chp 14

Question 1

Market failure

Answer 1

Market failure occurs when the market mechanism results in a misallocation of resources.
There are many examples of market failure in all economies.
Market failure: market forces resulting in an inefficient allocation of resources.

Question 2

Sample question
Decide which of the following are examples of market failure:
i a supermarket that runs out of its stock of rice i excessive pollution from a fish canning factory ii a situation where poor people cannot afford to
get medical treatment
SKILLS FOCUS
iv a supplier charging high prices when there is a
shortage of supply
v emissions from vehicles that lead to respiratory
diseases amongst pedestrians
vi a shortage of textbooks in secondary schools.

Answer 2

The examples of market failure are (i, iii), (v) and (vi).

Question 3

Private costs

Answer 3

Private costs: costs bome by those directly consuming or producing a product.

Question 4

External cost

Answer 4

External costs: costs imposed on those who are not directly involved in the consumption and production activities of others.

Question 5

Social cost

Answer 5

Social costs: the total costs to a society of an economic activity,

Question 6

Private benefits

Answer 6

Private benefits: benefits received by those directly consuming or producing, a product.

Question 7

External benefits

Answer 7

External benefits: benefits enjoyed by those who are not directly involved in the consumption and production activities of others.

Question 8

Social benefits

Answer 8

Social benefits: the total benefits to a society of an economic activity.

Question 9

Third parties

Answer 9

Third parties: those not directly involved in producing or consuming a product.

Question 10

Merit goods

Answer 10

Merit goods are more beneficial to consumers than they themselves realise and they have benefits for those who are not directly involved in their consumption, that is, extemal benefits.

Question 11

Demerit goods

Answer 11

Demerit goods are the opposite of merit goods - they are more harmful to consumers than they realise and they generate external costs.

Question 12

Merit goods term

Answer 12

Merit goods: products which the government considers consumers do not fully appreciate how beneficial they are and which will therefore be under-consumed if left to market forces. Such goods generate positive externalities.

Question 13

Demerit goods term

Answer 13

Demerit goods: products which the government considers are not fully appreciated by consumers in terms of how harmful they are and which will
negative externalities.
therefore be over-consumed if left to market forces. Such goods generate

Question 14

Public good

Answer 14

Public good: a product which is non-rival and non-excludable and hence needs to be financed by taxation.

Question 15

Private good

Answer 15

Private good: a product which is both rival and excludable.

Question 16

I Consider the following cases:
i a tuna processing factory in Mauritius
a scheme to fund more university places for students from poor families.
For each, make a list of the likely private costs, private benefits, external costs and external benefits that might occur.

Answer 16

Private costs: costs of producing tuna.
Private benefits: wages paid to workers, profits for factory owners.
External costs: noise and smells from the factory, depletion of tuna stocks for others.
External benefits: wider benefits to the local economy.
Private costs: costs to government of funding more university places.
Private benefits: a better education and job prospects for students receiving this funding.
External costs: additional cost to taxpayers.
External benefits: an enhanced rate of economic growth resulting from a better-educated population.

Question 17

Explain why:
i free dental care is a merit good i junk food is a demerit good.

Answer 17

Free dental care is a merit good since it generates a positive externality in the form of a healthier population that is more productive.
Due to information failure, many people in the population do not appreciate the problems that can be caused through consuming excessive amounts of sugar and the damage this can cause to teeth.
Junk food such as burgers, fried chicken and soda are demerit goods when their excessive consumption leads to additional costs on the community for waste disposal and combatting obesity amongst young people.

Question 18

3 Explain why:
i a local fire protection service is a public good i a new moped is a private good.

Answer 18

A local fire protection service is an essential service that is usually provided by the government. It is impractical to charge an annual fee or call-out charge when it is used. No one can be excluded from the benefits it provides; it is aso non-mval when provided in sufficient quantity.
Anyone purchasing a new moped has to pay for it. It is excludable since no one else can use it without the owner’s permission. The owner is the only person who receives the benefits of ownership.

Question 19

What are the social costs of an activity?

Answer 19

The private cost plus the external costs

Question 20

2
A government increases its spending on secondary education. What is the most likely outcome?

Answer 20

External benefits for the Econ

Question 21

Which is a characteristic of a demerit good

Answer 21

It has external costs in its consumption

Question 22

Why is a public good non-rival?

Answer 22

Consumption by one more person does not reduce someone else’s consumption