4.1.8 The Market Mechanism, Market Failure and Government Intervention in Markets

Question 1

Define Externalities

Answer 1

Indirect costs or benefits as a result of production or consumption of goods and services.

Question 2

Define Positive Externalities

Answer 2

The benefit from the production or consumption of a good of an economic transaction for a third party

Question 3

Define Negative Externalitites

Answer 3

The cost from the production or consumption of a good of an economic transaction for a third party

Question 4

Define Merit Goods

Answer 4

Goods that generate positive externalities and are under consumed or under produced in a free market economy because of imperfect information. E.g Pension Schemes

Question 5

Define Demerit Goods

Answer 5

Goods that generate negative externalities and are over consumed or over produced in a free market economy because of imperfect information. E.g. Heroin

Question 6

Define Private Benefit

Answer 6

The benefit for an individual or firm

Question 7

Define Private Cost

Answer 7

The cost for an individual or firm

Question 8

Define Social Benefit

Answer 8

This is the total benefit to society from consuming or producing a good or service

Question 9

Define Social Cost

Answer 9

This is the total cost to society from consuming or producing a good or service

Question 10

Define Deadweight Welfare Loss

Answer 10

The combined loss of consumer and producer surplus from a misallocation of resources

Question 11

Define Social Efficiency

Answer 11

The optimal distribution of resources in society

Question 12

Define Government Failure

Answer 12

When government intervention leads to worse allocation of resources

Question 13

Define Principle-Agent Problem

Answer 13

When shareholders and managers have a conflict of objectives. This is when a principal delegates an action to another individual, but the principal has imperfect information in regards to how the agent will behave

Question 14

Define Information Failure

Answer 14

When there is a lack of information available to firms and consumers to make an informed choice

Question 15

Define Moral Hazard

Answer 15

When individuals engage in reliant behaviour as they know someone else will hear the consequences

Question 16

Define Unintended Consequences

Answer 16

How economic decisions have unexpected events

Question 17

Define Regulatory Capture

Answer 17

A form of government failure where the regulator becomes hijacked by the regulated

Question 18

Define Public Goods

Answer 18

Goods that are non-rivalrous and non-excludable. E.g Lighthouse

Question 19

Define Private Goods

Answer 19

Goods that are rivalrous and excludable

Question 20

Define The Tragedy of the Commons

Answer 20

A situation in which individuals with access to a shared resource act in their own interest which can deplete the resource

Question 21

Define The Free Rider Problem

Answer 21

Consumers that consume the benefits of public goods without paying for it, reducing the level of profit available for firms, causing them to stop supplying the good leading to complete market failure

Question 22

Define Non-Pure Public Goods

Answer 22

Non-Pure Public goods are either (Excludable but Non-Rival, E.g. Toll roads) or (Non-Excludable but Rival, E.g. popular beach)

Question 23

Define Pure Public Goods

Answer 23

Pure public goods are completely non-excludable and non-rival. E.g Street Lighting

Question 24

Define Non-Rivalry

Answer 24

Consumption of a hood has little/no effect on the amount left for others.

Question 25

Define Non-Excludability

Answer 25

Difficult/Impossible to prevent others from consuming the good

Question 26

What Is The Solution To Public Goods?

Answer 26

State Provision - Where governments provide public goods funded by general taxation in order to maximise society’s welfare - E.g. Army, Roads, Street Lights.

Question 27

Define Partial Market Failure

Answer 27

Where a market is available but the market output and price is not optimal for society’s welfare. Where too much/too little of a good is being produced/consumed.

Question 28

Define Complete Market Failure

Answer 28

When there is no market available for a good which society regards as desirable, resulting in missing markets.

Question 29

Define Market Failure

Answer 29

Market outcomes lead to a misallocation of resources (Where resources are not used to maximise society’s welfare)

Question 30

Define regulatory capture

Answer 30

The process where regulatory agencies develop close links with the industry they are regulatory, for example employees moving between both organisations (firms to regulator)