Market Failure & Externalities

Question 1

What is a public good?

Answer 1

It is a good or service that can be consumed simultaneously by everyone and no one can be excluded. They can create free-rider problems.

Question 2

What happens when the government re-allocates resources?

Answer 2

They can modify the market outcomes and correct market failures.

Question 3

What is the difference between a positive and a negative externality?

Answer 3

A negative externality imposes an external cost while a positive externality provides an external benefit.

Question 4

How to get Marginal Social Cost (MSC)?

Answer 4

MPC (Producer cost) + MEC (Cost to others)

Question 5

How to get Marginal Social Benefit (MSB)?

Answer 5

MPB (Consumer Benefit) + MEB (Benefit to others)

Question 6

What happens when the external costs causes goods to be overproduced and overconsumed?

Answer 6

Governments can impose taxes to reduce the negative externalities.

Question 7

What happens when the external benefits causes goods to be underproduced and underconsumed?

Answer 7

Governments can provide subsidies to increase the positive externalities.