Market Failure: Externalities

Question 1

What is market failure

Answer 1

When the price mechanism leads to a misalloaction of resources

Question 2

What are the 4 main market failures

Answer 2

Negative externalities
Positive externalitities
Public goods
Information failure

Question 3

Define: Negative externality

Answer 3

Costs which affect third parties outside the price mechanism

Question 4

Define: Private costs

Answer 4

Costs for the producer

Question 5

Define: Private benefit

Answer 5

Benefit for the consumer

Question 6

Define: External costs

Answer 6

Costs on third party

Question 7

Define: External benefit

Answer 7

Benefit on third party

Question 8

Supply = MC = _____

Answer 8

Supply = MC = MPC

Question 9

Demand = MB = _____

Answer 9

Demand = MB = MPB

Question 10

Define: Negative production externality

Answer 10

An externality caused as a result of production (Eg. Buildings)

Question 11

In a negative production externality - MSC is __________ than MPC

Answer 11

Greater than

Question 12

Where is the SOLO

Answer 12

The SOLO is where MSC = MSB

Question 13

Where is allocative efficiency

Answer 13

Where MSC = MSB (Where marginal benefit = marginal cost)

Question 14

Where is welfare loss in a negative production externality

Answer 14

Triangle between SOLO, private equilibrium and MSC curve

Question 15

Example of a negative consumption externality

Answer 15

Alcohol

Question 16

Social costs = _________ costs + _________ costs

Answer 16

Social costs = Private costs + External costs

Question 17

Social benefit = _________ benefit + __________ benefit

Answer 17

External benefit

Question 18

What does the government introduce to solve negative externalities

Answer 18

Indirect tax (VAT) - This shifts supply inwards to SOLO