Market Failure

Question 1

characteristics of market economy (5)

Answer 1

• Almost no role for gov.
• FOP are mostly privately owned
• Competition between firms
• Dependence on price mechanism (Supply and Demand)
• Consumers have large influence on the 3 basic economic questions; “What, How and for Whom is produced”

Question 2

benefits of market economy (3)

Answer 2

• Private ownership of FOPs
  
  • Motivated entrepreneurs and workers
• Competition
  
  • Low prices
  • More choice for producers
  • Better quality / innovation / new products
• Price mechanism
  
  • Surplus and shortage are automatically solved

Question 3

definition of market failure:

Answer 3

when the market forces of demand and supply fail to allocate resources efficiently, resulting in external costs or external benefits

Question 4

definition of economic activity

Answer 4

an activity which requires resources to be executed

Question 5

definition of private benefit

Answer 5

the benefits enjoyed by the one who has done the economic activity

Question 6

definition of external benefit

Answer 6

the benefits enjoyed by others not involved in the economic activity

Question 7

definition of private cost

Answer 7

costs paid by the one undertaking the economic activity

Question 8

definition of external cost

Answer 8

costs paid by others not involved in the economic activity

Question 9

definition of social benefit

Answer 9

the total of all the private and external benefits

Question 10

definition of social cost

Answer 10

the total of all private and external costs

Question 11

positive externality

Answer 11

when an economic activity generates postive effects for others not involved in that activity

Question 12

negative externality

Answer 12

when an economic activity generates negative effects for others not involved in that activity

Question 13

disadvantages of black markets (3)

Answer 13

1. Gov. cannot regulate consumption of demerit goods
2. Quality of demerit goods from the black market may be unsafe for consumption
3. Gov. doesn’t recieve taxes for goods sold in black market

Question 14

If the social costs of the economic activity are more than the social benefits –>

Answer 14

the use of resources is uneconomic and inefficient

Question 15

definition of public goods

Answer 15

Public goods are non-excludable and non-rivalrous in comsumption. This means those who do not pay can still enjoy access to the product and there is no competition to purchase or use the good e.g. public roads, flood control systems

Question 16

definition of merit goods

Answer 16

Goods or services which when consumed create positive spillover effects in an economy e.g. healthcare services, education

Question 17

definition of demerit goods

Answer 17

Goods or services which when consumed create negative spillover effects in an economy e.g. cigarettes, alcohol