Market Failure 2.8-2.11

Question 1

What is market failure

Answer 1

a situation in which the free market does not lead to a socially optimal allocation of resources

Question 2

2 types of market failure

Answer 2

total market failure - free market fails to provide ANY of a good or service

partial market failure - free market fails to allocate scarce resources efficiently

Question 3

What is economic efficiency?

Answer 3

Occurs in a market when both allocative and productive efficiency are achieved

Question 4

What is an externality

Answer 4

a spillover effect whereby those not directly involved in taking a decision (third parties) are effected by the actions of others

Question 5

Private, External + Social costs

Answer 5

P - cost of an activity incurred to an individual (firm or consumer)
E - consequence of externalities borne by third parties
S - total costs to society of a particular action

Question 6

What is the marginal principle

Answer 6

Economic agents will make decisions based on small (marginal) changes
e.g cost to a firm of producing one more good

Question 7

Private, External + Social Benefits

Answer 7

P - benefits of an activity to an individual directly taking the economic action
E - benefits received by society as a consequence of externalities from a third party
S - Total benefits to society of a particular action

Question 8

What is information failure

Answer 8

a lack of information resulting in consumers and producers making decisions that do not maximize welfare

Question 9

What is asymmetric information?

Answer 9

a situation in which some participants have better information about market conditions than others

Question 10

What is Moral Hazard?

Answer 10

a situation in which a person who has taken out insurance is prone to taking more risk

Question 11

What is a merit good?

Answer 11

a good that brings unanticipated benefits to consumers, such that society believes it will be under consumed in a free market

Question 12

Evaluate the production + consumption of merit goods - FOR

Question 13

Evaluate the production + consumption of merit goods - AGAINST

Question 14

What are Demerit goods

Answer 14

their consumption is more harmful than consumers may realize

Question 15

What is a private good?

Answer 15

Other people can be excluded from consuming it - once consumed it can’t be benefitted from by another person

Question 16

what are public goods?

Answer 16

goods that are collectively consumed
-in a free market would not be provided as there is no incentive for firms to produce them

Question 17

features of public goods

Answer 17

non - excludability
non - rivalry
non - rejectabililty
free rider
zero marginal cost

Question 18

Main Areas of Market Failure

Answer 18

Externalities
Merit and De-merit goods
Information Failure
Public Goods
Lack of Competition

Question 19

What are taxes

Answer 19

compulsory charges imposed by governments on individuals and firms

Question 20

2 Types of Indirect Tax

Answer 20

Specific Tax: a tax of a fixed amount imposed on purchases of a commodity
Ad valorem tax: charged as a proportion of the price of a good

Question 21

Disadvantages of indirect taxation

Answer 21

If PED is inelastic the tax will not have the intended effect on production/ consumption

if tax is too high than lead to unemployment because firm will not want to produce the good

Question 22

Advantages of using indirect taxation

Answer 22

can internalise negative externalities
can force payment on the polluter
tax revenue can be used to fund merit and public goods

Question 23

what is a subsidy

Answer 23

a payment usually from the given to the producers or in some cases consumers of goods and services

effect will shift supply to the right