1.3 Market Failure

Question 1

if there’s is no externality…

Answer 1

private cost = social cost
private benefit = social benefit

Question 2

define a negative externality

Answer 2

occurs when there is a negative effect on a third party for which no compensation is paid

Question 3

formula of social cost

Answer 3

private cost + external cost

Question 4

formula of external cost

Answer 4

social cost - private cost

Question 5

define production externality

Answer 5

the negative effect in the the third party which is caused by production of the good

Question 6

in an externality graph what does the y-axis change to

Answer 6

costs and benefits

Question 7

in a externality graph what does the supply curve change to

Answer 7

marginal cost

Question 8

in a externality graph what does the demand curve change to

Answer 8

marginal benefit

Question 9

in a negative externality graph what does the marginal cost curve split into

Answer 9

marginal social cost
marginal private cost

Question 10

out of MSC and MPC which curve is first on a graph

Answer 10

MSC

Question 11

what is point a on this graph

Answer 11

free-market equilibrium - where the market would work at without government intervention

Question 12

what is point c on this graph

Answer 12

social equilibrium
social cost = social benefits + no externality
(allocative efficiency)

Question 13

what is the private cost on this graph

Answer 13

OQ1aP1p

Question 14

what is the external cost

Answer 14

P1pabP1s

Question 15

what is a positive externality

Answer 15

occurs when there is a positive effect on a third party for which no compensation is paid

Question 16

formula of social benefit

Answer 16

private benefit + external benefit

Question 17

formula of external benefit

Answer 17

social benefit - private benefit

Question 18

define consumption externality

Answer 18

the positive effect on the third party is caused by the consumption of the good

Question 19

what is abc in this graph

Answer 19

welfare gain

Question 20

what is Q1 to Q2 on this graph

Answer 20

under consumption

Question 21

what does MB split up into on a positive externality graph

Answer 21

marginal private benefit
marginal social benefit

Question 22

on a positive externality graph out of MPB and MSB which curve comes first

Answer 22

MPB

Question 23

what is point a on this graph

Answer 23

private equilibrium/ free-market equilibrium - where the market will operate at without government intervention

Question 24

what is point c on this graph

Answer 24

social equilibrium (allocative efficient point)

Question 25

define public good

Answer 25

1. non-rival: the quantity of good doesn’t diminish upon consumption
2. non-excludable: no price can be charged for the good
   
   • non-efficient pricing
   • benefits of consumption cannot be confined to the individual

Question 26

define private good

Answer 26

1. rivalry: the quantity of the good diminishes upon consumption
2. excludable: possible to prevent others from consuming the good

Question 27

define quazi public good

Answer 27

some attributes of a public good but not all

Question 28

what is the free-rider problem

Answer 28

occurs when people who benefit from a good use it and avoid paying for it by waiting for others to pay for it first

Question 29

how do public goods lead to market failure

Answer 29

• free rider problem
• no profit = no incentive for free market so good is underprovided

Question 30

define de-merit good

Answer 30

brings about negative externalities, not good for society

Question 31

example of public good

Answer 31

national defense