2.8-Market failure and externalities Flashcards
What is market failure?
Market failure occurs when the allocation of goods and services by a free market is not efficient.
True or False: Externalities can lead to market failure.
True
Fill in the blank: A _______ externality occurs when a third party benefits from a transaction they are not involved in.
positive
What is a negative externality?
A negative externality is a cost suffered by a third party as a result of an economic transaction.
Give an example of a negative externality.
Pollution from a factory affecting nearby residents.
What is a positive externality?
A positive externality is a benefit received by a third party from an economic transaction.
True or False: Public goods are a type of market failure.
True
What are public goods?
Public goods are goods that are non-excludable and non-rivalrous.
Fill in the blank: The _______ problem occurs when individuals do not have to pay for a public good, leading to under-provision.
free rider
What is the tragedy of the commons?
The tragedy of the commons is a situation where individuals exploit a shared resource, leading to its depletion.
What role do government interventions play in correcting market failures?
Government interventions can help to internalize externalities and provide public goods.
Name one method to correct negative externalities.
Imposing taxes on the activity causing the negative externality.
What is a subsidy?
A subsidy is a financial assistance granted by the government to encourage the production or consumption of a good.
True or False: Command and control policies are the only way to address externalities.
False
What is a Pigovian tax?
A Pigovian tax is a tax levied on activities that generate negative externalities.
Fill in the blank: The _______ curve shows the private cost of production.
supply
What is the social cost of production?
The social cost of production includes both private costs and external costs.
What is an external cost?
An external cost is a cost that is not reflected in the market price and is incurred by third parties.
What is the difference between private and social benefits?
Private benefits are the gains received by the individual or firm involved in a transaction, while social benefits include both private benefits and external benefits to third parties.
True or False: Market failure only occurs in monopolistic markets.
False
What is the Coase theorem?
The Coase theorem states that if property rights are well-defined and transaction costs are low, parties can negotiate to correct externalities.
Fill in the blank: A _______ is a good that is rivalrous but non-excludable.
common resource
What are merit goods?
Merit goods are goods that are under-consumed in a free market because consumers do not fully appreciate their benefits.
What is the role of regulation in market failure?
Regulation can help to limit negative externalities and promote the consumption of merit goods.
