1.3.1 - 1.3.4 market failure

Question 1

market failure definition

Answer 1

occurs when a market allocates resources inefficiently

(fail when price mechanism fails to allocate scarce resources efficiently and society suffers as a result)

Question 2

missing market def

Answer 2

complete market failure no market exists

Question 3

complete market failure def

Answer 3

occurs when there is no market whatsoever

Question 4

partial market failure def

Answer 4

occurs when a market exists but there is a misallocation of resources

Question 5

types of market failure

Answer 5

• externalities
• under provision of public goods
• information gaps

Question 6

third party def

Answer 6

not participating but being affected by decision

Question 7

externalities def

Answer 7

the effect that producing or consuming a good or service has on people who aren’t involved in the making, buying/selling, and consumption of good/service

Question 8

positive externality
negative externality

Answer 8

-external benefits to a third party
- external costs to a third party

Question 9

market failure could be …

Answer 9

-partial
- complete

Question 10

private cost def

Answer 10

the cost of doing something to wow the a consumer or a firm

Question 11

external costs caused by

Answer 11

externalities

Question 12

social costs calculations

Answer 12

adding the private costs to the external costs

Question 13

social cost def

Answer 13

full cost borne by a society of a good/ service

Question 14

private benefit def

Answer 14

the benefit gained by a consumer or firm by doing something

Question 15

external benefit caused by

Answer 15

externalities

Question 16

social benefit def

Answer 16

the full benefit received by a society from a good or service

Question 17

social benefit

Answer 17

private benefit added to external benefit

Question 18

market failure occurs in a free market the price mechanism will only take into account

Answer 18

private costs and benefits not external costs or benefits

Question 19

public good def

Answer 19

two main characteristics:
non excludable- people cannot be stopped from consuming the good even if they haven’t paid for it

non rivalry- on person benefiting from the good doesn’t stop others benefiting

Question 20

non rival and non excludable def

Answer 20

non excludable- people cannot be stopped from consuming the good even if they haven’t paid for it

non rivalry- on person benefiting from the good doesn’t stop others benefiting

Question 21

example of pure public goods

Answer 21

army/ street lights

Question 22

private goods are

Answer 22

goods that are excludable and exhibit rivalry

Question 23

unlike public goods private goods

Answer 23

people have the choice whether to consume private goods

Question 24

quasi public goods def

Answer 24

many private goods will take on some of the characters of a public goods

Question 25

what can change a good that once had characteristic of a public good into a private good

Answer 25

new technology

Question 26

why are pure public goods given

Answer 26

individuals wouldn’t pay for something that they couldn’t restrict other from using and that others would get for free except for them

Question 27

what can the non exclusivity of public goods lead to

Answer 27

free rider problem

Question 28

free rider problem means

Answer 28

once a public good is provided it’s impossible to stop someone from benefiting from it even if they haven’t paid towards it

Question 29

free rider def

Answer 29

someone who benefits from a good or service without paying for it

Question 30

producers tend to … public goods + why consumers tend to ….. public goods + why

Answer 30

- overvalue benefit- to increase price - undervalue benefit- to decrease price

Question 31

economic theory- tragedy of the commons

Answer 31

idea that people acting in their own best interests will overuse a commons resource without considering that this will lead to the depletion or degradation of that resource

Question 32

what happens to prevent destruction of common resources

Answer 32

government will intervene by taxation legislation subsidies or gov spending

Question 33

technical change leads to

Answer 33

markets efficiently providing goods previously regarded as non excludable or non rival

Question 34

turning public goods to private goods over time can be achieved through

Answer 34

- intellectual property rights (granting patents) - monitoring and control systems ( restricting the use of a good by monitoring resources)

Question 35

symmetric information def

Answer 35

perfect information which is equally available to all participants in a market (everyone has equal and perfect knowledge)

Question 36

perfect informations in competitive markets

Answer 36

assumes that buyers and seller know the full knowledge regarding price, costs, benefits, and availability of products

Question 37

asymmetric information

Answer 37

involves a lack of perfect information in a market buyers or sellers have more information

Question 38

why do some providers have asymmetric info

Answer 38

because they provide a service which is unpredictable

Question 39

asymmetric information results to

Answer 39

moral hazard

Question 40

moral hazard

Answer 40

people take risks because they won’t suffer the consequences themselves if things go wrong (buy home insurance then leave the locks of the doors open because they’re covered)

Question 41

imperfect information means that

Answer 41

merit goods are under consumed but demerit goods are over consumed

Question 42

reasons for imperfect information affecting consumption of merit or demerit goods

Answer 42

- consumers may not know full personal benefit of a merit good - consumers lack the information to decide which good or service is right for them - consumers may not have the information on how harmful a democrat good can be - advertising for a demerit good may withhold or gloss over health dangers

Question 43

market failure occurs because

Answer 43

externalities are being ignored

Question 44

marginal private cost def

Answer 44

cost of producing the last unit of a good

Question 45

msc =

Answer 45

mpc + external cost

Question 46

if its production what curve shifts

Answer 46

supply curve shifts

Question 47

if its consumption what curve shifts

Answer 47

demand curve shifts

Question 48

if its supply curve what curves are drawn

Answer 48

mpc and msc

Question 49

if its demand curve what curves are drawn

Answer 49

mpb and msb

Question 50

if its a positive consumption which curve is higher

Answer 50

msb

Question 51

if its a negative consumption which curve is higher

Answer 51

mpb

Question 52

if its a positive production which curve is higher

Answer 52

mpc

Question 53

if its a negative production which curve is higher

Answer 53

msc

Question 54

marginal benefit def

Answer 54

benefit to a consumer of consuming one more unit of a good or service

Question 55

marginal cost def

Answer 55

cost to the producer of producing one more unit of good or service

Question 56

welfare gain calf

Answer 56

social benefit- social cost

Question 57

social benefit calc

Answer 57

private benefits + external benefit

Question 58

social cost calc

Answer 58

private cost + external cost