1.3.1 + 1.3.2 Market failure and externalities

Question 1

What is market failure

Answer 1

-when the market mechanism causes an inefficient allocation of resources
-not socially or economically desirable
-not the socially optimum level of output
-government my intervene to correct

Question 2

What happens at the free market equilibrium

Answer 2

-consumer and producer surplus are jointly maximised
-efficient allocation of resources
-max welfare to society

Question 3

What are some types of market failure

Answer 3

-externalities
-under-provision of public goods
-info gaps/asymmetries

Question 4

What are externalities

Answer 4

-third party effects from the production or consumption
-not reflected in the market price
-cause market failure when the price mechanism doesn’t take into account social costs and benefits
-dead-weight welfare loss as not at socially optimum output level

Question 5

Difference between consumption and production externalities

Answer 5

consumption- external costs or benefits of consumption
production-external costs or benefits of production

Question 6

Difference between private and social costs/benefits

Answer 6

private costs- incurred by just producer
private benefits- incurred by just consumer
social costs/benefit- private + externality

Question 7

Difference between social efficiency and social inefficiency

Answer 7

efficiency- MSB=MSC, maximises social economic welfare
inefficiency- MSB doesn’t equal MSC, due to externalities there is market failure