market failure externalities some other stuff

Question 1

What are two main types of efficiency?

Answer 1

-Productive efficiency


-Allocative efficiency

Question 2

Define productive efficiency?

Answer 2

Where production takes place using the least amount of scarce resources

Question 3

When is Allocative efficiency be achieved?

Answer 3

When an economy or firm produces the good or service the consumers want, and therefore resources are used at their best

Question 4

What necessary conditions are needed for an economy to be allocatively efficient?

Answer 4

• The cost of producing one unit of the good equals the market price of that good.

• An economy would be allocatively efficient if everybody received exactly those goods and services for which they were prepared to pay the market price

Question 5

Define Allocative efficiency?

Answer 5

Allocative efficiency exists where consumer satisfaction is maximised. Where the quantity supplied equals the quantity demanded and resources are being used most effectively to satisfy consumers wants

Question 6

What is economic efficiency?

Answer 6

Where both productive and Allocative efficiency are satisfied

Question 7

Define market failure?

Answer 7

Where the free market mechanism fails to achieve economic efficiency

Question 8

Give some causes of Market failure?

Answer 8

• Information failure

• Externalities


-Merit and demerit goods


-Public and quasi-public goods


-Over consumption, under consumption


-Over production, under production


-Occupational and geographical immobility of labour (not AS

)
-Concentration of power in markets (not AS

)
-Distribution of income and wealth and equity (not AS)

Question 9

Examples of how some markets don’t work very well?

Answer 9

-Constant rising/falling prices
-Over production
-Under production

Question 10

Define an externality?

Answer 10

Externalities are spill over effects on third parties arising from production and consumption

Question 11

Define a negative externality?

Answer 11

An unfavourable spill over effect on third parties arising from production and consumption

Question 12

What do negative externalities impose on third parties?

Answer 12

External costs

Question 13

Define a positive externality?

Answer 13

A favourable spill over effect on third parties arising from production and consumption

Question 14

What do positive externalities impose on third parties?

Answer 14

External benefits

Question 15

What are private costs?

Answer 15

the cost to the firm from the production of a good or service

Question 16

What are external costs?

Answer 16

The costs borne by a third party or to society as a whole

Question 17

What are social costs?

Answer 17

Social cost = Private cost + external cost


They are the full costs to society of the production or consumption of any good.

Question 18

What are private benefits?

Answer 18

They are benefits that accrue directly to the decision makers

Question 19

What are external benefits?

Answer 19

They are the benefits accrued to a third party or to society as a whole

Question 20

What is the social benefit?

Answer 20

Social benefit = Private benefits + External benefits 
The full benefits to the society of production or consumption of any good

Question 21

When does a negative externality arise?

Answer 21

When the private costs of an economic activity is greater than the social costs

Question 22

When does a positive externality arise?

Answer 22

When the social benefit is greater than the private benefit

Question 23

Define information failure?

Answer 23

Information failure occurs when a lack of information results in consumers and/or producers making decisions that do not maximise their welfare

Question 24

What can information failure be caused by?

Answer 24

-misleading information

-lack of understanding or awareness among consumers

-persuasive advertising

Question 25

Define merit good?

Answer 25

A merit good is a product that is better for a person than that person realises. The benefits to the consumer are greater than he realises

Question 26

Give examples of merit goods?

Answer 26

-Health care
-Education
-Sports facilitie

Question 27

Give an example of asymmetric information failure?

Answer 27

HEALTH CARE

-The patient depends on the doctor’s knowledge to diagnose a disease.

-The doctor could exploit the patient by charging higher fees or recommending more visits than are truly required which could lead to over consumption

Question 28

What are some reasons for the under provision/ consumption of merit goods?

Answer 28

• Information failure 
Consumers are not in full possession of all the required information to be able to make the best or the right decision about how much to consume of the product

• Equity Problem
If for example education or health care is provided through the market, low income people will be unable to afford the school or doctors fees

Question 29

Define De-merit good?

Answer 29

A good that is worse for a person than that person realises. Individual consumers overvalue the benefits from consuming such a good

Question 30

Give some examples of de-merit goods?

Answer 30

-Cigarettes


-Fast-food

Question 31

What are some reasons for the over provision/consumption of demerit goods?

Answer 31

-Information failure


-Addiction

Question 32

solution to under-consumption of merit goods?

Answer 32

-Provision of information


-State provision


-Government subsidies


-Regulation

Question 33

Solution to over-consumption of demerit goods?

Answer 33

Taxation

-Regulation


-Provision of information


-Subsidising substitutes

Question 34

Define a public good?

Answer 34

A public good is a good or service that is both non-excludable and non-rival

Question 35

Define non-excludable?

Answer 35

Non-excludable means that an individual cannot be prevented from consuming the good or service

Question 36

Define non-rival?

Answer 36

Non-rival means that consumption by one person doesn’t reduce the amount available for consumption by others

Question 37

Define a quasi-public good?

Answer 37

A quasi public good has one characterise of a public good but not both

Question 38

Examples of public goods?

Answer 38

-Pavements

-Traffic lights

-Street lights

-firework display

Question 39

Examples of quasi public goods?

Answer 39

-beach by the sea

-public libraries

-toll roads