2.8 Market Failures

Question 1

What are common pool resources

Answer 1

Resources that are not owned by anyone, do not have a price and are available for anyone to use without payment or any restrictions

Can be rivalrous (consumption by one person reduces availability for someone else) but non-excludable

Question 2

What is tragedy of the commons

Answer 2

Story about cattle that feed on grass owned in common by a group of herders

Each header had small number of cattle and had plenty of space and grade to feed on

As business become more profitable number of cattle increases, the area became overfilled and cattle had to compete for food as it was becoming more scarce

Question 3

What is unsustainable production

Answer 3

Production that uses resources unsustainably depleting or degrading them

Question 4

What is market failure

Answer 4

The failure of the market to allocate resources efficiently resulting in allocative inefficiency

Question 5

What is allocative inefficiency

Answer 5

When too much or too little goods or services are produced and consumed from the point of view of what is socially most desirable

Question 6

Types of externalities

Answer 6

Negative production externality
Negative consumption externality
Positive production externality
Positive consumption externality

Question 7

What is a negative externality of production and what does the graph look like + provide example

Answer 7

The external costs created by producers e.x pollution caused by a factory when producing

Question 8

What is a negative externality of consumption and what does the graph look like + provide example

Answer 8

External cost created by consumers e.x cigarettes (second hand smoke)

Question 9

What is a positive externality of production and what does the graph look like + provide example

Answer 9

Producers create external benefits for society e.x firm succeeding in research and development and spreading new technology with other firms

Question 10

What is a positive externality of consumption and what does the graph look like + provide example

Answer 10

External benefits created by consumers e.x education provides external benefits to society in lower unemployment, productive workforce, lower crime rate etc

Question 11

Policies to correct negative production externalities

Answer 11

market based policies - indirect taxes
Market based policies - carbon taxes
Market based policies - tradable permits
Government legislation and regulation
Education and awareness creation
International policies

Question 12

Policies to correct negative consumption externalities

Answer 12

Market based policies - indirect taxes
Government legislation and regulation
Education and awareness-creation
Nudges

Question 13

Policies to correct positive production externalities

Answer 13

Direct goverment provision
Subsidies

Question 14

Policies to correct positive consumption externalities

Answer 14

Government legislation and regulation
Education and awareness creation
Nudges
Subsidies