1.3 market failure

Question 1

when do markets fail

Answer 1

-when the price mechanism fails to allocate scarce resources efficiently and society suffers as a result

Question 2

complete market failure

Answer 2

-when market simply does not supply products at all

Question 3

partial market failure

Answer 3

-when the market does function but produces either the wrong quantity of goods or at the wrong price

Question 4

types of market failure- externalities

Answer 4

-An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism. e.g. it is the spillover effect of the production or consumption of a good or service.

Question 5

types of market failure- under provision of public goods

Answer 5

-Public goods are non-excludable and non-rival, and they are underprovided in a free market because of the free-rider problem.

Question 6

types of market failure- information gaps

Answer 6

-this imperfect information leads to a misallocation of resources.

Question 7

externalities- private costs

Answer 7

-cost to economic agents involved directly in an economic transaction
-could refer to cost of production for producers or cost to consumers

Question 8

externalities- social costs

Answer 8

-private costs+external costs
-cost to society as a whole
-shown as vertical distance between 2 curves

Question 9

externalities- external costs

Answer 9

-e.g. pollution

Question 10

externalities- private benefit

Answer 10

-benefits from consumption of a good
-revenue made by firm from selling the good

Question 11

externalities- social benefits

Question 12

indirect taxation

Answer 12

-gov policy for neg externalities
-reduces quantity of demerit goods consumed
-increases the price of the good
-internalises the externality so polluter pays the damage

Question 13

subsides

Answer 13

• encourage the consumption of merit goods. This includes the full social benefit in the market price of the good.

Question 14

regulation

Answer 14

-enforces less consumption of a good
-e.g. min school leaving age
-bans for harmful goods

Question 15

provide the good directly

Answer 15

-government produces public goods which are underprovided by free market

Question 16

provide info

Answer 16

-so there is no info failure and consumers can make informed decisions

Question 17

personal carbon allowances

Answer 17

-tradeable
-firms can pollute up to a certain amount and sell the permits they do not use

Question 18

2 factors of public goods

Answer 18

1. non-excludable=by consuming the good someone else is not prevented from also consuming it
   2.non-rival=benefit does not diminish if more people consume the good

Question 19

the free rider problem

Answer 19

-people who do not pay still receive same benefits as those who do
-this is the reason public goods are underprovided