Market Failure

Question 1

What is market failure?

Answer 1

When free markets fail to allocate resources effectively.

Question 2

What are negative externalities called?

Answer 2

External costs

Question 3

What are positive externalities called?

Answer 3

External benefits

Question 4

What is an externality?

Answer 4

A cost or benefit caused by one party which affects a third party.

Question 5

What is a social cost?

Answer 5

The total cost of a businesses actions to society (includes private and external costs)

Question 6

What is a social benefit?

Answer 6

The total benefit of a businesses actions to society (includes private and external benefits)

Question 7

Give two reasons why markets fail.

Answer 7

When external costs harm third parties (as the cost is reflected in the price)
If there is not enough competition between producers (monopolies) this forces buyers to pay more than they would in a competitive market
Some products are unable to be provided in sufficient quantities or are not profiltable to be supplied to everyone (e.g healthcare)
If there is limited or insufficient information about products leading consumers to pay more than they would or selecting an inferior product

Question 8

Name 4 ways governments will try to correct market failure.

Answer 8

Taxation
Provision of service - healthcare
Tax breaks
Student loans
Subsidies
Legislation
Grants
Voluntary standards e.g traffic light system on food items.

Question 9

How does government intervention impact the market?

Answer 9

Each intervention will have an effect on supply and demand to try and regulate consumption to acceptable levels