Lecture 4

Question 1

what are the four major types of market failure

Answer 1

1) imperfect competition
2) public goods
3) externalities
4) information imperfection/asymmetries

Question 2

what is imperfect competition

Answer 2

violates assumptions of perfect competition:
a) seller/buyer has control over prices
b) blocked entry/exit

Question 3

types of imperfect competition (name 2)

Answer 3

1) monopoly
2) cartel
3) oligopoly
4) monopolistic competition
5) monopsony

Question 4

what is monopsony

Answer 4

buyer has power

Question 5

what are public goods

Answer 5

goods enjoyed in common
1) Non excludability (for consumers)
2) non rivalry (for consumers)

Question 6

what are externalities

Answer 6

side effect/ consequence of an action affecting some other party

Question 7

what is asymmetric information

Answer 7

when one party (buyer or seller) knows more than the other

Question 8

why does imperfect competition prevent pareto efficiency

Answer 8

monopoly - too little output
monopsomy - too little labour employed

Question 9

why does public goods prevent pareto efficiency

Answer 9

people want the good, but no firm will produce it because people already have it for free

Question 10

why do externalities prevent pareto efficiency

Answer 10

they have benefits/costs that are unincorporated into the price of the commodity, meaning some goods will either be overproduced or underproduced

Question 11

why does asymmetric information cause market failure

Answer 11

bad products are over provided when quality is unknown
good products are under provided when quality is unknown

Question 12

Qualities of private goods?

Answer 12

Rivalrous, excludable

Question 13

Qualities of club goods?

Answer 13

Non rivalrous, excludable

Question 14

Qualities of common goods?

Answer 14

Rivalrous, non excludable

Question 15

Qualities of public goods?

Answer 15

Non excludable, non rivalrous

Question 16

Which types of goods are left to the market and which goods are regulated by the government?

Answer 16

Private and Club goods are left to the market

Public goods are regulated by the government

Question 17

Solutions to imperfect information?

Answer 17

• Markets for information
• reputation
• review aggregators (yelp, trip advidor)
• labeling and disclosure requirements
• standards

Question 18

what type of externality is under provided and which one is over provided?

Answer 18

negative is overprovided
positive is underprovided

Question 19

what products are over provided? which are underprovided? when is this the case?

Answer 19

bad products are over provided when the quality is not known, and good products are underprovided

Question 20

what is ‘splitting the bill’ leading to excess consumption an example of

Answer 20

fiscal externality/ moral hazard