2.7-2.11

Question 1

Explain the margin/ total and marginal utility and the demand curve

Answer 1

-Marginal utility is the extra satisfaction derived from consuming one extra unit of the good.

> Formula: Change in Total Utility/ Change in N.o of units consumed.

> Marginal cost= Change in total cost/ Change in quantity

-Total utility isthe aggregate amount of a consumer receives through the consumption of a specific good or service.

-Demand curve is downward sloping because of diminishing marginal utility-Law of diminishing marginal utility suggests that consumer surplus generally declines with extra units consumed.

Question 2

Explain market failure/ marginal social cost, marginal external cost, marginal private cost.

Answer 2

> MF-occurs when there is an inefficient allocation of resources in a free market.

> Marginal social cost is the extra cost on society derived per extra unit consumed.

-MEC= Cost to a third party from the consumption/production of one extra unit.

-MPC- Cost to a firm of producing one extra unit
Marginal social cost = marginal external cost + marginal private cost.

Question 3

Explain Marginal social benefit, Marginal external benefit and marginal private benefit

Answer 3

> MSB: Extra benefit on society derived per extra unit consumed.
Marginal social benefit = marginal external benefit + marginal private benefit.

> MEB: Benefit to a third party from the consumption/production of one extra unit.

> MPB:Additional benefits that a consumer receives from consuming one more unit of a good or service

Question 4

Explain with the aid of a diagram positive externality consumption

Answer 4

-SMB>PMB
-Deadweight welfare loss
-Socially efficiency will occur where social cost = social benefit at Q2
- Free market Q1

Externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.

Question 5

Explain with the aid of a diagram positive externality production

Answer 5

-Occurs when a third party benefits from the production of a good.

-PMC> SMC
-Socially efficient level where social marginal cost= social marginal benefit.- Q2
- Free market- Q1

Question 6

Explain with the aid of a diagram Negative externality production

Answer 6

-When producing a good causes a harmful effect to a third party.

-SMC> PMC
-Free market output of Q1.
-Social efficiency occurs at Q2, where SMC=SMB.

Question 7

Explain with the aid of a diagram negative externality consumption

Answer 7

-Occurs when consuming a good causes a harmful effect to a third party

-PMB> SMB
-Social efficiency occurs at Q2 where SMB=SMC

Question 8

Explain Information failure

Answer 8

Information failure is a type of market failure where individuals or firms have a lack of information about economic decisions.

Question 9

Explain Asymmetric information

Answer 9

This is when there is unequal knowledge between consumers and producers.

Question 10

Explain moral hazard

Answer 10

Where an individual takes on more risk than usual because they do not bear the full cost of the risk.

Question 11

Explain Demerit Goods

Answer 11

> Negative externalities are caused by demerit goods.
These are associated with information failure, since consumers are not aware of the long run implications of consuming the good, and they are usually over-provided.

Question 12

Explain Merit goods

Answer 12

Positive externalities are caused by merit goods. These are associated with information failure too, because consumers do not realise the long run benefits to consuming the good. They are underprovided in a free market.

Question 13

Explain market failure due to information failure

Answer 13

Key examples of market failure owing to information failure is evident in the consumption of unhealthy food or cigarettes.
-Use negative externality CONSUMPTION DIAGRAM to explain this

Question 14

What are the characteristics of public goods?

Answer 14

Public goods characteristics:
1.Non-excludable-by consuming the good, someone else is not prevented from consuming the good as well
2.Non-rival/diminishable- benefit other people get from the good does not diminish if more people consume the good.
3. Non- rejetable
4. Zero Marginal cost

-Under-provided in a free market because of the free-rider problem.

Question 15

Explain the free rider problem

Answer 15

-People who do not pay for the good still receive benefits from it, in the same way people who pay for the good do

Question 16

Explain Private/ Quasi-public goods.

Answer 16

-Private goods are rival and excludable.
-Quasi public goods have characteristics of both public and private goods i.e partial excludability, reject-ability and non rivalry. e.g.

Question 17

Explain different forms of government intervention to target market failure

Answer 17

> Indirect taxes: taxes on expenditure- Two types: 1. Ad valorem taxes are percentages e.g. VAT adds 20%.
2. Specific taxes are a set tax per unit.
Subsides:a payment from the government to a producer to lower their costs of production and encourage them to produce more.
Government expenditure
Price controls: Max Price-have to be set below the free market price, encourage consumption or production of a good.
Min Price-have to be set above the free market price. Discourage production or consumption of a good.
Buffer stock schemes: A government plan to stabilise prices in volatile markets, mainly in agriculture markets. This requires intervention in buying and selling.

Question 18

Explain different forms of government intervention to target market failure

Answer 18

> Public/private partnerships:collaboration between a government agency and a private-sector company.
Legislation/Regulation: government could use laws to ban consumers from consuming a good.
Tradable pollution permits: Firms will be allowed to pollute up to a certain amount, and any surplus on their permit can be traded.
Information Provision
Competition policy: aims are to promote competition; make markets work better and contribute towards improved efficiency.

Question 19

Explain government failure and identify causes

Answer 19

> Gov’t intervention in economy causes an inefficient allocation of resources.
CAUSES:
1.Distortion of price signals
2.Unintended consequences
3.Excessive administrative costs
4.Information gaps
5. Moral hazard
6. Regulatory capture-government agencies become too friendly with business/groups they are trying to regulate