1.3 Market failure

Question 1

When does Market failure occur?

Answer 1

When the free market fails to allocate scarce resources at the socially optimum level of output

Question 1

What are Externalities?

Answer 1

Third party costs ignored by the price mechanism

Question 2

What are externalities also known as ?

Answer 2

indirects costs and benefits. External costs are negative externalities and positive externalities are benefits

Question 3

When may an external cost occur?

Answer 3

In the production or consumption of a good. Example of production is a chemical firm polluting a river with its waste. Consumption is smokers which effect non smokers

Question 4

What is a private cost?

Answer 4

• Costs that are internal to the firm. which pays for it directly. For example wages for workers, rent of buildings and even machinery.

Question 5

What is a social cost?

Answer 5

By adding private costs to external costs. and external costs are the difference between private costs and social costs. These curves often diverge

Question 6

What is an external benefit?

Answer 6

When a benefit occurs in the process of production and consumption. For example recycling waste such as newspapers,glass and tin. Helps promote sustainable growth. Consumption is vaccination when it stops spreading to other people.

Question 7

What is a social benefit?

Answer 7

when we add a private cost to an external cost. The line diverges away

Question 8

What is market equilibrium?

Answer 8

Where the marginal benefit equals marginal private costs

Question 9

What does external costs on consumers and producers cause?

Answer 9

• Overproduction since the free market exceeds social optimum level
• Underpricing
• Welfare loss
• Concerns on availability on future resources

Question 10

What does the impact of external benefits on consumers and producers cause?

Answer 10

• Underproduction
• Underpricing
• Potential welfare gain
• Calls for government intervention.

Question 11

What are public goods?

Answer 11

Not being produced in society and offer great benefits to it and causes a missing market.

Question 12

What does non-excludability mean?

Answer 12

Once the good has been produced for the benefit of one person it it impossible from people benefiting.

Question 13

What does non rivalry mean>

Answer 13

Means if people consume a good and enjoy it’s benefits than it does not reduce the amount for others.

Question 14

What is an example of a public good?

Answer 14

Public fireworks, displays, lighthouses and beaches

Question 15

What are private goods?

Answer 15

Opposite of public goods and displays characteristics of rivalry. An example is a mars bar. They use private property rights to stop other people using them.

Question 16

What is the free rider problem?

Answer 16

• Once a public good has been provided for one person it is provided for everyone. The market fails because it is not possible for firms to withhold the good from consumers who refuse to pay it. For example, National defence.

Question 17

What’s systematic information?

Answer 17

Assumed that consumers and producers have this information. They act in a rational way and will take into account everything

Question 18

What is asymmetric information?

Answer 18

Unequal market knowledge and have to make own economic decisions and could lead to misallocation of resources.