Market failure definitions

Question 1

What is allocative Inefficiency?

Answer 1

• When resources are not allocated in the right proportions and the product mix does not match consumers’ tastes.
• It is possible to reallocate resources to make one person better off while not making someone else worse off

Question 2

What is Allocative/Pareto Efficiency?

Answer 2

• Occurs when resources cannot be readjusted to make one consumer better off without making another consumer worse off.
• There is zero opportunity cost

Question 3

Define Cost-Benefit Analysis

Answer 3

An analysis done by government which weighs the costs and benefits of a project to determine whether it should be carried out

Question 4

what are Demerit Goods?

Answer 4

Goods that are seen to be socially harmful e.g. cigarettes, gambling

Question 5

What are Externalities?

Answer 5

Costs or benefits to third parties which are not included in the market price of a good

Question 6

Define Maximum Price/ Price Ceiling?

Answer 6

A price set below the market price to make goods affordable

Question 7

What are Merit Goods?

Answer 7

Goods that are so beneficial to society that every individual should consume them irrespective of their income e.g health care, education

Question 8

What is Minimum Price/ Price Floor?

Answer 8

A price set above the market price to allow producers to make a fair profit

Question 9

Define Minimum Wage

Answer 9

• A wage rate set by the government, below which no employer can pay their workers.
• It is set above the equilibrium wage rate

Question 10

What are Negative Externalities?

Answer 10

• A cost to a third party which is not included in a market price of a good.
• E.g. the harmful effect of a product

Question 11

Define Non-Excludable Goods

Answer 11

Goods whereby individuals can benefit even if they do not pay for it e.g: the police force

Question 12

What are Non-Rival Goods?

Answer 12

Goods when consumed by one person will not reduce the consumption by another individual e.g. street lights

Question 13

Define Positive Externalities

Answer 13

The benefit gained by a third party which is not included in the market price

Question 14

What is Private benefit?

Answer 14

• The gain a consumer gets from the use of goods
• The gain a producer gets from the sale of a product

Question 15

Define Private Cost

Answer 15

The actual cost paid by a consumer when a good is purchased. E.g. R150 000 for a car

Question 16

What is Producer Subsidies?

Answer 16

A cash allowance given to a producer to lower the cost of production and allow more goods to be supplied at a lower price

Question 17

Define Productive/ Technical Inefficiency.

Answer 17

When resources are not used appropriately to produce the maximum number of goods at the lowest cost and best quality

Question 18

What are Public Works Programmes?

Answer 18

A government initiative aimed at reducing poverty by creating temporary jobs in areas of infrastructure and other areas

Question 19

What is SABS – South African Bureau Of Standards?

Answer 19

An institute that monitors the quality of goods in South Africa

Question 20

Explain Social Benefit

Answer 20

The benefit gained by society from the use of a good or service. E.g. taxpayers pay for the maintenance of roads, society will benefit from fewer accidents. It is calculated by adding the private benefit and external benefit

Question 21

What is Social Cost?

Answer 21

• The cost of a good or service which is paid by society.
• It is calculated by adding the private cost and external cost.
• E.g. the air pollution caused by cars, will affect people’s health bills