Market Failure

Question 1

what is market failure and what are the 4 characteristics of it

Answer 1

when resources aren’t allocated efficiently

1. market power
2. externailitues
3. Public Goods
4. Common Property Goods

Question 2

what are the characteristics of an imperfect market

Answer 2

1. relatively small number of firms
2. firms have mkt power (can set high prices(
3. firms use product differentiation
4. Barriers to entry restrict competition

Question 3

( market power) explain how producers with market power and the effect on consumers and DWL - draw a graph

Answer 3

firms with mkt power try to profit maximise by reducing output which increases price
consumers pay more and get less
DWL = fall in TS (rise PS < fall CS)

Question 4

( market power) what is anticompetitive behaviour

Answer 4

agreements that limit price, divide mkt, prevent new firms

Question 5

( market power) explain 3 examples of anti comp behaviours

Answer 5

1. cartels - firms agree to collude instead of compete
2. mkt sharing - mkt divides into small mkts supplied by one firm
3. collective boycott - firms agree to exclude a dif firm

Question 6

( market power) what can happen when the ACCC and gov intervene to stop anti comp behaviour (4 points)

Answer 6

their rules may restrict comp

• limit #/type of business
• limit choice to consumers
• reduce comp incentive
• limit ability to compete

Question 7

(externalities) what is an exernality

Answer 7

an external side effect of economic activity

Question 8

(externalities) what is a neg externality (draw graph)

Answer 8

when economic activity creates an external COST so that quantity supplied is less than demand (surplus). price supplised is less than demanded

Question 9

(externalities) what is the formula for the social cost of neg externality and why is price less than demanded

Answer 9

social cost = priv cost + external cost

producers dont pay external costs

Question 10

(externalities) describe pollution as an example of a neg externality

Answer 10

factory emits pollutants = external cost
external cost - health of ppl in area
priv benefit - cheaper production

Question 11

(externalities) describe traffic as an example of a neg externality

Answer 11

external cost - congestion

priv benefit - conveniance, time

Question 12

(externalities) what is a pos externality (draw graph)

Answer 12

when econ activity creates an external benefit: quantity supplied is less than demanded and price is less than demanded = underproduction/shortage

Question 13

(externalities) what is the formula for social benefit of pos externality

Answer 13

social benefit = priv benefit + ext benefit

Question 14

(externalities) describe student HECS fees as an example of pos externality

Answer 14

priv benefit = uni gets $, ppl learn

ext benefit - socity gets better workforce

Question 15

describe club goods

Answer 15

non rival
excludable
netflic, spotify gym

Question 16

describe private goods

Answer 16

rival
excludable
phone
clothes
laptop

Question 17

descrbe common resources

Answer 17

rival
non excludable
forrest
fish
ocean

Question 18

describe public goods

Answer 18

non rival
non excludable
lighthouse
parks