1.3.1 - 1.3.2

Question 1

Market failure

Answer 1

When the market left to its own devices fails to produce an efficient allocation of resources

Question 2

Partial market failure

Answer 2

When a market exists but fails to allocate resources at the socially optimal level eg. over produces and consumes in the case of negative externalities eg. pollution or alcohol

Question 3

Complete market failure

Answer 3

A missing market due for example to the free-rider problem associated with public goods eg. street lights or nuclear defence

Question 4

Externailites

Answer 4

Impacts falling on third parties as a result of the actions of market participants

Question 5

Private goods

Answer 5

Goods and services that are rival and excludable. Health and education are examples of this

Question 6

Rival

Answer 6

Consumption by one diminishes the good for others

Question 7

Excludable

Answer 7

Consumers who have not paid for the food or service can be “excluded”/prevented from consuming it

Question 8

Public good

Answer 8

A good that is non-rival and non-excludable

Question 9

Quasi-public

Answer 9

A good or service with some of the characteristics of a public good or only some of the time eg. road, beach

Question 10

Common-pool resource

Answer 10

A good which is rival but non-excludable eg. deep sea fish stock or clean air/atmosphere

Question 11

Third parties

Answer 11

People outside the market

Question 12

Private (cost/benefit)

Answer 12

Relating to market participants - firms and consumers

Question 13

Negative externality

Answer 13

When the impact on third parties is adverse

Question 14

Positive externality

Answer 14

When the impact on third parties is beneficial

Question 15

Merit good

Answer 15

A good associated with myopic information failure, possibly a positive consumption externality and where society may judge people should be able to benefit irrespective of their ability to pay eg. healthcare, education

Question 16

Social

Answer 16

Private + external

Question 17

Privately optimal level of production / consumption

Answer 17

Where MPC = MPB (marginal private cost = marginal private benefit) - (ie. where the market will reach equilibrium left to its own devices)

Question 18

Socially optimal level or production / consumption

Answer 18

Where MSB = MSC (marginal social benefit = marginal social cost) - (this is where we want to market to be - where all costs and benefits are taken into account)

Question 19

Welfare loss triangle

Answer 19

The loss to society of failing to produce at the socially optimal level (conversely this is the gain when the market failure is corrected)

Question 20

Marginal social benefit

Answer 20

MPB + consumption externality (in the case of a negative externality the externality will be negative and in the case of a merit goof the MPB will be incorrect due to the information failure)

Question 21

Marginal social cost

Answer 21

MPB + production externality

Question 22

Mixed externality

Answer 22

An externality affecting both production and consumption eg. road use

Question 23

The social optimum is where MSB=MSC

Answer 23

Marginal social cost and marginal social benefit include all the costs and all the benefits and not jut the ones associated with the market participants. This means the social optimum at MSB=MSC reflects all costs and benefits

Question 24

The market left to its own devices reaches equilibrium at P,Q

Answer 24

The analysis assumes market participants are rational. This means they maximise their self interest and they ignore the costs falling on third parties. this means equilibrium will occur where MPC=MPB.

Question 25

There is a welfare loss from being at Q rather than Q*

Answer 25

For all units of output produced and consumed beyond Q*, the total cost (MSC) exceeds the total benefit

Question 26

Demerit good

Answer 26

Information failure: a negative consumption externality, people should not be able to consume just because they can pay, eg. alcohol, smoking, unhealthy food