Market failure - Chapter 5 (R)

Question 1

What is market failure?

Answer 1

Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market.

Question 2

how are market structures classified

Answer 2

• no. of sellers
• degree of product differentiation
• barriers to entry (costs)
• degree of control over price
• competitive methods

Question 3

types of markets

Answer 3

• perfect competition
• monopolistic competition
• oligopoly
• monopoly

Question 4

perfect competition

Answer 4

very many firms
unrestricted freedom of entry
undifferentiated product
eg, cabbages, carrots

Question 5

monopolistic competition

Answer 5

many/several forms
unrestricted freedom of entry
differentiated product
eg, builders, restaurants

Question 6

oligopoly

Answer 6

few firms
restricted freedom of entry
un/differentiated products
eg, cars, cement

Question 7

monopoly

Answer 7

one firm
restricted/ completly blocked freedom of entry
unique products
eg, local water, train operators

Question 8

perfect competition features

Answer 8

1. large number of small firms
2. very little product differentiation
3. very easy entry into or exit from the market
4. perfectly mobile resources
5. perfect knowledge

Question 9

game theory

Answer 9

rational self interest decisions result in each being worse off than if each had chosen to cooperate

Question 10

What are the characteristics of an imperfect market?

Answer 10

Competition for market share
Control over price
High barriers to entry and exit
Different products and services
Small number of buyers and sellers.

Question 11

consumer soveriegnty

Answer 11

consumers know best what is good for them and that their willingness to pay, they can ensure that such goods and services provided in the right quantities.

Question 12

Types of market failure

Answer 12

include negative and positive externalities, monopolies, inefficiencies in production and allocation, incomplete information, and inequality.

Question 13

What is the concept of market power?

Answer 13

Refers to a company’s relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both.

Question 14

What causes market power

Answer 14

There must be inelastic demand for its products

Question 15

How can Market power influence market efficiency

Answer 15

it makes demand and supply not be at equilibrium which means the market is not running efficiently and therefore market failure and deadweight loss.

Question 16

What policy options influence market power

Answer 16

the government will encourage the consumption of merit goods and discourage the consumption of demerit goods. governments can also put out campaigns (eg. no smoking)

Question 17

Definition: Positive Ext

Answer 17

when the consumption or production of a good causes a benefit to a third party.

Question 18

Example of Positive Ext

Answer 18

vaccines, they help society as a whole be protected from viruses and sicknesses

Question 19

Definition: Negative Ext

Answer 19

when the consumption or production of a good causes an adverse impact to a third party.

Question 20

Example of negative Ext

Answer 20

cigarettes, they cause bystanders to become sick from the smoke.

Question 21

What is the concept of externalities

Answer 21

An externality is the uncompensated impact of one persons actions on the wellbeing of a third party

Question 22

What influences do ext have on Market efficiency?

Answer 22

when externalities occur the market is not at equilibrium as the marginal social cost/benefit and marginal private cost/benefit are not the same. this means deadweight loss.

Question 23

What is the use of tax

Answer 23

taxes are used to make negative externalities less consumed

Question 24

What is the use of subsides

Answer 24

subsides are used to make positive externalities more consumed.

Question 25

What are policy options that correct ext

Answer 25

taxes, subsidies

Question 26

merit good

Answer 26

goods and services that the government considers beneficial for the public and will encourage production and consumption of (provide social benefit)

Question 27

merit good examples

Answer 27

education, healthcare, library, museums