Market Failure (Externalities and Public Goods))

Question 1

Details of Public Goods

Answer 1

Non-rivalrous, non-excludable, non-rejectable

Question 2

What is meant by non-rivalrous?

Answer 2

The consumption of a good does not diminish the SS available to others

Marginal cost of producing the good for each additional consumer is $0

Price = $0 (effective SS = 0)

Question 3

What is meant by non-excludable?

Answer 3

It is difficult or costly to exclude consumption of a public good once it is made available

Causes a free-rider problem which creates a concealed demand (Effective demand = 0)

Question 4

What is meant by non-rejectable?

Answer 4

Once a good is made available, consumers cannot reject consuming it.

Question 5

How is MF caused by public good solved?

Answer 5

Direct provision by govt financed by tax revenue.

Govts can provide the goods themselves, or pay private firms to produce the goods for the public at no cost.

Question 6

Give a benefit of Direct Provision.

Answer 6

Govt produces the goods themselves, ensuring the qty produced is at Qs to maximize Net Social Benefit.

Question 7

Give the 2 disadvantages of Direct Provision.

Answer 7

• Funding is required to not incur an opp. cost.
• The good may not produced cost-efficiently as it is not part of the government’s interests.

Question 8

What are the 3 MBPs to solve negative externalities in production?

Answer 8

• Taxing products
• Taxing emissions
• Incentivizing better production methods (opp. cost incurred by firms)

**All raise MPC

Question 9

What are the 5 C2 policies to address MF due to negative externalities in production?

Answer 9

• Quota
• Ban
• Permits
• Individual Transferrable Quotas
• Nationalisation

Question 10

What are the 2 MS policies used to address negative externalities in production?

Answer 10

• Educating producers
• Encouraging producers to switch to greener production methods

Question 11

What are the 3 MBPs to address negative externalities in consumption?

Answer 11

• Taxation
• Incentive to switch to better alternatives
• Incentive to switch to a substitute good

** All raise MPC

Question 12

What are the 2 C2 policies used to address negative externalities in consumption?

Answer 12

• Quota
• Ban

Question 13

What are the 2 MS policies used to address negative externalities in consumption?

Answer 13

• Educating consumers
• Changing consumer preferences

Question 14

What MBPs are used to address positive externalities?

Answer 14

• SS-side subsidies (in production)
• DD and SS-side subsidies (in consumption)

Question 15

What C2 policies are used to address positive externalities?

Answer 15

• Compulsory consumption (consumption)
• Supplementing production of goods (production)

Question 16

What are the MS policies used to address positive externalities?

Answer 16

• Providing positive publicity (production)
• Educating consumers (consumption)