2.3 – Social Costs and Benefits; Market Failure

Question 1

What are external costs?

Answer 1

Negative impacts on the society (third-parties) due to production or consumption of goods and services.
eg: Pollution from factory

Question 2

What are external benefits?

Answer 2

Positive impacts on the society due to production or consumption of goods and services.
eg:better roads for the society due to the opening of a new business.

Question 3

What are private costs?

Answer 3

The costs to the producer and consumer due to production and consumption respectively.
eg: cost of production

Question 4

What are private benefits?

Answer 4

The benefits to the producer or consumer due to production and consumption respectively.
eg: The better immunity received by a consumer when he receives a vaccine.

Question 5

What are social costs?

Answer 5

Social Costs = External costs + Private Costs

Question 6

What are social benefits?

Answer 6

Social Benefits = External benefits + Private benefits

Question 7

What is Market failure?

Answer 7

Market failure occurs when resources are allocated inefficiently. This is the most disadvantageous aspect to the Market Economy

Question 8

What are the causes of Market Failure?

Answer 8

When social costs exceed social benefits.
Over-provision of demerit goods
Under-provision of merit goods
Lack of public goods
Immobility of resources
Information failure
Abuse of monopoly powers