Ch 6. Market Failure and Socially Undesirable outcomes II

Question 1

Positive Production Externality

Answer 1

Caused by production activities, MSC < MPC, and it is external benefits created by producers

Question 2

Positive Consumption Externality

Answer 2

External benefits created by consumers, and MSB > MPB

Question 3

Merit Goods

Answer 3

Held to be desirable for consumers, but which are underprovided by the market.

Question 4

Public Good

Answer 4

Good that is non-rivalrous and non-excludable, firms do not have an incentive to produce it.

Question 5

Free Rider Problem

Answer 5

When people can enjoy the use of a good without paying for it, and arises from non-excludability

Question 6

Quasi-public Good (Club goods0

Answer 6

Goods that do not fall neatly into the other 2 categories, but have large positive externalities

Question 7

Assymetic Information

Answer 7

Type of market failure where buys and sellers do not have equal access to information, results in underallocation

Question 8

Adverse Selection

Answer 8

One party in a transaction has more information about the quality of the product being sold than the other party

Question 9

Screening

Answer 9

Buyer has limited information, so they may research and try to obtain the extra information

Question 10

Signalling

Answer 10

Method used by the party that has more information and they convince the buyers that it of high quality

Question 11

Moral Hazard

Answer 11

One party takes risks, but does not face the full costs of these risks because of the full costs of the risks are borne by the other party, arises in connection with insurance