1.3 Market Failure

Question 1

What is market failure

Answer 1

When the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss�

Question 2

What are externalities

Answer 2

Externalities are those costs or benefits which are external to an exchange. They are third-party effects ignored by the price mechanism.

Question 3

What external costs

Answer 3

Negative third-party effects outside of a market transaction

Question 4

What are private costs

Answer 4

These are costs internal to the firm, which it pays for directly. which are therefore taken into account by the price mechanism

Question 5

What are social costs

Answer 5

Social costs The sum of external costs and private costs from a market transaction

Question 6

What are external benefits

Answer 6

Positive third party effects outside of market transaction

Question 7

What are private benefits

Answer 7

Consumers are only concerned with private benefits or from consuming a good or service. Private benefits ma also refer to the revenue that a firm obtains from selling a good or service

Question 8

What are social benefits

Answer 8

The sum of external benefits and private benefits from a market transaction

Question 9

What is market equilibrium

Answer 9

Where marginal private benefits equals marginal private costs

Question 10

What is the social optimum

Answer 10

Where marginal social benefits equals marginal social costs

Question 11

What is the triangle of welfare lost and how does it occur

Answer 11

This leads to there being an excess of social costs over social benefits. This occurs when external costs are ignored

Question 12

What is the triangle of welfare gain and how can this occur

Answer 12

This is where the marginal private benefits are converted into the marginal social benefits. This can occur when the external benefits are ignored

Question 13

What is the impact of external costs on the consumers and producers (6)

Answer 13

Overproduction

Underpricing

Welfare loss

Concerns over availability of resources for future generations

Concerns over pollution levels

Calls for government intervention to internalise external costs and so correct market failure

Question 14

What is the impact of external benefits on consumers and producers (5)

Answer 14

Underproduction

Underpricing

Potential welfare gain

Concerns over the longe term implications of underproduction

Calls for government intervention to internalise the external benefits and so correct market failure

Question 15

What are public goods

Answer 15

Those goods that have non-rivalry and non-excludability in their consumption. These are often shared by many memebers of the public

Question 16

What does it mean if a good has non-excludability

Answer 16

Once this good has been produced for the benefit of once person it is impossible to stop others from benefiting

Question 17

What does it mean if a good has non-rivalry

Answer 17

Means that as more people consume this good, it does not reduce the amount available for others. S

Question 18

What are quasi public goods

Answer 18

These are goods which may show qualities of public good some of the time but otherwise there can be competition

Question 19

What are private goods

Answer 19

Those goods that have rivalry and excludability in their consumption

Question 20

What is the free rider problem

Answer 20

In a free market economy public goods are under provided as if they are made for one person then they are availed for everyone consumption. The market fails as it is not possible for the firm to refuse the goods to those who are not willing to pay for them. R

Question 21

What is the reason for the free rider problem

Answer 21

It is rational for the consumer to wait for someone else to pay for the good and reap the rewards of consumption. If everyone waits for someone else to pay for the good then it may never be provided.

Question 22

What is the solution of the free rider problem

Answer 22

The government provides public goods through general taxation

Question 23

What are information gaps

Answer 23

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

Question 24

How can producer knowledge exceeding consumer knowledge effect the market

Answer 24

This causes fear of consumers paying too much for poor quality car. Which causes the whole market to decrease in price making both consumers and producers the loser depending on the car sold

Question 25

What is symmetric information

Answer 25

Where consumers and producers have access to the same information about a good or service in the market

Question 26

What is asymmetric market information

Answer 26

Where consumers and producers have unequal access to information about a good or service in the market

Question 27

What is the solution to producers having more more knowledge than the consumer

Answer 27

The solution is inspection schemes offered by companies effected by this. They will evaluate if the deal is good or not.

Question 28

What is the problem of consumer knowledge exceeding producer knowledge

Answer 28

This can happen in the case of insurance companies where a person lives a risky like but does not disclose this to the insurer. They may then provide insurance at a low cost and therefore make a loss. This could lead to insurers existing the market.

Question 29

What is the solution to consumer knowledge exceeding producer knowledge

Answer 29

have a watchdog body with powers to investigate and prosecute fraudulent insurance claims.

Question 30

Draw diagram which presents the triangle of welfare loss

Answer 30

Check psy math tut

Question 31

Draw a driagrm which presents triangle of welfare gain

Answer 31

Check psy math tut