1.3 Market failure

Question 1

define market failure

Answer 1

a situation that arises when the free market equilibrium does not lead to the socially optimum allocation of resources , such as too little or too much of a good is consumed or produced

Question 2

define an externality?

Answer 2

a cost or benefit that is external to a market transaction and thus not reflected in market prices, which may affect third parties not involved in the transaction

Question 3

define an external cost?

Answer 3

costs to a third party not involved within the economic transaction

Question 4

define a private cost?

Answer 4

costs to the individual involved within an economic transaction

Question 5

define a private benefit?

Answer 5

benefits to the individual involved within an economic transaction

Question 6

define an external benefit?

Answer 6

benfits to a third party not involved within an economic transaction

Question 7

what is the social benefit?

Answer 7

external benefit + private benefit

Question 8

what is social cost?

Answer 8

external cost+ private cost

Question 9

what is marginal social cost?

Answer 9

the added cost to society from consuming an extra unit of a good

Question 10

what is marginal social benefit?

Answer 10

the added benefit to society from consuming an extra unit of a good

Question 11

what is a negative production externality?

Answer 11

they occur when the social costs are greater than the private costs

Question 12

when left to a free market where will a firm operate on externalities diagram

Answer 12

MPC = MPB

Question 13

what point is best for society?

Answer 13

MSC=MSB

Question 14

what is the supply curve on a externality diagram ?

Answer 14

MPC`

Question 15

what is the demand curve on an externality diagram?

Answer 15

MPB

Question 16

what are examples of a negative production externality?

Answer 16

toxic fumes, industrial waste and noise pollution from airplanes

Question 17

why are the lines MSC and MPC diverging?

Answer 17

this is because at small quantity the external cost is not much for example one person driving a car, but as quantity rises the external costs do aswell, lot more pollution when lots drive

Question 18

define a merit good?

Answer 18

a good with external benefit so social benefit is greater than private benefit (usually underprovided by the free market

Question 19

what are examples of merit goods?

Answer 19

education, health programs, public libraries

Question 20

what is a demerit good?

Answer 20

a good with an external cost so social cost is greater than then private costs (usually overprovided by the free market)

Question 21

what is the issue of measuring the size of

externalities?

Answer 21

a lot of the external costs and benefits are normative statements as they are based on value judgements, some people may see Christmas lights as a benefit however some may find them tacky so negative

Question 22

why is it hard for governments to tackle externalities that are international such as global warming?

Answer 22

actions in one country may have an affect on another country so the only solution is to have an international agreement between countrys to reduce the externality.

Question 23

what was the Kyoto protocol?

Answer 23

it was a summit in 1997 where most developed countries in the world agreed to reduce emissions by 6% by 2010 however, USA (the largest emitter of CO2 at the time) did not join due to economic reasons

Question 24

what is the effect of global warming on world inequality?

Answer 24

the largest polluters are the transport and industry from developed countries which causes sea level to rise which affects the developing countries especially flat land such as