Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics > 2.8 Market Failure > Flashcards

2.8 Market Failure Flashcards

1
Q

Examples of market failure

A
  • Public goods
  • Negative externalities of production
  • negative externalities of consumption
  • common pool resources
  • positive externalities of consumption
    -positive externalities of consumption
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is market failure?

A

Market failure occurs when there is a lack of allocative efficiency from society’s point of view.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What determines the most efficient allocation of scarce resources in a free market?

A

The price mechanism.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are scarce resources?

A

Factors of production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are positive externalities?

A

Benefits gained by a third party not involved in the economic transaction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are negative externalities?

A

Costs imposed on a third party not involved in the economic transaction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is an example of a negative externality?

A

Passive smoking.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are public goods?

A

Goods that are beneficial to society but would be under-provided by the free market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What characteristics define public goods?

A
  • Non-excludable
  • Non-rivalrous in consumption
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are common pool resources?

A

Resources with no private ownership that are collectively shared and finite.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is an example of a common pool resource?

A

Fishing grounds off the coast.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the effect of over-provision of demerit goods?

A

It causes over-allocation of resources used to make the goods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the effect of under-provision of beneficial goods?

A

It leads to under-allocation of resources used to create those goods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is marginal private benefit (MPB)?

A

The additional benefit received from the consumption or production of one additional unit of output.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is marginal private cost (MPC)?

A

The additional cost incurred through the consumption or production of one additional unit of output.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is marginal social benefit (MSB)?

A

The benefit to society from the consumption or production of one additional unit of output, including external benefits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is marginal social cost (MSC)?

A

The cost to society incurred through the consumption or production of one additional unit of output, including external costs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

When does socially optimum output occur?

A

When marginal social benefit (MSB) equals marginal social cost (MSC).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

True or False: Market failure can lead to both over-provision and under-provision of goods.

A

True.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Fill in the blank: Externalities occur when there is an external impact on a ______ party not involved in an economic transaction.

A

third

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are external costs in consumption?

A

Costs that occur when the consumption of goods harms third parties

Examples include pollution from coal-burning power stations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is a merit good?

A

A good that is beneficial to society but tends to be under-consumed

Examples include education, vaccinations, and electric cars.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a positive externality of production?

A

Benefits that arise from the production of a good or service that affect third parties

Example: Honey production increases bee populations, enhancing pollination.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What market failure occurs due to positive externalities of production?

A

Under-provision of goods since only private benefits are considered by producers

If external benefits were considered, supply would increase.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the impact of positive externalities on supply and price?

A

Supply would increase and prices would decrease if external benefits were considered

More factors of production should be allocated to producing goods with positive externalities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is a positive externality of consumption?

A

Benefits that arise from the consumption of goods or services that affect third parties

Example: Vaccinations prevent disease spread, benefiting the wider community.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What market failure occurs due to positive externalities of consumption?

A

Under-consumption of goods as only private benefits are considered by consumers

If external benefits were considered, demand would increase.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What are common pool resources?

A

Resources that are non-excludable but rivalrous in consumption

Examples include fisheries and forests.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Define non-excludable in the context of common pool resources.

A

Anyone can access these resources without having to pay

No one owns these resources.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Define rivalrous in the context of common pool resources.

A

Resources can be used up, reducing availability for others

As one individual uses them, it decreases the opportunity for others.

31
Q

What is the consequence of under-provision of merit goods?

A

It creates private and/or external benefits that are not fully realized

Governments may need to subsidize these goods to increase consumption.

32
Q

Fill in the blank: Positive externalities of production lead to _____ market failure.

A

Under-provision

33
Q

Fill in the blank: Positive externalities of consumption lead to _____ market failure.

A

Under-consumption

34
Q

True or False: External benefits are always considered by producers.

A

False

35
Q

True or False: Merit goods are over-consumed in society.

A

False

36
Q

What is allocative efficiency?

A

Allocative efficiency occurs when resources are distributed in a way that maximizes total benefits to society.

It is achieved when the price of a good or service reflects the marginal cost of production.

37
Q

What do the supply and demand curves represent in allocative efficiency?

A

Supply curve (S) represents Social Cost (MSC) and Demand curve (D) represents Marginal Social Benefit (MSB).

MSC includes both private and external costs, while MSB includes private benefits plus external benefits.

38
Q

At what point is allocative efficiency achieved?

A

Allocative efficiency is achieved at Qopt, where all external costs and benefits are accounted for.

This is the socially optimal level of output.

39
Q

What is consumer surplus?

A

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.

It is maximized at the allocative efficiency point.

40
Q

Define negative externalities of production.

A

Negative externalities of production occur when the production of goods or services imposes costs on third parties not involved in the transaction.

Examples include air pollution and water contamination.

41
Q

What happens when external costs are not considered by producers?

A

When external costs are not considered, supply increases leading to over-provision of goods, resulting in market failure.

Producers only account for private costs.

42
Q

What is the relationship between MSC and MSB in an efficient market?

A

The optimal allocation of resources occurs when MSB equals MSC.

This indicates no market failure.

43
Q

What are negative externalities of consumption?

A

Negative externalities of consumption arise when the consumption of goods or services imposes costs on third parties.

Examples include waste generated from single-use plastics.

44
Q

What is the impact of neglecting external costs in consumption?

A

Neglecting external costs leads to over-consumption and market failure.

Consumers only consider private costs.

45
Q

Fill in the blank: The socially optimal level of output is at _______.

A

Qopt

46
Q

True or False: A free market is efficient if MSB equals MSC.

A

True

47
Q

What is the significance of the ‘pink triangle’ in economic diagrams?

A

The ‘pink triangle’ represents welfare loss due to inefficiencies in resource allocation.

It indicates the lost potential benefits to society.

48
Q

What are common examples of negative externalities in consumption?

A

Common examples include:
* Cigarettes
* Alcohol
* Fatty foods
* Single-use plastics

49
Q

What does the term ‘market failure’ refer to?

A

Market failure refers to a situation where the allocation of goods and services is not efficient.

This often occurs due to externalities.

50
Q

What is the consequence of over-consumption in a free market?

A

Over-consumption results in a welfare loss and inefficient allocation of resources.

Fewer resources should be allocated to produce over-consumed goods.

51
Q

What is the formula for Social Cost (MSC)?

A

MSC = Private Cost (MPC) + External Cost

52
Q

What does the term ‘opportunity for government intervention’ imply?

A

It implies that government action may be required to correct market failures and achieve more socially efficient outcomes.

This can include regulations or taxes to internalize external costs.

53
Q

What is the Tragedy of the Commons?

A

Occurs when common pool resources are used in an unsustainable way

This leads to negative externalities of production.

54
Q

What are common examples of common pool resources?

A
  • Ocean fishing
  • Communal grazing land
  • Water sources (rivers)
  • Nature forests (rainforests)
55
Q

What are some government interventions to address market failure?

A
  • Indirect taxes
  • Carbon taxes
  • Producer subsidies
  • Legislation & regulation
  • Education
  • Tradable permits
  • Collective self-governance
  • International agreements
  • Government provision
56
Q

What is the purpose of indirect taxes?

A

To increase the price of goods/services with negative side effects to reduce quantity demanded/supplied

Aims to make individuals or firms causing externalities pay for them.

57
Q

What is the equation for Marginal Social Cost (MSC)?

A

MSC = Marginal Private Cost (MPC) + Tax

58
Q

What is a disadvantage of collective self-governance in the Darién Gap?

A

Illegal loggers are violent and armed, making it difficult for tribes to govern the land

Tribes often lack resources compared to illegal loggers.

59
Q

What is an advantage of appealing to the government for legal ownership rights?

A

Legal rights of property ownership can be enforced by law

Some illegal loggers have been imprisoned as a result.

60
Q

What is a disadvantage of international agreements to protect resources?

A

Not all countries follow the law, and corruption can hinder enforcement

For example, China has been noted to ignore these laws.

61
Q

What is the socially optimal output condition?

A

MSC = MSB; allocative efficiency

62
Q

True or False: Market failure occurs when MSC is greater than MSB at equilibrium.

A

True

63
Q

Fill in the blank: Indirect taxes can be _______ or specific.

A

[ad-valorem]

64
Q

What is the result of over-provision of a product in terms of quantity?

A

Qe - Qopt

65
Q

What happens to social cost when government intervention is applied?

A

S = MSC

66
Q

What is the impact of a carbon tax?

A

It aims to reduce carbon emissions by taxing firms that pollute.

67
Q

What does the term ‘pre-tax welfare loss’ refer to?

A

The loss in welfare before any taxes are applied.

68
Q

What does the term ‘post-tax welfare loss’ refer to?

A

The loss in welfare after taxes have been applied.

69
Q

Draw negative externalities of consumption graph(ciggartets)

A
70
Q

Draw negative externalities of production graph(pollution)

A
71
Q

Draw posative externalities of conumption(vaccines)

A
72
Q

Draw positive externalities of porduction(bee pollen)

A
73
Q

Externalities definition

A

Costs or benefits that affect third parties who are not involved in an economic transaction . They can be positive (benefits) or negative (costs).

74
Q

Evalaute this diagram. WHat is happening?

A

There are net negative externalities in this market.

It costs society more to produce these goods then society is valuing them

There is negative externalities in production and positive externalities in consumption

Economics (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions