2.8 Market Failure

Question 1

What is a market failure?

Answer 1

A situation in which the allocation of goods and services is not efficient.

Question 2

True or False: Externalities can lead to market failure.

Answer 2

True

Question 3

Define externality.

Answer 3

A consequence of an economic activity that affects other parties who did not choose to be involved in that activity.

Question 4

What are positive externalities?

Answer 4

Benefits experienced by third parties as a result of an economic transaction.

Question 5

What are negative externalities?

Answer 5

Costs suffered by third parties as a result of an economic transaction.

Question 6

Fill in the blank: An example of a negative externality is _____ pollution.

Answer 6

air

Question 7

What is a common pool resource?

Answer 7

A resource that is available to all but is limited in supply, leading to potential overuse.

Question 8

True or False: Common pool resources are non-excludable and rivalrous.

Answer 8

True

Question 9

What is the tragedy of the commons?

Answer 9

A situation in which individuals acting in their own self-interest deplete a shared resource.

Question 10

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

Answer 10

B) Ocean fish stocks

Question 11

What is the Coase theorem?

Answer 11

The proposition that if property rights are well-defined and transaction costs are low, parties can negotiate solutions to externalities.

Question 12

Fill in the blank: Government intervention to correct externalities typically involves _____ or subsidies.

Answer 12

taxes

Question 13

What is an example of a positive externality?

Answer 13

Education, as it benefits society beyond the individual receiving it.

Question 14

True or False: The presence of externalities always leads to government intervention.

Answer 14

False

Question 15

What is an external cost?

Answer 15

A cost incurred by a third party due to an economic transaction.

Question 16

What is an external benefit?

Answer 16

A benefit received by a third party due to an economic transaction.

Question 17

Fill in the blank: The market outcome is efficient when _____ are accounted for.

Answer 17

externalities

Question 18

What is meant by ‘internalizing the externality’?

Answer 18

Incorporating external costs or benefits into the decision-making process of the parties involved.

Question 19

True or False: All externalities can be easily quantified.

Answer 19

False

Question 20

What role do taxes play in addressing negative externalities?

Answer 20

They increase the cost of the harmful activity, potentially reducing its occurrence.

Question 21

What is a public good?

Answer 21

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.

Question 22

Fill in the blank: Overfishing is a classic example of the _____ of the commons.

Answer 22

tragedy

Question 23

What is a possible solution to the tragedy of the commons?

Answer 23

Implementing regulations or creating property rights to manage resource use.

Question 24

True or False: Common pool resources can be managed sustainably.

Answer 24

True

Question 25

What is an example of a policy to mitigate negative externalities?

Answer 25

Carbon taxes or cap-and-trade systems.

Question 26

What is the significance of transaction costs in the Coase theorem?

Answer 26

High transaction costs can impede negotiations to resolve externalities.

Question 27

Examples of market failure include:

Answer 27

When a production process causes pollution, such as in the air or water

When people consume goods that are harmful for them and the rest of society, such as cigarettes and illegal drugs

When the current generation exploits or depletes resources so that they won’t be available to future generations

Question 28

In other words, when the marginal social benefit (MSB) equals the marginal social cost (MSC),

Answer 28

this is the socially optimal output.