1.3

Question 1

Define market failure

Answer 1

Market failure- when the free market left alone fails to deliver an efficient allocation of resources leading to a loss in social welfare

Question 2

3 types of market failure

Answer 2

• Underprovision of public goods- due to free rider problem
• Information gaps- cannot make rational decisions on the allocation of resources so socail welfare is not maximised
• Externalities- cost or benefit a third party received from an economic transaction outside the market mechanism

Question 3

Define private cost, social cost and external cost

Answer 3

Priavte cost- cost to the individual participating in the economic activity

Social cost- the cost of the economic activity to society as a whole

External cost- cost incurred by a third party not involved in the economic activity

Question 4

Define private benefit, social benefit and external benefit

Answer 4

Private benefit- benefit to the individual participating in the economic activity

Social benefit- benefit of the economic activity to society as a whole

External benefit- benefits to a third party not involved in the economic activity

Question 5

Negative externality diagram

Answer 5

Negative externality graph- overproduction
Social cost is greater than private cost= loss in social welfare

Question 6

Positive externality diagram

Answer 6

Postitive externality graph- underconsumption
Social benefit is greater than social cost

Question 7

Define private and public goods

Answer 7

Private goods- goods that are rivalry and excludable

Public goods- goods that are non-excludable and non-rivalry

Question 8

Define quasi public goods and the free rider problem

Answer 8

Quasi-public goods are goods which arent perfectly non-rivalry and non-excludable but arent perfectly rival or excludable

Free-rider problem- people who dont pay for public goods but still receive benefits from it
> Private sector will underprovide the good because theres no profit incentive

Question 9

Define symmetric and asymmetric info

Answer 9

Symmetric information- both producers and consumers have access to the same information

Asymetric information= one party has more information that the other = market failure

Question 10

How can imperfect information lead to missalllocation of resources

Answer 10

• Info gaps= misallocation of resources as consumers dont pay/buy things maximisng their welfare, can lead to supply or demand being too low or high= price or quantity not as social optimum = market failure
• Unable to make rational decisions
• People could thinks benefits or costs are too high or low when they arent