Market Failure

Question 1

What is market failure?

Answer 1

Occurs when the market is unable to allocate resources efficiently

Question 2

What are the 4 examples of Market failure?

Answer 2

Public Goods
Merit & Demerit goods
Positive & Negative externalities
Monopolies

Question 3

Why are public goods a market failure?

Answer 3

Consumers see no reason to pay for and producers see no reason to produce as they are provided by the government. (e.g. streetlights)

Question 4

Why are Merit & Demerit goods a market failure?

Answer 4

Merit goods = Under provided & Benefit society (e.g healthcare)
Demerit goods = Over provided & bad for society (e.g. cigarettes)

Question 5

Why are monopolies a market failure?

Answer 5

Monopolies restrict output.
- higher prices lower quality goods

Question 6

What are the costs of market failure?

Answer 6

• Cost to society ( money needed for consequences of actions e.g. disease from smoking - money for NHS)
• Quality of life (is poorer)
• Inequality (only rich can afford expensive goods/services)

Question 7

What are some examples of government intervention?

Answer 7

Minimum price (demerit goods)
Maximum price (merit goods)
Indirect taxes (demerit goods)
Government provision (merit goods)
Subsidies (merit goods)

Question 8

Define externalities?

Answer 8

The costs and benefits to a third party created by a business when undertaking activities

Question 9

Define negative externalities?

Answer 9

Where social costs are greater than private costs (e.g. pollution)

Question 10

Define positive externalities?

Answer 10

Where social benefits exceed private benefits (e.g. job opportunities in a newly built factory)

Question 11

What is a private cost?

Answer 11

Any cost to a consumer of the good / service (e.g. money spent & health)

Question 12

What is a social cost?

Answer 12

Any cost to everyone added up (e.g. secondary smoking)

Question 13

What is a private benefit?

Answer 13

Benefits to the consumer (e.g. good health & education)

Question 14

What is a social benefit?

Answer 14

Benefits to everyone added up (e.g. good health = cheaper for NHS)

Question 15

What are some examples of externalities of production?

Answer 15

Positive: Building schools, hospitals
Negative: Pollution, chemical spills

Question 16

What are some examples of externalities of consumption?

Answer 16

Positive: Education, vaccination
Negative: Smoking, alcohol