1.3

Question 1

What are externalities?

Answer 1

Externalities affect parties that are not directly involved in a
transaction and may be either costs or benefits.

Question 2

What is social cost equal to?

Answer 2

Social cost = PRIVATE COST + EXTERNAL COST

Question 3

What is social benefit equal to?

Answer 3

Social benefit = PRIVATE BENEFIT + EXTERNAL BENEFIT

Question 4

In negative externalities which is greater social cost or private cost?

Answer 4

Social cost > private cost

Question 5

In positive externalities which is greater social benefit or private benefit? And what does this lead to

Answer 5

Social benefit > Private benefit

This leads to under consumption/production which ultimately leads to market failure

Question 6

What is market failure?

Answer 6

When the price mechanism fails to allocate resources efficiently. Leading to net welfare loss.

Question 7

What is complete market failure and partial market failure?

Answer 7

When there are missing markets.
Partial market failure leads to over/under production or consumption

Question 8

What are information gaps?

Answer 8

Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.

Question 9

What are the causes of information failure?

Answer 9

-Long term consequences -
-Complexity - when the product is highly complex
-Unbalanced knowledge - When the buyers knows more than the seller or vice versa.
-Price information

Question 10

Define adverse selection

Answer 10

When the seller has more information than the buyer or vice versa.

Question 11

What is a moral hazard?

Answer 11

A situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will pay for the cost. It arises when one of the parties has incomplete information about the other.

Question 12

Define private costs/benefits

Answer 12

The costs/ benefits of a market transaction to the individual participating. Taken into account by price mechanism.

Question 13

Define social costs/benefits

Answer 13

The SUM of external costs/benefits and private costs/benefits in a market transaction.

Question 14

Define external costs/benefits

Answer 14

The positive/negative effects outside of a market transaction.

Question 15

What is a merit good?

Answer 15

This is a good with external benefits, where the benefit to society is greater than the benefit to the individual.

Question 16

Define public goods

Answer 16

They are goods which are non rivalrous - This means that one persons use of the good doesn’t stop someone else from using it.

They are also non excludable which means that you cannot stop someone from accessing the good.

Question 17

What are the main types of market failure?

Answer 17

• Externalities
• Under provision of public goods
• Information gaps

Question 18

What is the market equilibrium?

Answer 18

Where the marginal private benefits equals marginal private cost.

Question 19

Why are public goods underprovided in free markets?

Answer 19

Due to the free rider problem and difficulty in measuring their value.

Question 20

What are quasi public goods?

Answer 20

Goods either characteristics of both public and private goods

Question 21

Define assymetric information

Answer 21

When there is unequal knowledge between consumers and producers, leading to market failure.

Question 22

What is the social optimum?

Answer 22

Where marginal social benefit equals marginal social cost.

Question 23

What are private goods?

Answer 23

Goods that have rivalry and excludability in their consumption.