Market failure and externalities

Question 1

What is an externality?

Answer 1

Factors affecting the business out of their control caused by a third part. (e.g war, weather, pollution)

Question 2

What is market failure?

Answer 2

When free markets fail to allocate resources effectively.

Question 3

What are demerit goods?

Answer 3

Products with a negative externality (overconsumed)

Question 4

What are merit goods?

Answer 4

Products with a positive externality.

Question 5

What are social costs?

Answer 5

Total costs to society.

Question 6

What are social benefits?

Answer 6

The total benefit to society from producing or consuming a good/service.

Question 7

List three things the government will do to fix market failure.

Answer 7

(Any 3 of the following)
Legislation.
Loans.
Taxation.
Grants.
Subsuidies.
Tax breaks.

Question 8

Why do markets fail?

Answer 8

Inefficient distribution of goods/services leading to a lack of equillibrium in a free market.

Question 9

Why would government intervention to correct market failure not work?

Answer 9

Admin costs are high eg policing a smoking ban in cars.
Unintended consequences e.g higher tax on cigarettes leading to increased poverty.