Chapter 6

Question 1

Define market failure

Answer 1

Occurs when the price mechanism fails to allocate scarce resources in a productively efficient way

Question 2

What is resource allocation and Misallocation ?

Answer 2

Resources allocation is about how factors of production or inputs into the Production process our allocated between competing uses. The best possible way to allocate resources because one factors of production are employed and productively efficient way and also in a way which maximises social welfare or the happiness of the population

Question 3

What is the difference between complete market failure and partial market failure ?

Answer 3

Complete market Failure is one the market simply does not exist. Porsche market is one the market functions but produce is the wrong quantity of a good or service therefore it is overproduced or overconsumed such as in a monopoly

Question 4

What is a private good?

Answer 4

A good which examines the characteristics of excludability and rivalry. The owners can exercise private property rights

Question 5

What is property rights?

Answer 5

The exclusive authority to determine how resources used. In the case of a private property right the owner of a private property such as a bar of chocolate in a sweet shop has the right to rent all the people from consuming a ball unless they are prepared to pay a price to the owner

Question 6

What is the third characteristic of private goods possesses

Answer 6

Rejectability people can opt out and refuse to purchase private goods

Question 7

What does non-excludability mean

Answer 7

That it is impossible to provide are good to one person while preventing others from enjoying it

Question 8

What is non-rivalry

Answer 8

When are good is consumed by one person it does not reduce the amount available for others

Question 9

What is the free rider problem

Answer 9

Free riding occurs when people decide to gain the benefits of a good or service while refusing to pay for it

Question 10

What is it quasipublic good

Answer 10

A good which has characteristics of both of public and private goods and might not be excludable but rival

Question 11

Name one example of a quasi-public good

Answer 11

Roads can be converted into private goods arriving for profit through market this could be done by limiting points of access by constructing tollgates without introducing the scheme of electronic road pricing

Question 12

What is the marginal cost of providing a public good to an extra consumer

Answer 12

0, allocative efficiency the forecast price is equal to 0 and the good it’s free for consumers. However private entrepreneurs will only provide goods of profit can be made for this to happen the past must be above zero price must be greater than zero

Question 13

Why does public goods lead to market Failure

Answer 13

Members of the general public cannot be excluded from enjoying the goods benefits

Question 14

Examples of government provided goods

Answer 14

Defence police and Roads education and healthcare

Question 15

What is a public bad

Answer 15

When people are prepared to pay a price of would consuming a bag such as household rubbish they produce. If a private sector company tries to charge a price for rubbish removal households me avoid paying the price by dumping the garbage this is why local authorities empty dustbins without charging financing rubbish removal through local taxation

Question 16

What is an externality ?

Answer 16

This occurs when production or consumption of goods or services imposed as external costs or benefits on third-party is outside of the market without this be reflected in market prices when externality is generated there is a divergence between private and social costs and benefits

Question 17

What is a negative externality

Answer 17

They cost that suffered by third-party as a result of an economic transaction in the transaction the producer and consumer are the first and second parties and third parties include any other people or firms that are affected by the transaction

Question 18

What is a positive externality

Answer 18

A benefit that is enjoyed by a third-party as a result of an economic transaction

Question 19

When does private benefit maximisation Take place

Answer 19

When marginal private benefit is equal to marginal private cost

Question 20

When does social benefit maximisation take place

Answer 20

When marginal social benefit is equal to marginal social cost

Question 21

What do Orthodox or traditional economic theory assume about households

Answer 21

They seek to maximise their own private benefit also interests and not the wider social interest of the whole community they ignore the affects of the actions and other people

Question 22

What is the formula for social benefits

Answer 22

Marginal social benefit is equal to marginal private benefit plus marginal external benefit

Question 23

What is the formula for social cost

Answer 23

Marginal social cost is equal to marginal private cost plus marginal external cost

Question 24

One can allocate of efficiency early a car

Answer 24

If there were competitive markets for goods and services including future markets. There were no economies of scale. Markets were simultaneously in equilibrium

Question 25

When will there be no externalities or negative or positive

Answer 25

The price is equal to marginal cost

Question 26

If we ignore the four bullet points and which allocates of efficiency would occur what happens

Answer 26

In the long run profit maximisation of cost and the perfect market answer the price at which price is equal to marginal private cost in the absence of external see this also means that the price equals a marginal social cost of production but as we have seen on the production of a good cause pollution external costs are generated with the result that marginal social cost is greater than was your private cost this means that one price is equal to marginal private cost price is less than marginal social cost

Question 27

What is production externalities you

Answer 27

When production of a good or a service of persons external costs or benefits on third-party is outside of the market without this being reflected in market prices

Question 28

What is consumption externalities

Answer 28

When consumption of a good or service imposes external costs or benefits on third-party is outside of the market without this being reflected on market prices