Lecture 6B - Market Failure

Question 1

What is meant by resource allocation?

Answer 1

• this is when resources are allocated to their most productive use

Question 2

What are the two themes of market failure?

Answer 2

1) Equity issues

2) Social efficiency

Question 3

What are equity issues?

Answer 3

• High income for some, low income for others

- Free markets fail to deliver a fair distribution of resources

Question 4

What is meant by social efficiency?

Answer 4

• If the marginal benefits to society of producing the given good exceed the marginal costs it is said to be socially efficient to produce more
• If the opposite it is beneficially to produce less

Question 5

What are spillover effects?

Answer 5

• These are the result of individual decisions and can be positive or negative e.g a new student accommodation being built would result in noise yet it would boost local shops

Question 6

What are externalities?

Answer 6

• Spillovers to third parties not involved in the decision making e.g the government giving permission for something such as a new run way. This won’t affect her personally.

Question 7

Two characteristics of public goods?

Answer 7

1) Non-rivalry

2) Non excludability

Question 8

What is meant by non-rivalry?

Answer 8

• If one person enjoys the benefits, it doesn’t prevent anyone else from also enjoying it

Question 9

What is meant by non excludability?

Answer 9

Anyone can get the benefits for free, can’t charge consumption

Question 10

Whats a producer surplus?

Answer 10

• excess of total revenue over total variable costs