Externalities and Market failure

Question 1

What are the types of market failure?

Answer 1

Externalities, information gaps , under provision of goods and services

Question 2

What is market failure?

Answer 2

a situation defined by an inefficient distribution of goods and services in the free market.

Question 3

What is a non-excludable good?

Answer 3

products that cannot exclude a certain individual or group of individuals from using them

Question 4

What is a non-rivalrous good?

Answer 4

Non-rivalrous goods are public goods that are consumed by people but whose supply is not affected by people’s consumption

Question 5

What is a non-rejectable good?

Answer 5

once a public good is supplied it cannot be rejected by beneficiaries

Question 6

What is the difference between a non excludable good and a non rejectable good?

Answer 6

non-rejectable goods are consumed by everyone , regardless of their choice, non-excludable cannot exclude someone from using the good ,however people can choose to use it or not

Question 7

What is asymmetric information?

Answer 7

when one party in a transaction possesses more information than the other

Question 8

What is morale hazard?

Answer 8

A moral hazard occurs when one party engages in risky behaviour or makes decisions that benefit them while they do not bear the full consequences of that risk.

Question 9

What are the characteristics of a public goods?

Answer 9

non-excludable, non-rival, non-rejectable

Question 10

What is the principal agent problem?

Answer 10

goals of principals and managers are different

Question 11

What is adverse selection?

Answer 11

people taking out insurance often being at highest risk

Question 12

What are the advantages of carbon taxes?

Answer 12

make the polluter pay incentivises to reduce carbon, revenue generated

Question 13

What are the disadvantages of carbon taxes?

Answer 13

Carbon inelastic may have little effect , hard to enforce

Question 14

What are maximum prices and why are they set?

Answer 14

To prevent the market price from reaching a certain level./ Set below market equilibrium

Question 15

What are minimum prices and why are they set?

Answer 15

Set above the equilibrium, ban on sales of goods below the minimum price.

Question 16

What are the negatives of maximum pricing?

Answer 16

Excess demand may lead to shortages, suppliers may leave the market

Question 17

What are the positives of minimum pricing?

Answer 17

Reduces consumption of goods with negative externalities, minimum wage

Question 18

What are the negatives of minimum pricing?

Answer 18

Reduction in producer surplus, reduction in dynamic efficiency due to low SNP, depends on elasticity of goods, affects low income individuals. Potential of excess supply

Question 19

What are the positives of maximum pricing?

Answer 19

Increased affordability, increased consumer surplus, welfare gain, prevents consumer exploitation

Question 20

What are the negatives of maximum pricing?

Answer 20

Shortage may be created due to excess demand , suppliers may leave the market

Question 21

What are the reasons that governments may intervene in markets?

Answer 21

Correct market failures, promote welfare gain, regulate markets/ provision of public goods

Question 22

When does market failure occur?

Answer 22

Market failure happens when the price mechanism fails to efficiently allocate the scarce resources to where they are best suited.

Question 23

What is a price mechanism?

Answer 23

The ways in which prices are determined

Question 24

What are the benefits of tradable pollution permits?

Answer 24

This system can put a cap on the level of pollution.
The lower the pollution of a firm, the more they can benefit. This encourages firms to lower their pollution levels.
Governments make revenue.

Question 25

What are the negatives of tradable pollution permits?

Answer 25

There is a cost to implementing the scheme.
Deciding on the level of pollution is difficult.
The market for permits is subject to failure also.