Market Failure

Question 1

What markets can externalities exist in?

Answer 1

All markets -> even perfectly competitive ones

Question 2

What is the problem with externalities?

Answer 2

They are directly imposed on non-market participants

Question 3

In an externality diagram what 2 supply curves are there?

Answer 3

SMC =  Social Marginal cost
MPC = Marginal Private cost

Question 4

Which of these curves is mainly considered by produers?

Answer 4

The MPC

Question 5

How is the consumer and producer surplus affected by the existence of an externality?

Answer 5

They aren’t, they will remain the same if the externality exists or not, but a deadweight loss will exist

Question 6

What is a Pigouvian Tax?

Answer 6

A government policy that can be used to increase firm efficiency and thus reduce or remove the deadweight loss

Question 7

How big will the government want this tax to be?

Answer 7

They will want to make sure that the tax is big enough to make social costs and private costs equal

Question 8

What impact will the tax have on the externality and who will pay it?

Answer 8

The firm will internalise the externality, paying it themselves

Question 9

Why is deciding the tax difficult?

Answer 9

It requires a lot of information to know how big it should be and how to best implement it

Question 10

What other issue exists within a Pigouvian Tax implementation?

Answer 10

The social optimum that the tax tries to achieve can be subjective -> different people/parties may believe it exists at different points

Question 11

How is the size of the tax calculated?

Answer 11

The equilibrium price and quantity are identified. The cost of the externality is then calculated and added on to the equil price and quantity to bring about the socially optimum price and quantity

Question 12

How will the firm being a monopolist affect the success of a Pigouvian Tax?

Answer 12

Adding a tax will not be effective because the firm will just decrease production to the point of under-production, or they will pass the cost of the tax onto the consumer through higher prices -> creates a new market failure

Question 13

What is an alternative solution to externalities?

Answer 13

Create a market for that externality which is co-ordinated by an authority e.g. pollution permits

Question 14

What issue arises from consumption externalities?

Answer 14

It means that a competitive equilibrium may not be a Pareto efficient one

Question 15

For roommate smoking example:

Answer 15

Check notes

Question 16

How can we bring about a more efficient outcome when consumption externalities exist?

Answer 16

Property rights can be assigned to one of the members in the group -> trade can now occur that will allow utility and efficiency to increase

Question 17

What are the limitations of introducing property rights?

Answer 17

In some cases it can be very hard to define those rights -> e.g. for non-tangible goods

Question 18

What 2 conditions do public goods have?

Answer 18

Non-rival = can be consumed by more than one person at a time 
Non-excludable = no one can be prevented from consuming them

Question 19

Do all public goods always have these 2 conditions?

Answer 19

No, most public goods lie in a continuum between public and private goods -> they can be differentiated and in some cases charged for e.g. education and healthcare

Question 20

How does crowding impact public goods?

Answer 20

Crowding can make public goods more rival -> as the number of people using it increase, the utility decreases and costs may increase e.g. firework displays - if more people are there your view gets worse

Question 21

How do we derive market demand for private goods?

Answer 21

You find the quantity that people demand at a certain price and horizontally sum that to find out what total market demand is at a given price level

Question 22

How do we derive market demand for public goods?

Answer 22

Given that the quantity can now be consumed by all at the same time, you find take a quantity and vertically sum to find the marginal willingness to pay of consumers at that quantity

Question 23

What is the efficient private good output level in the private good market?

Answer 23

Where MC = Dm -> consumer 1 consumers were MC = D1 and consumer 2 consumes were MC = D2

Question 24

What is the efficient public good output level in the market?

Answer 24

Will again be where MC = Dm, but in this case D1 + D2 = MC

Question 25

For PPF analysis about public vs private good endowments:

Answer 25

Check notes

Question 26

What is the role of governments in relation to public good consumption?

Answer 26

We look to the government to bring our private incentives in line with socially desirable levels of investment into public goods

Question 27

What role does the government have in supply in the public good market?

Answer 27

The government will either directly supply the good and tax individuals to finance that supply, or they will subsidise others to provide them