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A LEVEL ECONOMICS > Externalities > Flashcards

Externalities Flashcards

1
Q

what is market failure

A

when the price mechanism fails to allocate scarce resources efficiently

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2
Q

what is the price mechanism

A

if demand increases, prices will rise- the price of goods and services based on demand and supply

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3
Q

what are scarce resources

A

when demand for a resource is higher than supply as resources are limited

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4
Q

to prevent market failure , what do goverments do

A

intervene

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5
Q

Market failure can be complete or partial. describe complete market failure

A

no market exists. this is called a ‘missing market’

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6
Q

give an example of a missing market and who has to provide it

A

national defence - the government

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7
Q

when does partial market failure occur

A

when the market functions, but either the price or quantity supplied for the good/ service is wrong

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8
Q

give an example of a situation where a service would experience parital market failure

A

if the provision of healthcare is left completely to market forces because some people wouldn’t be able to afford needed treatment

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9
Q

what are eternalities

A

the effects that producing or consuming a good/ service has on people who aren’t involved in the making, buying, selling and consumption on it

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10
Q

what are those impacted by externalities called

A

’ third parties’

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11
Q

what are positive externalities

A

external benefits to the third party

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12
Q

what are negative externalities

A

external costs to the third party

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13
Q

give an example of a negative production externality

A

producing steel could be pollution that harms environment

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14
Q

give an example of a negative consumption externality

A

consumption of fast food increases health risk- pressures NHS

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15
Q

give an example of a positive production externality

A

construction of infrastructure, improving transport for work

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16
Q

give an example of a positive consumption externality

A

Training to become a doctor [ training is being consumed] could be a benefit to society

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17
Q

when externalities are ignored, what happens to the markets

A

they fail

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18
Q

why does market failure occur when externalities are ignored

A

because a product or service’s price equilibrium does not accurately reflect the costs and benefits of that product or service

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19
Q

what is a private cost

A

the cost of doing something to either a consumer or firm

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20
Q

give an example for each.. a private cost for a firm and a private cost for a consumer

A

firm - the cost to make a good …. consumer- the rice the consumer pays to buy the good

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21
Q

what are external costs caused by

A

externalities

22
Q

give an example of an external cost

A

if you dropped an empty crisp packet that creates an external cost to the council who have to employ someone to sweep it up

23
Q

what is a social cost

A

a bad effect that a business, activity, etc has on people, society and the environment

24
Q

give an example of a social cost

A

e.g. steel production causing pollution… leading to breathing problems…

25
Q

what is a private benefit

A

the benefit gained by a consumer or firm by doing something

26
Q

give an example of a private benefit for a consumer

A

from purchasing a holiday, a private benefit would be the consumer’s enjoyment of the experience

27
Q

what are external benefits caused by

A

externalities

28
Q

give an example of an external benefit

A

a factory that invests in new equipment may create the external benefit of needing less electricity , which reduces its impact on the climate

29
Q

how do you calculate the social cost

A

private cost add externa cost

30
Q

what is a social benefit

A

the full benefit received by society from a good or service

31
Q

how do you calculate social benefit

A

private benefit plus external benefit

32
Q

in a negative production externality diagram, what is a marginal private cost

A

the cost of producing the last unit of a good

33
Q

how do you calculate the marginal social cost from a negative production externality diagram

A

marginal private cost add external cost

34
Q

in a negative production externality diagram, what is the difference between the MPC and MSC curves

A

the external costs of production- negative externalities

35
Q

in a negative production externality diagram, if the curves are parallel what does this tell you about the external costs per unit

A

they are constant

36
Q

in a negative production externality diagram, if the curves diverge what does this tell you about external costs per unit

A

they increase with outuput

37
Q

for a negative production externality diagram, give an example of when the curves diverge and why

A

pollution - the external costs per unit caused by pollution increase as output increases

38
Q

in a positive consumption externality diagram, what is a marginal private benefit

A

the benefit of someone consuming the last unit of a good

39
Q

how do you calculate marginal social benefit

A

marginal private benefit add external benefit

40
Q

is the equilibrium point always the same as the socially optimal point

A

no. it may be different

41
Q

when is there equiibrium in the free market

A

when supply and demand are equal

42
Q

what is the free market

A

an economic system in which prices are determined by unrestricted competition between privately owned businesses

43
Q

in the free market, do consumers and producers ONLY consider their social costs/ benefits or only their private costs/ benefits

A

only their private costs/ benefits

44
Q

as a result of only private benefits/ costs being considered in the free market, is the MPC seen as the supply or demand curve of a good/ service

A

supply

45
Q

is the MPB seen as the supply or demand curve for a good/ service

A

demand

46
Q

where on the socially optimum/equilibrium diagram does equilibrium occurs

A

at points Q,P where MPC= MPB

47
Q

where on the socially optimum / equilibrium diagram is the socially optimum level of output

A

at E1, where MSC= MSB

48
Q

why is the socially optimum level of output at E1, where MSC= MSB

A

because this includes the external costs/ benefits to society

49
Q

where on the socially optimum/ equilibrium diagram is the socially optimum price

A

P where demand [MPB] and supply[MPC] meet

50
Q

where on the socially optimum / equilibrium diagram is the socially optimum level of output [ Q or Q1]

A

Q1

51
Q

what will the optimum level of output [Q1] and socially optimum price level [P] do for society

A

give society the maximum benefit of positive externalities and still cover the cost of any negative externalities

52
Q

what two externality diagrams is the socially optimum/equilibrium made of [ and which one is on top/ at bottom]

A

negative production [ on top] and positive consumption [ at bottom]

A LEVEL ECONOMICS (51 decks)

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