.3

Question 1

What’s Market Failure?

Answer 1

Main role of a free market economy is to allocate scarce resources efficiently. Exists when competitive outcome isn’t efficient.

Question 2

What is Complete Market Failure?

Answer 2

When a market doesn’t supply products at all. e.g. pure public goods

Question 3

What’s Partial Market Failure?

Answer 3

When market functions but supplies either the wrong quantity or at the wrong price

Question 4

What are Property Rights?

Answer 4

Property rights are constructs in economics for determining how a resource or economic good is used and owned.

Question 5

What’s the importance of Property rights?

Answer 5

-Confer legal control or ownership
-For markets to operate efficiently their property rights must be protected.
-Failure to protect property rights can lead to permanent damage

Question 6

What are the three types of Market Failure?

Answer 6

-Externalities
-Public Goods
-Information Gaps

Question 7

How are Externalities a type of Market Failure?

Answer 7

Market equilibrium doesn’t take into account the impact on third parties

Question 8

How are Public Goods a type of Market Failure?

Answer 8

Not provided by free market as they aren’t profitable for firms

Question 9

How are Information Gaps a type of Market Failure?

Answer 9

Market equilibrium doesn’t take into account the buyer/seller knowledge

Question 10

What are Positive Externalities?

Answer 10

An external benefit on a third party. Goods/ Services that benefit 3rd parties are under-consumed because we either aren’t aware of the benefits or ignore them.

Question 11

What’s an example of a Positive Externality?

Answer 11

e.g. When a person eats healthy then they have a less likely chance of having health problems so don’t cost the NHS more. So by eating healthy they are saving the nurses by not making them treat them so the nurses are positively affected as they don’t have to treat the person.

Question 12

What are Negative Externalities?

Answer 12

An external cost on a third party. Goods/ Services that damage 3rd parties are over-consumed because we either aren’t aware of the dangers or ignore them.

Question 13

What’s an example of a Negative Externality?

Answer 13

e.g. when a smoker smokes the smoke goes into another persons face and affects their health. so the person affected by the smokers smoke is the third party as they haven’t done anything wrong but are getting affected.

Question 14

What are Public Goods?

Answer 14

Goods that are provided for free by government. Commodities in an economy like street lights, Education, Healthcare, Beaches or Public Parks. They are Non-Excludable and Non-Rivalrous.

Question 15

Why do Firms not provide Public Goods?

Answer 15

This is because it doesn’t make a firm any money and they wont make profit so they go down the route of private goods.

Question 16

What are Private Goods?

Answer 16

Goods that are Provided by firms for Profit. is a product that must be purchased to be consumed, and consumption by one individual prevents another individual from consuming it. They are Excludable and Rivalrous.

Question 17

What is Symmetric Info?

Answer 17

Buyer and Seller have the same amount of knowledge about a good or service. product could be underpriced.

Question 18

What is Asymmetric Info?

Answer 18

Buyer and Seller have different amounts of knowledge about a good or a service. Means seller can get more as a buyer wont know the price. Over-Priced.

Question 19

What is the Free Rider problem?

Answer 19

Type of Market Failure that occurs when people benefit from resources they they don’t pay for or under-pay. This reduces the incentive to provide the good or service and leads to an inefficient allocation of resources. Can be solved by tax regulation or social norms.

Question 20

What are Information Gaps?

Answer 20

Refers to a situation where one party in a business deal had more information than the other party. Its usually the seller has more info than the buyer and its also know as asymmetric info. Where there is an info gap the market isn’t running efficiently and it can lead to market failures.

Question 21

What’s an example situation where there is an Information Gap?

Answer 21

e.g. A car salesman selling a car will generally have more information about the car than the buyer so the seller could just not mention some certain damage etc.. and so the buyer will be getting partially ripped off.

Question 22

What does MPC stand for and what is it?

Answer 22

It stands for Marginal Propensity to Consume and its the the production. (supply on graph)

Question 23

What does MPB stand for and what is it?

Answer 23

It stands for Marginal Private Benefit and its the the Consumption.(Demand on graph)

Question 24

What’s a bad MPC example?

Answer 24

e.g. Air Pollution, Traffic Distribution

Question 25

What’s a Good MPC example?

Answer 25

e.g. Military Innovation and Products

Question 26

What’s a bad MPB example?

Answer 26

e.g. Smoking +second-hand smoking, Fatty foods +NHS burden

Question 27

What’s a good MPB example?

Answer 27

e.g. Education and employment

Question 28

What does Positive Consumption look like on a graph? (shift?)

Answer 28

Positive Consumption (MPB) shifts MPB to the right. (MPC equals to MSC) under-consumed and underpriced

Question 29

What does Negative Consumption look like on a graph? (shift?)

Answer 29

Negative Consumption (MPB) shifts MPB to the left.(MPC equals to MSC) over-priced and over-consumed

Question 30

What does Positive Production look like on a graph? (shift?)

Answer 30

Positive Production (MPC) means MPC shifts to the right.(MPB equals to MSB) overpriced and under-consumed

Question 31

What does Negative Production look like on a graph? (shift?)

Answer 31

Negative Production (MPC) means MPC shifts to the left.(MPB equals to MSB) underpriced and over-consumed

Question 32

What does Excludability mean?

Answer 32

When you buy something you are excluding other people from buying it and consuming it.

Question 33

What does Rivalrous mean?

Answer 33

The act of consuming something uses up the good and then is considered rivalrous. When a consumer reduces the ability for someone else to consume that certain good.

Question 34

What is a Quasi?

Answer 34

When a public good has elements of being rivalrous and excludable. When a Public Good is used up. e.g. When Public Beach Loungers are all being used. Its a Public good but is being used and so is excludable to others by you using it.

Question 35

What does Utility mean?

Answer 35

Refers to the level of satisfaction gained from consuming a good or service. Rational person will consumer goods and services that maximize their utility.

Question 36

What does Maximizing Utility mean?

Answer 36

If you are a rational person you will consume goods and services that maximize your utility. However, you may not have all the info you need to truly understand which goods or services will maximize it.

Question 37

What’s a Quality Mark?

Answer 37

Standard or Criteria met by industry or government. Logo on a product or on the description of a service. Shows that it meets their standards.