4.1.8 Market Mechanism, Market Failure and Government Intervention in Markets (ONLY 4.1.8.1-4.1.8.6)

Question 1

What does the price mechanism do?

Answer 1

Moves resources to where they are demanded or where there is a shortage
And
Removes resources from where there is a surplus

Question 2

What are the 3 main function the price mechanism uses to allocate resources?

Answer 2

Rationing
Incentive
Signaling

Question 3

When does market failure occur?

Answer 3

Whenever a market leads to a misallocation of resources

Question 4

What are the types of market failure?

Answer 4

• Externalities
• Under-provision of public goods
• information gaps
• inequalities in income/wealth distribution

Question 5

What is the free-rider problem?

Answer 5

Once a public good is produced, there is no way to control who benefits from it

Question 6

What is a public good?

Answer 6

A non-excludable, non-rival good

Question 7

What is a quasi-public good?

Answer 7

Goods that have characteristics of both public and private goods

Question 8

What is a tax?

Answer 8

A compulsory Levi imposed by the government to de-incentivise production of a good

Question 9

What is a subsidy?

Answer 9

A payment made by the government to incentivise the production of a good

Question 10

When does partial market failure occur?

Answer 10

When the market produces a good but it is the wrong quantity or the wrong price
Due to misallocation

Question 11

When does complete market failure occur?

Answer 11

When there is a missing market as the market does not supply the products at all

Question 12

What does non-rival mean?

Answer 12

The benefit other people receive from the good does not diminish if more people consumer the good

Question 13

What is the tragedy of the commons?

Answer 13

Individuals prioritizing personal gain over the well-being of society

Question 14

What are private goods?

Answer 14

Rival and excludable goods

Question 15

What is an externality?

Answer 15

The cost or benefit a third party receives from an economic transaction

Question 16

What are demerit goods?

Answer 16

Goods which yield negative externalities when consumed

Question 17

What are merit goods?

Answer 17

Goods which yield positive externalities in consumption

Question 18

Calculation for social costs

Answer 18

Private costs + external costs

Question 19

What does private cost determine?

Answer 19

• How much the producer will supply
• The market price which the consumer pays for the good

Question 20

What does private benefit refer to?

Answer 20

• The benefits a consumer will receive from consuming the good
• Firm’s revenue from selling the good

Question 21

Social beinift calculation

Answer 21

Private benefit + external benefit

Question 22

Where is the social optimum position?

Answer 22

Where MSC = MSB
(The point of maximum welfare)

Question 23

Answer 23

Question 24

How do you show negative externalities on a graph?

Answer 24

MSC>MPC

Question 25

What side does the triangle of welfare gain go on for benefits?

Answer 25

Question 26

When does frictional unemployment exist?

Answer 26

While people move between jobs and search fro new ones

Question 27

When does structural unemployment exist?

Answer 27

When there is a decline in an industry
So workers skills do not match the location and skills required for the job

Question 28

How do monopolies lead to market failure?

Answer 28

They exploit the consumer by charging them higher prices
Due to no competition
So the good is underconsumed
So consumer needs and wants are not met