Lecture 11

Question 1

Market failure

Answer 1

• Occurs when the allocation of a good is Pareto inefficient
• Price setting firms are not the only source of market failure
• When prices do not equal the marginal social cost we have market failure

Question 2

Other types of market failure

Answer 2

1. Monopoly/monopsony
2. Moral hazard
3. Adverse selection
4. Public goods
5. Tragedy of the commons
6. External effects

Question 3

Monopoly/monopsony

Answer 3

Buyers and sellers are price setters

Question 4

Moral hazard

Answer 4

Hidden action e.g. employers/employees

Question 5

Adverse selection

Answer 5

Hidden attributes e.g. insurance

Question 6

Public goods

Answer 6

Goods are non rival and non excludable

Question 7

Tragedy of the Commons

Answer 7

Goods are rival but non excludable

Question 8

External effects

Answer 8

Price doesn’t fully capture effect of own consumption on society

Question 9

Marginal social cost

Answer 9

Marginal private + marginal external cost

Question 10

Cap and trade

Answer 10

The government issues a limited number of permits to pollute and firms can buy and sell these permits on a market

Question 11

Contingent valuation

Answer 11

Ask people

Question 12

Hedonic pricing

Answer 12

Infer value from observing economic behaviours

Question 13

Green growth accounting

Answer 13

Measures the value of conserving environmental resources for society as a whole, today and in the future