2.8 Market Failure And Externalities

Question 1

When does market failure occur

Answer 1

When the free market fails to allocate resources to the best interests of society, so there is an inefficient allocation of scarce resources

Question 2

What happens to economic and social elfare where there is market failure

Answer 2

Economic and social welfare is not maximised where there is market failure

Question 3

What is an externality

Answer 3

The cost or benefit a third party receives from and economic transaction outside of the market mechanism

Question 4

What are the two externalities

Answer 4

Positive ( external benefits )

Negative ( external costs )

Question 5

What causes negative externalities

Answer 5

Demerit goods

Question 6

Explain negative externalities

Answer 6

These are associated with information failure, since consumers are not aware of the long run implications of consuming the good, and they are usually overprovided

Question 7

Give an example of negative externalities

Answer 7

Consuming cigarettes is second hand smoke or passive smoking

Question 8

What causes positive externalities

Answer 8

Merit goods

Question 9

Explain positive externalities

Answer 9

These are associated with information failure because consumers do not realise the long run benefits to consuming the good. They are unprovided in a free market

Question 10

Give an example of positive externalities

Answer 10

Education gives a higher skilled workforce