Market failure and government intervention

Question 1

Define market failure

Answer 1

where the free market mechanism fails to achieve economic efficiency

Question 2

Define productive efficiency

Answer 2

where production takes place using the least amount of scarce resources

Question 3

Define economic efficiency

Answer 3

where both allocative and productive efficiency are achieved

Question 4

Define inefficiency

Answer 4

any situation where economic efficiency is not achieved

Question 5

Define information failure

Answer 5

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

Question 6

Example of information failure

Answer 6

where some consumers are not aware of the benefits and in some cases the harmful effects of consuming a particular product

Question 7

Define asymmetric information

Answer 7

information not equally shared between two parties

Question 8

Example of asymmetric information

Answer 8

Health care - when visiting the doctor you must rely on the doctor’s knowledge

Question 9

Define externalities

Answer 9

an effect whereby those not directly involved in taking a decision are affected by the actions of others

Question 10

Define private costs

Answer 10

the costs incurred by those taking a particular action

Question 11

Define private benefits

Answer 11

the benefits directly accruing to those taking a particular action

Question 12

Define external costs

Answer 12

the costs that are the consequences of externalities to third parties

Question 13

Define external benefits

Answer 13

the benefits that accrue as a consequence of externalities to third parties

Question 14

Define social costs

Answer 14

the total costs of a particular action

Question 15

Define social benefits

Answer 15

the total benefits of a particular action

Question 16

Define negative externalities

Answer 16

this exists where the social cost of an activity is greater than the private cost.

Question 17

Define positive externalities

Answer 17

this exists where the social benefit of an activity exceeds the private benefit

Question 18

Define merit goods

Answer 18

these have more private benefits than their consumers actually realise

Question 19

Define demerit goods

Answer 19

their consumption is more harmful than is actually realised

Question 20

Define public goods

Answer 20

goods that are collectively consumed and have the characteristics of non-excludability and non-rivarly

Question 21

Define non-excludability

Answer 21

situation existing where individual consumers cannot be excluded from consumption

Question 22

Define non-rivalry

Answer 22

situation existing where consumption by one person does not affect the consumption of all others

Question 23

Methods of government intervention

Answer 23

Taxation
Subsidies
Legislation

Question 24

Define direct tax

Answer 24

one that taxes the income of people and firms and that cannot be avoided

Question 25

Define indirect tax

Answer 25

a tax levied on goods and services

Question 26

Problems of taxation

Answer 26

• hard to determine amount of tax
• producers do not always pay full amount of tax
• inelastic goods may not be as effected as intended.

Question 27

Define subsidy

Answer 27

a payment, to encourage production or consumption

Question 28

Examples of legislation

Answer 28

environment - legislation relating to amounts of pollution

transport - governing the compulsory use of seatbelts