Market Failure (externalities)

Question 1

What is a negative externality ?

Answer 1

When the actions of an individual or business inflict costs on a third party

Question 2

Give examples of negative externalities ?

Answer 2

Smoking-damaging health-NHS treatment costs-uncomfortable for some people-suspicion of parents-pollution-absentees from work

Question 3

What does MPC stand for ?

Answer 3

Marginal Private Cost

Question 4

What does MPB stand for?

Answer 4

Marginal Private Benefit

Question 5

What does MSC stand for ?

Answer 5

Marginal Social Cost

Question 6

The difference between Q1 and Q2 is ?

Answer 6

The miss allocation of resources

Question 7

What ways can you solve market failure associated with negative externalities?

Answer 7

• tax
• advertising
• subsidise alternatives
• regulation

Question 8

What are the advantages and disadvantages of tax ?

Answer 8

disadvantages
•addiction/in elasticity
•encourages black market
•difficult to quantify the cost of the externality

Question 9

Pros & cons of advertising ?

Answer 9

Pros
•goes more to the route of the problem
•people who don’t smoke are less likely to start
•payment is against state rather than individuals

Cons
•difficult to evaluate effectiveness
•incredibly expensive
•addiction

Question 10

What is market failure ?

Answer 10

Market failure is when we have a miss allocation of resources

Question 11

Cons of subsiding alternatives ?

Answer 11

• price
• won’t kill people financially
• cost of subsidy has to come from somewhere
• people can consume equal amounts of both things

Question 12

Cons of regulation?

Answer 12

• encourages black market
• becomes more dangerous
• people will do it because it’s illegal to seem cool
• have to pay to enforce these regulations , police, prisons, judges

Question 13

Cons of subsiding alternatives ?

Answer 13

• price
• won’t kill people financially
• cost of subsidy has to come from somewhere
• people can consume equal amounts of both things

Question 14

Cons of regulation?

Answer 14

• encourages black market
• becomes more dangerous
• people will do it because it’s illegal to seem cool
• have to pay to enforce these regulations , police, prisons, judges

Question 15

What is a positive externality ?

Answer 15

When the actions of an individual or a business have a positive impact on a third party ( no reward for the individual or business)

Question 16

Equilibriums are determined how ?

Answer 16

By the costs of society or the individual being equal to the benefits