2.5 The Interaction of Markets

Question 1

What is deadweight loss?

Answer 1

A situation where society incurs a loss of welfare, where social welfare is less than the maximum possible, and occurs when markets fail to allocate resources efficiently in social terms

Question 2

What does price act to do in a free market?

Answer 2

Signal information to economic agents
Ration/allocate scarce resources amongst competing uses on basis of ability to pay
Provide incentives via utility maximising buyers/consumers and profit maximising producers/sellers