1.3 - Market Failure

Question 1

What is market failure

Answer 1

when the market fails to allocate resources efficiently, causing a loss in social welfare loss

Question 2

What’s an externality

Answer 2

A cost/benefit a third party receives from the production or consumption of a good or service

Question 3

What’s is non-rival

Answer 3

Where the consumption of one individual doesn’t reduce the availability to others (e.g spotify subscription)

Question 4

What is non-excludable

Answer 4

The good isn’t just for those who have paid for it (you have free access to it).

Question 5

What a rival good

Answer 5

There’s a limited amount

Question 6

What’s an excludable good

Answer 6

A product/service you pay for

Question 7

What’s a public good

Answer 7

Non-rival and non-excludable goods

Question 8

What’s an information gap

Answer 8

Where the producer/consumer doesn’t have complete knowledge of the good

Question 9

What’s are private costs/benefits

Answer 9

the costs/benefits to the individual participating in the transaction of the good

Question 10

What are social costs/benefits

Answer 10

the costs/benefits to society as a whole

Question 11

What are external costs/benefits

Answer 11

the costs/benefits to a third party not involved in the economic activity (the difference between private costs/benefits and social costs/benefits)

Question 12

What’s a merit good

Answer 12

A good with external benefits, where the benefit to society is greater than the benefit to the individual

Question 13

What’s a demerit good

Answer 13

A good with external costs, where the cost to society is greater than the cost to the individual

Question 14

What’s a marginal cost/benefit

Answer 14

the extra cost/benefit of producing or consuming one extra unit of the good

Question 15

What’s marginal private benefit (MPB)

Answer 15

The extra satisfaction gained by the individual from consuming one more of a good

Question 16

What’s marginal social benefit (MSB)

Answer 16

The extra gain to society from the consumption of one more good

Question 17

What’s marginal private cost (MPC)

Answer 17

The extra cost to the individual from producing one more of the good

Question 18

What’s marginal social cost (MSC)

Answer 18

The extra cost to society from the production of one more good

Question 19

When do negative externalities of production occur

Answer 19

When social costs are greater than private costs

Question 20

When do positive externalities of consumption occur

Answer 20

When social benefits are greater than social costs

Question 21

What’s government intervention

Answer 21

Where the government intervenes to ensure the market considers the external costs and benefits

Question 22

What are indirect taxes and subsidies

Answer 22

Where taxes are put on goods with negative externalities and subsidies on goods with positive externalities

Question 23

What are tradable pollution permits

Answer 23

Allow firms to produce up to a certain amount of pollution, and can be traded amongst firms

Question 24

What is provision of the good

Answer 24

When social benefits are very high, the government may decide to provide the good through taxation (e.g. healthcare and education)

Question 25

What’s provision of information

Answer 25

Since some externalities are associated with information gaps, the government can provide information to help people make informed decisions and acknowledge external costs

Question 26

What are regulations

Answer 26

This limits consumption of goods with negative externalities

Question 27

What’s a free rider

Answer 27

Someone who receives the benefit from a public good without paying for it

Question 28

Where do public goods come from

Answer 28

The are provided by the government​ and financed through taxation

Question 29

What’s symmetric information

Answer 29

Where buyers and sellers have access to the same information

Question 30

What’s asymmetric information

Answer 30

Where one party knows more than the other in an economic transaction

Question 31

How do information gaps lead to market failure

Answer 31

As there is a ​misallocation of resources because people do not buy things that maximise their welfare