LS17 - Market Failure & Externalities

Question 1

Market Failure

Answer 1

Where the market fails to allocate resources efficiently

Question 2

Market Failure (In Practice)

Answer 2

Where too much/too little of a good is produced/consumer compared with the social optimal level of output.

Question 3

Social Optimal Level Of Output

Answer 3

The output level that reflects all costs and benefits with a transaction.

Question 4

Where’s The Social Optimal Level Of Output On A Graph

Answer 4

Where MSC intersects MSB.

Question 5

Externalities (Type Of Market Failure)

Answer 5

The consumption and production of some goods/services provides costs or benefits to economic agents that weren’t involved in the transaction e.g. second-hand smoking.

Question 6

Public Goods (Type Of Market Failure)

Answer 6

Some goods/services would be under-provided if provision was left entirely to the private sector e.g. healthcare.

Question 7

Information Gaps

Answer 7

Some markets have information problems resulting in under/over consumption of the product.

Question 8

Incur

Answer 8

To experience something, usually something good, as a result of action you’ve taken.

Question 9

External Cost (Negative Externality)

Answer 9

A cost to a third party that isn’t involved in the making, buying/selling and consumption of a specific good/service.

Question 10

External Benefit (Positive Externality)

Answer 10

A benefit to a third party that isn’t involved in the making, buying/selling and consumption of a specific good/service.