Chapter 8

Question 1

What is market failure

Answer 1

When the forces of demand and supply do not result an optimum allocation of resources, too much or too little of a good is being consumed

Question 2

What is the ideal outcome for the society of consuming a good

Answer 2

This is when the marginal benefit of consuming each good matches the marginal cost of producing it

Question 3

What is information failure

Answer 3

When consumers are not aware of all the information about the product, which would affect their willingness to pay. Lack of information of economic decisions. Of ten caused by lack of education

Question 4

What are public goods

Answer 4

Goods that because of their characteristics cant be provided by a purely free market

Question 5

What are merit goods

Answer 5

Goods that are good for society (positive consumption externality), are often under-consumed

Question 6

What are demerit goods

Answer 6

Goods that are not good for society, are often overconsumed

Question 7

What are private costs

Answer 7

Costs incurred by an individual (firm or consumer) as part of its production or other economics activities. It determines how much a producer will supply. (could refer to market price)

Question 8

What are external costs

Answer 8

costs associated with an individual (a firm or household) production or another economic activity, which are borne by a third party and are not reflected in market prices

Question 9

What are external costs

Answer 9

costs associated with an individual (a firm or household) production or another economic activity, which are borne by a third party and are not reflected in market prices

Question 10

What are social costs

Answer 10

The sum of private and external costs, shown as the verticle distance between 2 curves, the difference between private and social costs

Question 11

What are social benefits

Answer 11

The sum of private benefits and external benefits
The extra benefit to society derived per extra unit consumed
Marginal social benefit = marginal external benefit + marginal private benefit

Question 12

What are private benefits

Answer 12

The benefit received by an individual (a firm or consumer) as part of its economic activity. The consumers are willing to pay determines this.
Alklso could be firms revenue from selling a good

Question 13

External benefits

Answer 13

The benefits received by society (a firm or household) that accrues to a third party (form or household) not engaged in that economic activity, and which are not reflected in market prices

Question 14

What is a production externality

Answer 14

An externality that affects the production side of a market, which may be either positive or negative

Question 15

What is a Negative production externality

Answer 15

MSC > MPC MPB, an example of this is Toxic fumes form burning of coal

Question 16

What is a Positive production externality

Answer 16

MPC > MSC MSB, an example of this is building a train station which provides shelter for the homeless

Question 17

What is a Negative consumption externality

Answer 17

MPB > MSB MSC, an example of this is playing loud rock music that stops your neighbours from going to bed

Question 18

What is a positive consumption externality

Answer 18

MSB > MPB MPC, an example of this is christmas lights outside your house (subjective)

Question 19

Welfare loss

Answer 19

The social loss incurred when the market equilibrium diverges from the social optimum (MSB = MSC), is often referred to as deadweight loss. You can find this by drawing down from the line with greater value (form new equilibrium) to the line below

Question 20

Supply always represents …. in externality graphs

Answer 20

MSC MBC, as it talks about costs as that’s what producers infer

Question 21

Demand always represents …. in externality graphs

Answer 21

MSB MPB, as it talks about benefits and that’s what consumers gain from consuming a product

Question 22

Information asymmetric

Answer 22

When one individual knows something another does not

Question 23

What is an externality

Answer 23

An externality is the cost or benefit a third-party receives from an economic transaction outside of the market mechanism. In other other words it is the spill over effect the production or consumption of a good or service.

Question 24

What are negative externalities caused by

Answer 24

Demerit goods

Question 25

What are positive externalities caused by

Answer 25

Merit goods

Question 26

Can the extent to which a market fails be quantified

Answer 26

No its a value judgement and can be subjective to different people

Question 27

What is marginal social costs

Answer 27

The costs to society in the consumption of one extra unit consumed,
Marginal social cost = Marginal external cost + Marginal private cost

Question 28

What is the social optimum position

Answer 28

Where MSC = MSB

Question 29

Government policies for negative externalities

Answer 29

Subsidies for merit goods
Indirect taxes which increase the price of the good to internalise the externality and the polluter pays the damage
Regulation like abbning harmful goods
Provide information to encourage innovation and inform people
Tradable pollution permits