Market Failure

Question 1

What is market failure?

Answer 1

When the market fails to allocate resources efficiently

Question 2

What is complete market failure?

Answer 2

When no market exists, called a missing market

Question 3

What is partial market failure?

Answer 3

When the market functions, but the price or the quantity supplied is wrong

Question 4

What are externalities?

Answer 4

The effect of consuming or producing a good or service on third parties who aren’t directly involved in the transaction

Question 5

What is private cost?

Answer 5

The cost of doing something to either a consumer or firm

Question 6

What is external cost?

Answer 6

A cost that the company or firms doesn’t pick up

Question 7

What is the equation for social costs?

Answer 7

Social costs = private cost + external cost

Question 8

What is private benefit?

Answer 8

The benefit gained by a consumer or firm by doing something

Question 9

What is external benefit?

Answer 9

A benefit that doesn’t only benefit the consumer or firm

Question 10

What is the equation for social benefit?

Answer 10

Social benefit = Private benefit + external benefit

Question 11

Why does market failure occur?

Answer 11

In a free market, the price mechanism will only take into account the private costs and benefits, but not the external costs and benefits

Question 12

On a negative externalities in production diagram, where is the external cost?

Answer 12

The difference between marginal social cost and marginal private cost

Question 13

On a positive externalities in consumption diagram, where is the external benefit?

Answer 13

The difference between marginal social benefit and marginal private benefit

Question 14

What does a negative production externalities diagram look like?

Answer 14

MSC is higher than MPC, both are going in the supply direction, welfare loss pointing left

Question 15

What does a negative consumption externalities diagram look like?

Answer 15

MPB is higher than MSB, both are going in the demand direction, welfare loss pointing left

Question 16

What does a positive production externalities diagram look like?

Answer 16

The gap between the PMC and SMC reflects the external benefit to society

Question 17

What does a positive consumption externalities diagram look like?

Answer 17

The external benefit is shown as the area between the PMB and SMB, indicating the additional benefit to society from increased consumption

Question 18

What is a property right?

Answer 18

The legal authority or entitlement that an individual or entity has over the use

Question 19

What is a merit good?

Answer 19

A good that’s considered beneficial for individuals and society, but which tends to be under-consumed in a free market due to lack of information or awareness about its full benefits

Question 20

What is a demerit good?

Answer 20

A good that’s considered harmful to individuals and society, often leading to overconsumption when people are unaware of or ignore the negative effects

Question 21

What do merit goods generate?

Answer 21

Positive externalities

Question 22

What do demerit goods generate?

Answer 22

Negative externalities

Question 23

What is a public good?

Answer 23

A good that is non-excludable and non-rivalrous

Question 24

What are the characteristics of public goods?

Answer 24

Non-excludability
Non-rivalry
Free rider problem
Provided collectively

Question 25

What is non-excludability?

Answer 25

It’s impossible, or very costly, to exclude individuals from accessing or benefiting from a good or service once they are provided

Question 26

What is non-rivalrous?

Answer 26

One person’s consumption does not reduce the availability of the good for others

Question 27

What is a private good?

Answer 27

A good that is both excludable and rivalrous, meaning individuals can be prevented from using it, and one person’s consumption reduces the quantity available for others

Question 28

What is a quasi public good?

Answer 28

A good that has characteristics of both public goods and private goods

Question 29

What is the free rider problem?

Answer 29

Occurs when individuals benefit from a good or service without paying for it, relying on others to bear the cost. This leads to market failure as firms lack the incentive to provide the good

Question 30

What is the tragedy of the commons?

Answer 30

When individuals, acting in their self-interest, overuse and deplete a shared resource, leading to its degradation or exhaustion

Question 31

What is asymmetric information?

Answer 31

When one party in a transaction has more or better information than the other, leading to an imbalance in decision-making

Question 32

What is imperfect information?

Answer 32

When participants in a market do not have access to complete, accurate, or reliable information to make informed decisions

Question 33

What is an immobile factor of production?

Answer 33

A resource that cannot easily be relocated or reallocated to a different use or geographic location

Question 34

What is occupational immobility?

Answer 34

When workers are unable to move from one job or industry to another due to a lack of skills, qualifications, or experience needed for new roles

Question 35

What is geographical immobility?

Answer 35

When workers are unable or unwilling to move from one location to another in search of better job opportunities, often due to financial, social, or personal constraints