Externalities & Correcting Market Failure

Question 1

How does supply and demand allocate resources

Answer 1

According to the wishes of the consumers

Question 2

What stops demand and supply from causing major problems

Answer 2

Government intervention

Question 3

What are the three types of externalities

Answer 3

Production externalities
Consumption externalities
Positive externalities

Question 4

What are production externalities

Answer 4

When production takes place there can be effects on third parties

E.g air or water pollution

Question 5

What are consumption externalities

Answer 5

When goods and services are used can lead to bad effects on third parties

E.g house hold waste, obesity and congestion

Question 6

What are positive externalities

Answer 6

External benefits on third party from production or consumption

E.g flood defence, youth clubs and apprenticeships

Question 7

What 4 things can the government do to reduce negative externalities

Answer 7

Taxes and charges

Provision of merit goods- health and education would be unaffordable if left to market.

Subsidies

Law and regulation