1.3.1, 1.3.2 1.3.3 and 1.3.4 Flashcards
What is market failure?
When the market fails to make the best or optimum use of scarce resources.
What’s a positive externality?
When the consumption or production of a good has a beneficial effect on a third party.
What’s a negative externality?
When the consumption or production of a good has an adverse effect on a third party.
What’s an information gap?
When a consumer, producer, or government doesn’t have enough information to make a rational economic decision.
What’s the under-provision of public goods?
This is when the state (government) has to provide goods since consumers and producers won’t.
This links to the free-rider problem.
What are the 2 characteristics of public goods?
Non-excludability
- People can’t be stopped from consuming the good
Non-rivalry
- One person benefitting doesn’t stop others from benefitting also
What’s a demerit good?
Goods whose production and consumption causes harm to the consumer.
What’s a merit good?
Goods whose consumption provides a positive effect to the consumer.
Draw a graph to show a negative externality in production
- Y axis is Price Level
- X axis is QD
- Demand line is D = MPB = MSB
- Supply line is S = MPC
- Shifted in supply line is S = MSC
- Equilibrium lines
- The Equilibrium lines should form a triangle showing deadweight welfare loss
Name an example of a negative externality in production
Pollution
Draw a graph to show a positive externality in consumption
- Y axis is Price Level
- X axis is QD
- Supply line is S = MPC = MSC
- Demand line is D = MPB
- Shifted demand line is D = MSB
- Equilibrium lines
- The Equilibrium lines should form a triangle showing deadweight welfare loss
Name an example of a positive externality in consumption
Covid vaccine
