3.8 Limitations of Markets

Question 1

Positive Externality

Answer 1

Beneficial effect of an economic activity on third parties, aka. external benefit

Question 2

Negative Externality

Answer 2

Harmful effect of an economic activity on third parties, aka. external cost

Question 3

Government Policies to Correct Positive and Negative Externalities

Answer 3

• Taxation
• Subsidies
• State Provision
• Legislation and Regulation
• Information Provision

Question 4

Taxation (tax)

Answer 4

A compulsory payment to the government

Question 5

Subsidy

Answer 5

An amount of money the government gives directly to firms to encourage production and consumption

Question 6

State Provision

Answer 6

Goods and services provided directly by the government

Question 7

Legislation

Answer 7

Laws to control the way people and organisations behave

Question 8

Regulation

Answer 8

Rules, directives or government orders to control the way people and organisations behave

Question 9

Information Provision

Answer 9

The government provides information to encourage people (eg. consumers) and organisations to change their behaviour (eg. providing the clear harmful effects of cigarettes)