chp 14 Flashcards
Market failure
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.
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.
The examples of market failure are (i, iii), (v) and (vi).
Private costs
Private costs: costs bome by those directly consuming or producing a product.
External cost
External costs: costs imposed on those who are not directly involved in the consumption and production activities of others.
Social cost
Social costs: the total costs to a society of an economic activity,
Private benefits
Private benefits: benefits received by those directly consuming or producing, a product.
External benefits
External benefits: benefits enjoyed by those who are not directly involved in the consumption and production activities of others.
Social benefits
Social benefits: the total benefits to a society of an economic activity.
Third parties
Third parties: those not directly involved in producing or consuming a product.
Merit goods
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.
Demerit goods
Demerit goods are the opposite of merit goods - they are more harmful to consumers than they realise and they generate external costs.
Merit goods term
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.
Demerit goods term
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
Public good
Public good: a product which is non-rival and non-excludable and hence needs to be financed by taxation.
Private good
Private good: a product which is both rival and excludable.
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.
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.
Explain why:
i free dental care is a merit good i junk food is a demerit good.
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.
3 Explain why:
i a local fire protection service is a public good i a new moped is a private good.
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.
What are the social costs of an activity?
The private cost plus the external costs
2
A government increases its spending on secondary education. What is the most likely outcome?
External benefits for the Econ
Which is a characteristic of a demerit good
It has external costs in its consumption
Why is a public good non-rival?
Consumption by one more person does not reduce someone else’s consumption
