Market Faliure

Question 1

What is market failure

Answer 1

When the competitive market outcome is not the best outcome to society

Question 2

Give an example of a negative externality of production

Answer 2

Factories polluting the local environment

Question 3

What is a negative externality of production

Answer 3

When the process of creating a good or service creates a negative consequence for a 3rd party

Question 4

What is an externality in consumption

Answer 4

When consuming a good or service creates an impact on a 3rd party

Question 5

Give an example of a negative externality of consumption

Answer 5

Smoking

Question 6

how are the demand and supply curves labelled if the externality is in production

Answer 6

D = MPB = MSC
S = MPC

Question 7

How are the demand and supply curves labelled if the externality is in consumption

Answer 7

D = MPB
S = MPC = MSC

Question 8

What is information failure

Answer 8

Where individuals or firms lack the necessary information to make an informed decision

Question 9

What are the 4 types of information failure

Answer 9

Asymmetric information
Moral Hazard
Merit goods
Demerit goods

Question 10

What is asymmetric information failure

Answer 10

When one side of a transaction has more information than the other

Question 11

Why is a dodgy car salesman such a good example of information failure

Answer 11

Because they know about the potential damage to the car but the purchaser does not

Question 12

What is a moral hazard in relation to information failure

Answer 12

A situation in which one party engages in risky behaviour because they know someone else will bear the consequence

Question 13

Give an example of moral hazard

Answer 13

Banks in 2008

Question 14

How can moral hazard be avoided

Answer 14

Create incentives to act morally
Penalise bad behaviour
Split up banks
Pay people based on performance

Question 15

What are merit goods

Answer 15

Goods that are under-consumed due to consumers not fully understanding their benefit

Question 16

What are demerit goods

Answer 16

Goods that are over-consumed because consumers do not know their negative effects

Question 17

What are public goods

Answer 17

Goods that are non-excludable and non-rivalrous

Question 18

What is a good that fulfils some characteristics of a public good but not others called

Answer 18

A qusi-public good

Question 19

Why can public goods only be provided by state provision

Answer 19

Due to the non-excludable nature of public goods and the existence of free riders firms would be unable to effectively charge the use of public goods

Question 20

Pollution Permit System

Answer 20

A system for controlling pollution based on a market for permits that allows firms to pollute

Question 21

What are pollution permits systems good

Answer 21

They create incentives to cut pollution
effective at controlling the total level of pollution

Question 22

Why are pollution permit systems bad

Answer 22

Must be enforced
Complex

Question 23

What is the process of contracting out

Answer 23

A situation in which the public sector outsources activities to a private firm

Question 24

What is competitive tendering

Answer 24

The process in which the public sector calls for private firms to bid for a contract for provision of a good or service

Question 25

What is public-private partnership

Answer 25

An arrangement by which a government service or private business venture is funded and operated through joint cooperation between the public and private sector

Question 26

What is the Private Finance Initiative

Answer 26

A funding arrangement under which the private sector designs, builds, finances and operates an asset in return for an annual payment

Question 27

Give some disadvantages of Public-Private Partnerships

Answer 27

Health and safety issues due to the private sector being less inclined to maintain safety standards

Question 28

Give an advantage of Public-Private partnerships

Answer 28

Fixed payment incentivizes firms to keep costs low
Risk is shared by both the public and private sector