2.8 + 2.9 Market Failure Flashcards
What is a market failure?
A situation in which the allocation of goods and services is not efficient.
True or False: Externalities can lead to market failure.
True
Define externality.
A consequence of an economic activity that affects other parties who did not choose to be involved in that activity.
What are positive externalities?
Benefits experienced by third parties as a result of an economic transaction.
What are negative externalities?
Costs suffered by third parties as a result of an economic transaction.
Fill in the blank: An example of a negative externality is _____ pollution.
air
What is a common pool resource?
A resource that is available to all but is limited in supply, leading to potential overuse.
True or False: Common pool resources are non-excludable and rivalrous.
True
What is the tragedy of the commons?
A situation in which individuals acting in their own self-interest deplete a shared resource.
Which of the following is an example of a common pool resource? A) Public park B) Ocean fish stocks C) Public library D) National defense
B) Ocean fish stocks
What is the Coase theorem?
The proposition that if property rights are well-defined and transaction costs are low, parties can negotiate solutions to externalities.
Fill in the blank: Government intervention to correct externalities typically involves _____ or subsidies.
taxes
What is an example of a positive externality?
Education, as it benefits society beyond the individual receiving it.
True or False: The presence of externalities always leads to government intervention.
False
What is an external cost?
A cost incurred by a third party due to an economic transaction.
What is an external benefit?
A benefit received by a third party due to an economic transaction.
Fill in the blank: The market outcome is efficient when _____ are accounted for.
externalities
What is meant by ‘internalizing the externality’?
Incorporating external costs or benefits into the decision-making process of the parties involved.
True or False: All externalities can be easily quantified.
False
What role do taxes play in addressing negative externalities?
They increase the cost of the harmful activity, potentially reducing its occurrence.
What is a public good?
A good that is non-excludable and non-rivalrous, meaning individuals cannot be effectively excluded from use and one person’s use does not reduce availability to others.
Fill in the blank: Overfishing is a classic example of the _____ of the commons.
tragedy
What is a possible solution to the tragedy of the commons?
Implementing regulations or creating property rights to manage resource use.
True or False: Common pool resources can be managed sustainably.
True