Externalities

Question 1

Market failure occurs when a market Allocates Resources Inefficiently

Answer 1

1. market fails when price mechanism fails to allocate scarce resources efficiently and society suffers as a result.
2. Market failure = common problem and governments often intervene to try to prevent

Question 2

Market failure can be Complete or Partial

Answer 2

1. When there’s complete market failure, no market exists
2. National defence = example of missing market as there’s no market which allocates national defence
3. When market functions, but either the price or quantity supplied of the good/service = wrong then there’s partial failure
4. When the market functions, but either price of quantity supplied of the good/service is wrong then there’s partial failure
5. The provision of healthcare, if left completely to market forces => partial failrure

Question 3

Externalities affect Third Parties

Answer 3

1. Externalities are the effects that producing or consuming a good/service has on ppl who aren’t involved in the making of the product
2. Externalities - positive or negative
3. Externalities occur in production or consumption E.g.
   * look in book*

Question 4

Market failure occurs because Externalities are ignored

Answer 4

1. Private cost = cost of doing something to either the firm or consumer
2. External cost = caused by externalities
3. Adding the private cost to the external cost = social cost => full cost borne by society
4. A private benefit = benefit gained by a consumer or a firm by doing something
5. External benefits are also caused be externalities
6. Adding the private benefit to the external benefit => social benefit
7. Market failure occurs because in a free market the price mechanism will only take into account the private costs and benefits, but not the external costs and benefits

Question 5

Externalities can be shown using diagrams

Answer 5

1. look at example of negative externalities

2. look at example of positive externalities

Question 6

The equilibrium point may be different to the socially optimal point

Answer 6

1. look in book at diagram and explanation

- when demand and supply are equal there’s equilbrium in the free market

Question 7

Ignoring Negative Production Externalities leads to Overproduction

Answer 7

look at diagram and explanation

Question 8

Ignoring Positive Consumption externalities => underconsumtpion

Answer 8

look at diagram on page 78

Question 9

Examples of positive consumption externalities education

Answer 9

education

• students/ parents
• more productive

Question 10

Examples of positive consumption externalities healthcare

Answer 10

• only consider costs and benefits

- workforce will be more productive => increase counties economic output

Question 11

Ignoring negative consumption externalities => overconsumption

Answer 11

look on page 79

Question 12

Ignoring Positive Production externalities => underproduction

Answer 12

look on page 79

Question 13

A lack of property right can => negative externalities

Answer 13

look on page 79