Market failure and externalitites

Question 1

What is meant by market failure in economics?

Answer 1

Market failure occurs when markets allocate resources inefficiently, leading to a loss of economic welfare.

Question 2

Why do markets fail?

Answer 2

Markets fail due to externalities, public goods, information gaps, or market power like monopolies.

Question 3

What are externalities?

Answer 3

Externalities are costs or benefits of economic activity that affect third parties not involved in the transaction.

Question 4

What is the marginal social cost (MSC)

Answer 4

MSC is the total cost to society of producing one more unit, including private and external costs.

Question 5

What is marginal external cost (MEC)

Answer 5

MEC is the additional cost imposed on third parties from producing or consuming one more unit.

Question 6

What is marginal private cost?

Answer 6

MPC is the cost borne by the producer for producing one more unit, excluding external costs.

Question 7

What is marginal social cost (MSB)

Answer 7

MSB is the total benefit to society from consuming one more unit, including private and external benefits.

Question 8

What is marginal private benefit?

Answer 8

MPB is the benefit received by the individual consumer from consuming one more unit.

Question 9

What is marginal external benefit (MEB)?

Answer 9

MEB is the additional benefit received by third parties from consuming or producing one more unit.