CH4: Market failures

Question 1

What is the relation between consumer surplus and price?

Answer 1

they are inverse.
Increase in price, decrease in consumer surplus

Question 2

what is consumer surplus?

Answer 2

It is the difference between maximum price consumer is willing to pay and the actual price they pay.

Question 3

What is producer surplus?

Answer 3

difference between the actual price producer receive and minimum price that a consumer would pay.

Question 4

What are the conditions for allocative efficency?

Answer 4

Marginal benefit=Marginal cost
Maximum willingness to pay=minimum acceptable price
Total surplus is maximized

Question 5

What are externalities?

Answer 5

Negative externality occurs when a producer imposes a cost on someone who isn’t involved in the production/consumption

positive externality is when a third party enjoys the benefits of production/ consumption.

Question 6

What is asymmetric information?

Answer 6

occurs when one party has more information about a product than the other.

Question 7

Moral hazard

Answer 7

when individuals will behave recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto other.