Chapter 8&9 Market Failures and Behavioral Anomalies

Question 1

Excludable Goods

Answer 1

a person can be prevented from using it when they do not pay for it

Question 2

Rival goods

Answer 2

one person’s use diminishes other people’s use

Question 3

Private goods

Answer 3

Rival Yes, Excludable Yes (e.g. clothing, ice-cream, etc.)

Question 4

Public goods

Answer 4

Rival No, Excludable No (e.g. national defense, street lighting, etc.).
“free” = special challenge for economic analysis. Forces that normally allocate resources are absent.

Question 5

Free Rider Problem

Answer 5

a person who receives the benefit of a good but avoids paying for it.

Question 6

Common Resources

Answer 6

Rival Yes, Excludable No (Fish, Environment)

Question 7

Mixed Public Goods

Answer 7

Rival No, Excludable Yes (Cable TV)

Question 8

Tragedy of the Commons

Answer 8

Example: Overfishing (more fish are captured than the population can replace through natural reproduction.

Question 9

Externality

Answer 9

the cost or benefit of one person’s decision on the well-being of a bystander (a third party) which the decision maker does not take into account when making the decision.

Question 10

Negative externality

Answer 10

Examples: exhaust gases from industry

Question 11

Positive externality

Answer 11

the social value of the good exceeds the private value of the good.

Question 12

Internalising an externality

Answer 12

involves altering incentives so that people take account of the external effects of their actions
-> achieving socially optimal output.

Question 13

Taxes and Subsidies (graphs)

Answer 13

Question 14

Merit goods

Answer 14

goods which can be provided by the market but may be under-consumed as a result of imperfect information about the benefits.
-> consumption is assumed to be desirable by society
-> education, health care, postal services, etc.