Externalities

Question 1

what is market failure

Answer 1

when the price mechanism fails to allocate scarce resources efficiently

Question 2

what is the price mechanism

Answer 2

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

Question 3

what are scarce resources

Answer 3

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

Question 4

to prevent market failure , what do goverments do

Answer 4

intervene

Question 5

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

Answer 5

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

Question 6

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

Answer 6

national defence - the government

Question 7

when does partial market failure occur

Answer 7

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

Question 8

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

Answer 8

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

Question 9

what are eternalities

Answer 9

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

Question 10

what are those impacted by externalities called

Answer 10

’ third parties’

Question 11

what are positive externalities

Answer 11

external benefits to the third party

Question 12

what are negative externalities

Answer 12

external costs to the third party

Question 13

give an example of a negative production externality

Answer 13

producing steel could be pollution that harms environment

Question 14

give an example of a negative consumption externality

Answer 14

consumption of fast food increases health risk- pressures NHS

Question 15

give an example of a positive production externality

Answer 15

construction of infrastructure, improving transport for work

Question 16

give an example of a positive consumption externality

Answer 16

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

Question 17

when externalities are ignored, what happens to the markets

Answer 17

they fail

Question 18

why does market failure occur when externalities are ignored

Answer 18

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

Question 19

what is a private cost

Answer 19

the cost of doing something to either a consumer or firm

Question 20

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

Answer 20

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

Question 21

what are external costs caused by

Answer 21

externalities

Question 22

give an example of an external cost

Answer 22

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

Question 23

what is a social cost

Answer 23

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

Question 24

give an example of a social cost

Answer 24

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

Question 25

what is a private benefit

Answer 25

the benefit gained by a consumer or firm by doing something

Question 26

give an example of a private benefit for a consumer

Answer 26

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

Question 27

what are external benefits caused by

Answer 27

externalities

Question 28

give an example of an external benefit

Answer 28

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

Question 29

how do you calculate the social cost

Answer 29

private cost add externa cost

Question 30

what is a social benefit

Answer 30

the full benefit received by society from a good or service

Question 31

how do you calculate social benefit

Answer 31

private benefit plus external benefit

Question 32

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

Answer 32

the cost of producing the last unit of a good

Question 33

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

Answer 33

marginal private cost add external cost

Question 34

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

Answer 34

the external costs of production- negative externalities

Question 35

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

Answer 35

they are constant

Question 36

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

Answer 36

they increase with outuput

Question 37

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

Answer 37

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

Question 38

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

Answer 38

the benefit of someone consuming the last unit of a good

Question 39

how do you calculate marginal social benefit

Answer 39

marginal private benefit add external benefit

Question 40

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

Answer 40

no. it may be different

Question 41

when is there equiibrium in the free market

Answer 41

when supply and demand are equal

Question 42

what is the free market

Answer 42

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

Question 43

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

Answer 43

only their private costs/ benefits

Question 44

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

Answer 44

supply

Question 45

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

Answer 45

demand

Question 46

where on the socially optimum/equilibrium diagram does equilibrium occurs

Answer 46

at points Q,P where MPC= MPB

Question 47

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

Answer 47

at E1, where MSC= MSB

Question 48

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

Answer 48

because this includes the external costs/ benefits to society

Question 49

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

Answer 49

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

Question 50

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

Answer 50

Q1

Question 51

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

Answer 51

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

Question 52

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

Answer 52

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